Did Sanctions Just Stop Working?
In investing, there's something called technical analysis, which is fundamentally the belief that if you look at a line on a chart, you can tell where it’s going by looking at the going.
Technical analysis is the belief that the chart is all the information you need. You look at a chart, draw some lines on top of the main line and you can tell whether it will go up or down. Here are some examples:
And one last, extra wild one:
This is an insane way to think about markets (setting aside the fact that because of the Keynesian Beauty Contest concept, or what George Soros calls reflexivity, it can be important for non-insane investors understand technical analysis).
Enter now the chart of the dollar to the ruble:
The ruble is now almost back to its pre-invasion of Ukraine levels. (I have added a red line for dramatic diplomatic effect.) That apparently means Russia’s central bank is very close to achieving its “greatest victory so far” and that the “White House has some decisions to make here.” The idea seems to be that the Biden administration will have to increase sanctions, alter sanctions or militarily escalate its support for Ukraine in the face of this newfound Russian economic might.
That’s totally wrong. The value of the ruble to the dollar is not now a gauge of Russia’s economic health or the functioning of its financial markets.
Think about it this way: On the one hand there's the ruble to dollar exchange rate chart.
On the other hand, no financial institution in the dollar system is touching Russia; no major business in the dollar economy is doing business with Russian firms; the Russian economy is likely already in a severe recession on the order of the 2008 financial crisis or the onset of the Covid-19 pandemic.
“The current exchange rate is not representative of a normal functioning market,” sanctions researcher Edoardo Saravalle points out.
That’s because in response to Western sanctions, the Russian Central Bank sold foreign currency and bought rubles, jacked up interest rates and implemented capital controls.
The fundamental point is that the U.S. imposed sanctions on Russia's economy, not a chart.
“The real damage is visible in other aspects of the economy, from the continued announcements of suspended investments (e.g. Chinese oil company Sinopec paused its Russian projects) and the gradual degradation of its economy,” Saravalle notes. “At the end of the day, this is still an economy with a 20% interest rate.”
Drawing a line on a chart and deciding it means something about sanctions with no other context is what happens when technical analysis meets a certain kind of D.C. analysis that uses “optics” to force questions – always just questions – about a crisis of inaction or weakness or ... something.
If anything, that the dollar-to-ruble exchange rate is stabilizing is a sign that the Russian economy, after a panicked period, is starting to “adjust to a permanently bad equilibrium rather than a free-fall,” in Saravalle’s description.
If Putin thinks whatever monetary shenanigans he pulled to goose the rub/usd chart are setback for the U.S., there’s no good reason for American policymakers to let his delusion become our own.
The exchange rate may be an indication that a shrunken Russian economy can, like Iran, function in a permanently denuded state.
But the ultimate measure of U.S. and European sanctions will be whether they help push Russia to strike a peace deal with Ukraine.