The Volokh Conspiracy
Mostly law professors | Sometimes contrarian | Often libertarian | Always independent
[NB: UPDATE at 02/28/22 330 PM at End of Post]
When Russian troops entered Ukraine last Thursday, it was hard not to feel an overwhelming sense of doom and gloom. There were, it seemed to me, two possible outcomes, both terrible: Either the Russians would steamroll over the Ukrainian resistance, occupy Kyiv, install a puppet government, throw Zelensky and his associates in jail (or worse), and leave; or, the Ukrainian resistance would be more formidable than expected, and there would be a horrific, bloody carnage that would, inevitably, end in a Russian victory by virtue of their vastly superior force, at the cost of tens or hundreds of thousands of casualties.
But I hadn't foreseen the third possibility: that the Allies could deploy a weapon powerful enough to force Putin to reconsider the wisdom of what he was doing and bring him to the negotiating table. But that is what seems to be happening.
As I write this, the two sides are meeting at the Belarus-Ukraine border to explore whether some kind of negotiated settlement is possible. What is noteworthy—remarkable, even,—is that it was the Russians who instigated the negotiations, inviting Zelensky to come to the table. On Day Four of the invasion.
That does not look, to me, like the move of someone who believes he is in a strong position, with the situation well in hand. It looks even less like that when, after Zelensky refuses to come to Belarus, Putin compromises, and agrees that the two sides can hold their meeting at the border.
If you saw that coming on Thursday morning, you're a lot smarter than I am.
Perhaps it will turn out to be all bluff and bother. But it feels, to me, like the tide has perhaps already started to turn. After four days. What happened?
Two things happened. The first, of course, is that the Ukrainian resistance appears to have been stronger, and the steamroll into Kyiv was going to take longer, than anticipated.
Not to minimize in any way the quite extraordinary bravery and valor that the Ukrainians are demonstrating,** my guess is that, standing alone, that didn't give Putin too much pause. He had only deployed a relatively small fraction of his troops, and the overwhelming superiority of their numbers surely meant that the steamroll-into-Kyiv strategy was still available, it would just have to come at the cost of immense bloodshed and suffering. And I'm not at all sure that those consequences weigh much in Putin's calculus.
** I grew up in a household where, to be entirely candid, Ukrainians were not held in terribly high regard. My grand-parents fled from that part of the world; Jews had an especially tough time in the Ukrainian countryside, and the stories they brought with them of life in the Ukraine were not pleasant ones. But it's hard not to be stirred by the incredible courage that so many Ukrainians are now demonstrating to defend their country's independence.
The other thing that happened is that on Saturday—the day before Putin extended his offer to begin negotiations—the Allies rolled out their new "sanctions." It includes a weapon that appears capable of inflicting—indeed, one that has already begun inflicting—catastrophic damage on the Russian economy and the Russian people.
The sanctions package announced on Saturday not only included kicking several large Russian banks off of the SWIFT network—the main global network for bank-to-bank transactions—it also …
"…prohibits United States persons from engaging in transactions with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation. This action effectively immobilizes any assets of the Central Bank of the Russian Federation held in the United States or by U.S. persons, wherever located."
It is rather breath-taking in its simplicity. The Fed, of course, is a "United States person." So it means that, henceforth, the Fed will not honor requests from the Russian Central Bank to "cash in" any portion of their dollar holdings.
So that stack of 600 billion or so dollars that Putin and his cohorts have gathered together to ride out the war? It's now worth a good deal less than it was on Friday, because a substantial portion of that stack is "held"** in US financial institutions that are ultimately under the Fed's control, and the Fed is now prohibited from transferring control over those funds to the Russian Central Bank (or to anyone else designated as the recipient by the Russian Central Bank).
** The use of "hold" in its various forms in connection with these accounts is antiquated and, worse, confusing. Putin's stack—or, really, anybody's stack—isn't "held" anywhere, these days; at least, not in the sense that it consists of tangible things, like dollar bills, capable of a "holding." The stack isn't really a thing that can be held; it consists of ledger entries, inter-linked to various obligations of financial institutions within the global system requiring them to adjust their ledger entries as directed by the "holder" of the account.
And if the Germans, and the Swiss, and the British, and the others who "hold" these assets that "belong" to the Russian government also get on board, the stack gets smaller and smaller.
It starts a kind of death-spiral, because Putin will really need those dollars to prop up the ruble. That's almost certainly why he put the stack together in the first place—a rainy day fund for buying up rubles to keep the price stable. It has already, as of today, fallen by one-third. It will continue to fall, because as the sanctions noose tightens a ruble can buy fewer and fewer things; and the drop accelerates as more people become increasingly desperate to unload the rubles that they have and convert them into something of value before they fall further.
The Russian Central Bank can stop all this from happening by promising to keep buying rubles, at a set and stable price, in exchange for good old American dollars.
Except now it can't.
This is the kind of thing that brings governments down—when the price of bread goes up 500% because your leaders have done something very stupid. Isolated from the global financial system—with nobody willing to take their rubles, or even their dollars and deutschemarks and euros in exchange for goods and services—the Russian economy will go into free fall. And Putin surely knows that. His oligarch friends know it, too. The suffering this will impose on the Russian people will be immense, and many of them may not take kindly to having had that imposed on them in order to satisfy Putin's imperial fantasies. If they're not worried about that, they should be.
It could all turn out differently, of course. I could be wrong, and the war could take a completely different turn. The actual implementation of these sanctions, and the goal of isolating Russia from the global financial system, may prove too difficult to accomplish. As the saying goes, there's nothing harder to predict than the future.
But the sanctions do already seem to be working: the ruble is collapsing, the Russian stock market (closed today, by order of the government) has lost around 40% of its value, the Russian Central Bank has raised interest rates to 20%, and Putin has asked for a meeting with the Ukrainians.
My sense is that this is not only a turning-point moment in this war; I think it may well be a turning-point moment in the long history of war. On Thursday, it looked, terrifyingly, like we were about to re-live something out of the 1940s—an all-out ground war in Europe, with tanks and infantry and air cover and the rest of it.
But if the Allies have found a way to wreak havoc on the entire Russian economy without, as it were, firing a shot, this war will not be remembered as a throwback but for the first appearance of a new kind of warfare, played out not on the actual battlefield but on the global network. I don't know if it will work—but it sure looks to me like it can work, and—much more importantly—that the Russians are starting to act as if they know it can work, too.
[UPDATE 2/28/22 330 PM]: On the noose-tightening front, the Swiss and the U.K. have joined in the prohibition on transactions with the Russian Central Bank, an especially important development given, as mentioned above, the large amount of Russian-owned dollar-denominated assets held by financial institutions in those countries. And the ruble continues its steep drop, losing another 20% of its value against the dollar today; whereas 70-75 rubles could buy $1.00 before the invasion, it now takes 120 rubles. [See "The ruble crashes, the stock market closes and Russia's economy staggers under sanctions"]
And the results of the first meeting between the two sides are hopeful indeed. Neither side is talking about what happened—a very good sign. I would not have been surprised if one side (probably the Ukrainians) had stormed out of the meeting, charging the Russians with negotiating in bad faith; nor would I have been terribly surprised if the Russians captured the Ukrainian negotiators to hold them hostage. But neither of those events occurred; both sides said they have to return to their respective capitals for further instructions, a strong implication that at least something substantive was put on the table.]
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