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Vladimir Putin’s biggest mistake of the Ukraine war so far? Trusting the Western financial system

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The West is arraying financial weapons never deployed before against a country of Russia’s size, forsaking some of the principles that have defined it.

Part of what has defined the West — and most of what has been the world’s engine of prosperity for the past century and a half — has been the free flow of goods across borders, a working banking system, and property rights.

There’s been an implicit understanding that no sizeable nation (Russia’s economy is about the size of Australia’s) would be denied access to these things. Otherwise the financial system wouldn’t be the financial system.

That seems to have been the understanding of Russian President Vladimir Putin. But 10 days ago, the West did the unthinkable, and the global financial system may never be the same again.

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Australia places sanctions on Russia

Russia’s vast war chest

Over the seven years since Putin last invaded Ukraine (and annexed Crimea) in 2014, Russia’s central bank has almost doubled its holdings of foreign currency and foreign bonds and gold, building up a reserve of US$630 billion at a considerable cost to the living standards of ordinary Russians.

It was a war chest that would enable Russia to continue to buy things that could only be bought in foreign currency, even if customers overseas refused to trade with it and supply it with that currency. It was Russia’s insurance policy.

And although it could have been stored in Russia, much of it was kept in banks in the UK, Western Europe and the US, for easy access when it was needed to buy things on those markets.

Whatever his other suspicions of the West, Putin seemed to think its financial system wouldn’t be turned off — not to a nation of Russia’s size.

China will learn from Russia’s mistake

On February 27 the West froze the assets and travel of named oligarchs and Russian officials, as was expected.

Also, and less expected, it stopped named Russian banks from accessing the messaging system used to transfer money across borders, ensuring they were “disconnected from the international financial system“.

And, much less expected, it froze the reserves of Russia’s central bank stored in France, Germany, Italy, the United Kingdom, Canada, and the US — the hundreds of billions of savings legitimately placed in foreign banks for safekeeping.



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