Eyck Freymann

At the beginning of the Russia-Ukraine war, Russia was blindsided that the Europeans joined all the sanctions.

They had moved a lot of their central bank assets from dollars into euros, and then the Europeans froze those assets, which meant suddenly half of their foreign exchange reserves were just inaccessible to them.

That was a huge boo-boo for the Russians.

And then the sanctions regime targeted Sparabank and other major banks in ways that had not been expected.

So the ruble lost something like half its value in a couple of weeks.

And...

there was a real risk of Russian collapse.

But with only $300 billion of foreign exchange available, they were able to right the ship because they imposed a capital control regime, they limited outflows from banks, they raised interest rates to 20%, they demanded that state enterprises take payments in rubles, all of these things to increase demand for rubles and keep the banks solvent.

And then foreign hedge funds that had profited on the ruble short took a look at the situation and they said, well, are there more sanctions coming?

Well, if the answer is no, then it's all priced in and the ruble looks pretty cheap because actually Russia's imports have just collapsed and their exports are booming because the oil price is up.

And then in April of 2022, the ruble was the best performing currency in the world.

And then the ship was set in and then the economic war became an attritional contest that we have not won yet.

And I think there is a similar dynamic with China.

There is some possibility that their financial system could implode.

But China, if you count their shadow reserves, has between 10 and 20 times the FX that was available to Russia.

They have an existing capital control regime.

All the banks are run by the state.

And if they survive that gut punch, they have the stockpiles to live on their own supply for many, many, many months if they're entirely cut off from imports.

So the question is if we can't defeat them economically slowly, how do we think about the long-term contest of economic pain such that it is something that we as a coalition of democracies can possibly win?

And the answer I come to in the book is we have to stop thinking about it as punishment.