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US Russia Sanctions Are 'A Colossal Strategic Mistake', Putin Warns

As Russia is preparing plans to wean its banking system off the dollar, advancing a trend of de-dollarization among the US's largest economic and geopolitical rivals, Russian President Vladimir Putin accused Washington of making a "colossal" but "typical" mistake by exploiting the dominance of the dollar by levying economic sanctions against regimes that don't bow to its whims.

"It seems to me that our American partners make a colossal strategic mistake," Putin said.

"This is a typical mistake of any empire," Putin said, explaining that the US is ignoring the consequences of its actions because its economy is strong and the dollar's hegemonic grasp on global markets remains intact. However "the consequences come sooner or later."

These remarks echoed a sentiment expressed by Putin back in May, when he said that Russia can no longer trust the US dollar because of America's decisions to impose unilateral sanctions and violate WTO rules.

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While Putin's criticisms are hardly new, these latest remarks happen to follow a report in the Financial Times, published Tuesday night, detailing Russia's efforts to wean its economy off of the dollar. The upshot is that while de-dollarization may be painful, it is, ultimately doable.

The US imposed another round of sanctions against Russia over the summer in response to the poisoning of former double-agent Sergei Skripal and his daughter Yulia, and the US Senate is considering measures that would effectively cut Russia's biggest banks off from the dollar and largely exclude Moscow from foreign debt markets.

With the possibility of being cut off from the dollar system looming, a plan prepared by Andrei Kostin, the head of Russian bank VTB, is being embraced by much of the Russian establishment. Kostin's plan would facilitate the conversion of dollar settlements into other currencies which would help wean Russian industries off the dollar. And it already has the backing of Russia's finance ministry, central bank and Putin.

Meanwhile, the Kremlin is also working on deals with major trading partners to accept the Russian ruble for imports and exports.

In a sign that a united front is forming to help undermine the dollar, Russia's efforts have been readily embraced by China and Turkey, which is unsurprising, given their increasingly fraught relationships with the US. During joint military exercises in Vladivostok last month, Putin and Chinese President Xi Jinping declared that their countries would work together to counter US tariffs and sanctions.

"More and more countries, not only in the east but also in Europe, are beginning to think about how to minimise dependence on the US dollar," said Dmitry Peskov, Mr Putin’s spokesperson. "And they suddenly realise that a) it is possible, b) it needs to be done and c) you can save yourself if you do it sooner."

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Still, there's no question that US sanctions have damaged Russia's currency and contributed to a rise in borrowing costs. And whether Russia - which relies heavily on energy exports - can convince buyers of its oil and natural gas to accept payment in rubles remains an open question. Increased trade with China and other Asian countries has helped reduce Russia's dependence on the dollar. But the greenback still accounted for 68% of Russia's payment inflow.

But, as Putin has repeatedly warned, that won't stop them from trying. The fact is that Russia is a major exporter, with a trade surplus of $115 billion last year. As the FT pointed out, Russia's metals, grain, oil and gas are consumed around the world - even in the west, despite the tensions surrounding Russia's alleged involvement in the Skripal poisoning and its annexation of Crimea.

To be sure, abandoning the dollar as the currency of choice for oil-related payments would be no easy feat.But China has already taken the first step and show that it can be done by launching a yuan-denominated futures contract that trades in Shanghai - striking the most significant blow to date against the petrodollar's previously unchallenged dominance.

That should embolden Putin to continue with his experiment - not that the US is leaving him much choice.

Source: Zero Hedge
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