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Washington Watch: Russian sanctions risk ‘developing world debt crisis’ — not a Lehman moment

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The risks from the profound economic and financial sanctions that the West has put on Russia as a result of its invasion of Ukraine are not tantamount to another 2008 “Lehman” meltdown in financial markets, said Adam Posen, the president of the Peterson Institute for International Economics, on Tuesday.

The risks are akin instead to the developing nation debt crises that roiled the banking sector in the early 1980s, Posen said, in an interview with MarketWatch.

Russia is not systemically connected enough and not large enough to cause that sort of shock, according to Posen. The bankruptcy of Lehman was the pivotal event of the 2008 financial crisis and caused the Great Recession.

Russian assets are not as widely held, Posen said.

“There just aren’t that many people exposed to Russians,” Posen said. Instead, it’s worth a comparison to another country facing a financial crisis.

“I think its analogous to distress when Argentina was defaulting on the International Monetary Fund,” Posen said. Someday, the debts will be paid off in some measure but there may be a legal fight to get paid off at face value, he said.

“We all remember 2008. In this case, I don’t think it’s there. I hope I’m right,” he added.

Experts say that more than $500 billion of Russian securities have been effectively frozen due to the moves to the moves to isolate Russia.

Read: Experts see risk of a massive liquidity shock from sanctions of Russia

Russian President Vladimir Putin’s effort over the past eight years to make his country’s economy sanction-proof has backfired, Posen said.

Putin’s moves to building a fortress of foreign-exchange reserves and reducing exposure to U.S. and European creditors also “cuts the other way.”

“If you make yourself too disentangled from the world economy, than the world’s governments don’t have to care that much about you. They can afford to play hardball,” he said.

Posen, a leading academic on monetary policy, was a voting external member of the Bank of England’s monetary policy committee from 2009 until 2012.

He said the U.S. Treasury’s decision to freeze assets of Russia’s central bank “is an extremely big step.”

The collapse of the value of the Russian ruble
the decline in Russian stocks, the rise in the cost of living will hit Russia hard.

In response, the Russian central bank is forcing people to turn over foreign exchange and not letting foreign owners get their money out.

“These are familiar from financial crisis textbooks from Latin America or Southeast Asia,” he said.

The sanctions are analogous in some ways to strategic bombing campaigns, he said, with a goal of breaking support for the Russian government.

“Ethically, it is not quite the same as bombing, but it is not that different. You’re saying women and children, you’re going to be deprived of medicines and technology and quality of life and opportunities to make a living indefinitely until your government changes,” he said.

“It is not costless,” he added.

Depending on how long the sanctions last, Russians will experience a significant rise of inflation with shortages of goods. Rents will be higher and purchasing power will fall due to the weaker currency, he said.

The Russian economy is also likely to experience a contraction in GDP growth.

Dow skids about 750 points, U.S. stocks drop sharply as Russia says it will begin attacks on Kyiv

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