- How is the federal government thinking about policy options to force Russia to end the war?
- What financial tools are available to lawmakers and regulators?
- How will this response to the war play out in the domestic financial system?
- What are the next macro geopolitical issues that are likely to arise?
Transcript:
Chana Schoenberger:
Thanks so much. So I have here with me today our Washington bureau chief John Heltman, who spends a lot of time, both reporting on and overseeing our reporting about the war and about the regular response to it. So, John, how is the federal government thinking about policy options to force Russia to end the war?
John Heltman:
So thank you, Chana. Um, there's, there's basically four choices or four kind of lanes that the government can move in. There's military, there's diplomatic, there's cyber and there's economic. There are limits to how far the government can go in all of these, and I'll describe those in turn. As far as military, the administration's been very clear that it is trying to avoid a direct confrontation with the Russian military, which is why things like a no-fly zone, and sort of like even a partial no-fly zone or things that are effectively not really being considered. However, there are things that they can do and are doing such as supplying weapons to Ukraine, stinger, missiles, anti-tank weapons, and even sort of going behind the scenes and trying to get other countries to assist as well with military equipment, if not personnel.
John Heltman:
The point is there's a limit to like what the government is willing to do directly and militarily. Diplomatically, there are some things that are happening, a number of EU countries have, you know, expelled diplomats in various, embassies and consulates. And Russia has replied in turn. This is also something that can ramp up to the point of just kind of ending diplomatic relations with Russia. That would be a pretty extreme step. Even during the cold war, that never happened. And I don't think anyone necessarily thinks that's an objective or really aligned with what they want to reach. From a cyber perspective, a big aspect of this is sort of the effects of, of this war on sort of cyber warfare, the prospect of cyber warfare, and that is an increased risk.
John Heltman:
And of course, banks, especially the largest banks have been kind of dealing with cyber entry reasons for a very long time. And this is in some ways kind of nothing new. This is an area where Russia can escalate and we can escalate back. And the playing field of cyber warfare is such that it is very much to the advantage of the attacker. And so to the extent that nation-states are, to the extent that the United States is considering kind of cyber attacks against Russia and vice versa, I think they both recognize that you know, whatever they do to us, we'll do back to them and vice versa. So that's also kind of somewhat limited. And when it comes to economics, though, there is a lot more room to run, and there's a lot more that they can do and have been doing. And, you know, even just like almost every day, there's some kind of new expansion of sanctions. I can talk a little bit about that some more, but I'll just kind of leave it there.
Chana Schoenberger:
Interesting. Okay. So when we, economic is obviously the area that concerns banks the most. So there have been a number of things that have been well publicized. The sanctions seem to be reaching both into, in the case of many of the oligarchs, and then more broadly, you know, not trading Russian oil or gas. There was an interesting piece in the paper the other day about how a lot of the ships carrying oil have just turned around in the middle of the ocean because they lost their buyers while they were on their journey. So something is happening. What else could we actually do economically? Yeah.
John Heltman:
Yeah. So, I mean, I think it's worth kind of taking a moment and sort of absorbing the majesty of like, just how broad and in fact, or just how broad a raft of sanctions that has been levied against Russia already, really is. And what's remarkable about that is less what the United States has done as it is what the United States and Europe and Japan, and like Switzerland, and like Sweden, like countries that don't typically play this game, are all kind of presenting a pretty united front and effectively have a shared goal of making of making Russia, unable to kind of transact business in the international marketplace in a total way. That's pretty amazing. And that has, there isn't really much, I asked somebody if there's like a sort of parallel to this, and they were like, the closest thing would be like the response to Italy's invasion of Ethiopia in like 1935 is like the closest thing into like an international response that kind of mirrors this.
John Heltman:
So one of the things that's remarkable here is that they've sanctioned the central bank of Russia. That's called Bank of Russia. And that is something that doesn't happen very much. That makes it really difficult for the central bank to manage the impacts and basically manage its cash flow. It has reserves all over the world, uh, that it can't get to something like half of the sovereign or half of the kind of war chest that Russia was using to kind of use have reserves so that if something like this happened, they could, you know, wait it out. It isn't really available to them. That's pretty incredible.
Chana Schoenberger:
So, wait, what does that, what does that mean? They have a rainy day fund, but it's held outside the country or it's held in a different currency.
John Heltman:
Yeah, exactly. I mean, and all central banks kind of do this, and they'll hold dollars, they'll hold euros, they'll hold yen, they'll hold whatever. But all of those currencies are not really exchangeable to them, through the central banks. So, they're kind of, you know, just kind of chewing gum and bailing twine, trying to kind of like keep the thing together. And there's just an announcement today about how the treasury is not allowing the central bank to ACC access dollars for its sort of like purposes and for, or for repay debt rather. And that means that the, you know, Russian Federation is a significant risk of defaulting on its debt, um, which is bad news, huge. Um, yeah, well, it's like, it can, it can default on its debt or just like not, you know, it's like, or not eat, you know, it's like, it's really kind of running out of choices.
John Heltman:
Um, the, uh, of course like the, the sort of oligarchs and the oligarch families, and like, this is sort of an expanding perimeter, um, that, you know, may have some effect, but it's really just like revoking visas, you know, that kind of thing. That's something that, you know, will ratchet up. And you know, there's also a significant restriction to Russia on access to technology, again, not just from the United States, but from other, uh, countries as well from Europe, from Japan. Um, and that's kind of like, um, it's like the, the, you know, how in, in Iran, like they can't get spare parts for their like jets and stuff. Like, um, that's kind of what we're talking about up there. Like the, the ability Russia is very reliant on, um, uh, on the, on foreign access to those sorts of technological goods.
John Heltman:
So that's having a big effect, um, as well. Um, as far as like, what is, what's kind of left to go, I mean, you can just have a flat out total embargo, like we did with Cuba, still have more or less done with Cuba. Um, that that's a, probably a line that we're still a little ways from breaching. Um, and it also is not clear, like the US can do what it wants, but the question is like, where's the coalition going? Like what in the Europe is in a much less, um, uh, it has a, it is a lot harder for, for Europe to totally say no to everything Russian than it is for the United States, just in terms of trade balances. Um, so, uh, and then there's kind of secondary sanctions. So if you, um, uh, if you have, uh, sanctions against, you know, um, uh, GazProm or something, right. Uh, so GazProm can't do business with the United States. Um, but GazProm does business with India. Do you sanction India for, or do you kind of go after people in India for doing business with your sanctioned entity? Um, that can be extremely effective, uh, but it can also kind of, there's a kind of contagion risk there, uh, which we can get to in, in, you know, in a second.
Chana Schoenberger:
So basically we're creating blocs, there's, you know, that's where
John Heltman:
I'm getting to. Yeah. Or like that that's a risk, um, is sort of a bifurcation of the global economy.
Chana Schoenberger:
Right. Which we've seen before. Of course, this is the Cold War all over again.
John Heltman:
Yeah. I mean, actually the Cold War is an interesting analogy because that was a, um, that's much more of like a rivalry, you know, in a sphere of influence thing. Um, and really like a, a competition between two totally fundamentally different visions of what like the economy should be. And, um, this is a little different because Russia is not trying to expand communism. Russia is just trying to expand its, you know, power, you know, like the Russian Federation's sphere of influence. Right. And, um,
Chana Schoenberger:
There's no ideology involved here anymore,
John Heltman:
Not as much. And, and the question, like, I think that there's an analogy to World War I, or kind of like leading up to World War I where, you know, you had a big military buildups in all of these European countries, European and, and Asian countries. And leading up to the First World War, everyone was kind of convinced like, just give us an excuse to go to war with the Germans or like the French or whatever. And we're just gonna wipe 'em out. Cause we've got all these cool guns and ships and stuff, and everyone kind of wanted that war. I, I think the real question here is less what Russia does, but what China does and to lesser extent what India, Brazil, and some other nonaligned countries choose to do, whether they, um, whether they wanna kind of throw their lot in with Russia, uh, or they don't. And I think what they're worried about is this sort of secondary kind of blockification of the economy. That's not really good news for them either. So I guess the, the counterpoints, the World War I analogy is that nobody, like the US doesn't really want that, China doesn't really want that. Nobody really wants that, but there, there is that kind of potential,
Chana Schoenberger:
Right. People just wanna be quiet and have their economic systems work the regular way. Trade with one another, you know, know, tend their gardens, as it were. Yeah.
John Heltman:
Yeah, go ahead.
Chana Schoenberger:
No, no,
John Heltman:
I was just gonna say like, you know, from China's perspective, you know, they are, they really like Russian oil and gas. It's a, uh, China has very limited, uh, sort of energy resources of its own. It's always been reliant on imports and that's a sort of strategic weakness. Russia is a giant gas station with an army. Uh, they would love to sell their oil and gas. And China is the only one that's kind of has an outright said that they won't take it. Um, but China does a lot more business with the EU and with the United States than it does with Russia. Um, and so it's kind of, it's, it's trying to kind of have it both ways as long as it can. Um, but I don't think that it's, it thinks that it is in its interest to kind of just throw its lot in and have Russia sort of become a client state of China because it just creates an enormous amount of liability. Um, and really doesn't that, that deepened trading partnership would not offset the loss of the trading partnerships it has elsewhere.
Chana Schoenberger:
Well, not to mention from a geopolitical standpoint, they can't really be a client state unless China was going to control their politics and tell them what to do. And I don't see the Russians allowing that.
John Heltman:
I mean, the Russians may get to a point where they don't have a choice. Um, but that, again, a lot, I should have started all this by saying that like, this all depends on how long this goes on. Um, right.
Chana Schoenberger:
You know, we're in week six now, I believe.
John Heltman:
Seven, I think.
Chana Schoenberger:
February 20, which, which is like, you know, it's, it's seven weeks longer than anyone thought this would last.
John Heltman:
Yeah, no, I mean, everyone was kinda like, uh, you know, Ukraine will be taken over by Saturday. Um, and, uh, and so it's, um, this is definitely like held out a lot longer than, than anyone thought it was going to. Um, So
Chana Schoenberger:
Yeah, so interesting. Okay. Let's talk a little bit about the, uh, American domestic financial system, which is mostly what we cover here at American Banker. What, what will happen? So this is the war is causing a lot of uncertainty. Overseas is a lot of uncertainty and international trade, but of these companies, while they do have significant international operations, they're mostly American banks with American clients. So what does this all mean for them?
John Heltman:
Yeah, I mean, so as far as like direct, you know, sanctions, um, like the, the biggest impact is sort of implementing the sanctions regime and that, uh, that it's really something that only, um, uh, only the largest banks have any sort of direct exposure to like have any offices in Moscow have any, you know, kind of business relationships with Russian companies, et cetera. Um, the, uh, that is a technical challenge. It's not easy to do because it's not like all their accounts are in their names. Uh, and when they get sanctioned, they open up some LLC or something or some, you know, shell corporation to kind of operate out of. So it's a bit of a shell game. Um, so it's always that, that isn't like a straight ahead, simple task to accomplish, but what makes it, what you can ask for that makes it easier, is getting like a lot of guidance and, um, sort of intelligence if you will, from treasury and, uh, and OFAC, um, it's the Office of Foreign Asset Control within Treasury.
John Heltman:
What I've been hearing is that Treasury's been really forthcoming with, in making it kind of been a very good partner in sort of helping banks kind of identify who to sanction and who, you know, who not to. There's another kind of complication here is where if you have business lines, you know, uh, or business relationships, you know, you don't, it, you can stop them, but it, that can have sort of effects on not only the sort of targeted party, but also the counterparty who is not targeted. So like if you have, uh, a contract to sort facilitate payments for, you know, energy products, for example, and you just say like, well, you know, hit the button and that's cut, you know, that certainly people scrambling. So, so it takes a little time to wind these things down. And, uh, from what I understand, treasury has been, uh, accommodating in kind of trying to minimize those, um, those effects.
John Heltman:
Um, the, the sort of, uh, the effect on markets is a, is less predictable. Um, we've obviously seen energy prices kind of going way up, um, all over. That's 'cause it's a globally traded commodity, a sort of, uh, lack of supply leads to higher price everywhere. Um, but you know, you never know what new sources are gonna come online. Um, the, uh, so again, hard to predict you can't just say like, okay, well, oil will be expensive forever. Like it might very reason to think it would be, but you know, people have been wrong before. I think there's been a concern in certain commodity markets like nickel is a big, uh, market that Russia has a big play, a big part in providing global supply for, you know, we'll see there, um, wheat, you know, of course Russia and Ukraine are both significant wheat, uh, exporters.
John Heltman:
Um, that's not something that I think the United States is going to have to worry about very much 'cause we are ourselves a significant wheat exporter. Um, but in general, just like across the board, the EU is in a much more vulnerable place in terms of the sort of effects of these sanctions than the United States is. Um, and I think the United States is trying to kind of stay like, be sensitive of, to the EU kind of like pain tolerance, um, while everybody is. And this is again, all in the context of higher inflation, uh, and more aggressive efforts to kind of curb inflation domestically. Um, and all this is just stuff that, that is increasing inflationary pressure. Um, and again, all of this, how this plays out very much has to depend on how long the conflict lasts and how long the coalition sort of opposing the Russian invasion, uh, sticks together.
Chana Schoenberger:
Yeah. Which is by, by no mean is a foregone conclusion that they will stick together because a lot of these places don't have a lot of the same interests at all.
John Heltman:
Yeah. I mean, but then again, it's been surprising. I mean, uh, you know, again like Switzerland, you know, isn't like right.
Chana Schoenberger:
The idea of Switzerland joining any sort of alliance is amazing. Yeah.
John Heltman:
It's pretty uncommon. Um, and I think that just the, the fact that this has been such a brutal and, you know, nakedly aggressive, um, you know, invasion, uh, has, has really it's garnered incredible international unity that like this is something that we're willing to kind of accept some pain to kind of inflict some pain. Um, and so like, I don't know, it's, it's easy to be like, well, any day, you know, Italy can peel off or, and maybe they will, but so far it's been pretty, it's pretty remarkable that, that they're, they're saying, uh, that especially European countries that, that are so much more reliant on Russia as a sort of importer of, um, raw materials, uh, is, is sticking together and, and asking for more.
Chana Schoenberger:
That's fascinating. It's just, it's, it's interesting to think of all these banks that for, for decades now have been investing a overseas in places like Russia and, you know, sort of the, the, the way that investing works is you make an investment and you assume that it will eventually pay off for a long time. That's why you do it. If you can think that you wouldn't do it, and now they're just turning around and, and that's when an investment is turn around and, and pack up and, and go away and it sort of makes you under, you know, what, what this will mean. Will anyone ever go back to Russia to invest? Are they just done with Western brands from now on?
John Heltman:
I think it's interesting to look at what, I mean, we talked a lot about what the government is doing and what the government sort of steps and options are, but, um, there are effects ha there, Russians are feeling the, so the, of not just these sanctions, but just companies quitting the country, you know, McDonald's like, right. Nobody made McDonald's, you know, shut down in Russia, but they did it anyway for reputational reasons. Um, cuz it's a bad look. Um, maybe because they are just like, Hey, we actually, you know, politics aside or what, whatever, like we don't wanna be a part of this, you know? And, uh, and Russia sort of responded with its kind of like knock off McDonald's and I mean, I think, I guess to answer your question is like, you know, this is a really hard bell to UN ringing. Um, you know, it's, it's gonna be a long time before, you know, Western, uh, and I say Western, cuz you know, U.S., EU, you know, a lot of countries are not gonna wanna put any money in Russia, you know, no matter what, cuz it's just, it's unpredictable. Like they could, you know, it just it's, it seems like a worse and worse kind of bet.
Chana Schoenberger:
It's what happens when you have a sovereign default is that it's very hard to issue debt after that. Even if you have new leadership or you promise that this time it's different.
John Heltman:
Yeah, exactly. I mean, if you have, you know, if they have a new president and they're, they're like, Hey, we wanna rejoin the world. Like it's just not as easy as like it's not as easy as saying uncle. I mean like, uh, you know, the, the analogy here that is, I made a lot of analogies, but like the, um, the Iran sanctions leading up to the JCPOA in what was it, 2015, you know, was very similar in the sense of like pursuing secondary sanctions, a very unified, um, you know, coalition of countries, including Russia, like that was sort of, um, kind of applying this pressure to Iran. And, but like in that case, there was an ask, you know, like there was something that Iran could do to like make it stop, which is, is like, okay, some sort of deal where it says like we're not gonna get a nuclear bomb.
John Heltman:
This is a little trickier in both directions. Like there, isn't an obvious way that, and again, this is like my, you know, state department expertise, which is limited, I should say. Like, but there aren't, it's not, it's not that easy for any, for Russia to sort of off ramp and say like, okay, we're, we'll just settle for Donbass and call it a day or, you know, whatever. It's not easy for Russia to get out of this in a way that the west can find credible. Um, and it's there and the west can't kind of like back down either. So that's where you have this risk, that this is going to be kind of a normal for a long time. And the longer this kind of goes on, then the longer Russia is gonna be looking for other markets looking for other kind of partners.
John Heltman:
And that's when you get into the kind of cold war analogy where you have kind of a block of kind kind of aligned, you know, or, or sort of helping Russia in that sphere. And then you have, you know, kind of the, the west and then that just makes international investment far more complicated. Um, cuz you never know which way, you know, in some non-aligned country, you don't know where who's, where the one's gonna blow. And um, you know, during the cold war you had nonaligned countries would sort of play the USSR and the US off of each other, um, to sort of like maximum advantage. Um, and that's gonna be a little trickier, um, in this, in this case just because, um, you know, even if you have kind of China, you know, throwing its slot in with Russia, which is like, that's the biggest kind of elephant in the room or the biggest risk cuz I mean, China does have an economy that can rival the United States. Um, yes. It just doesn't that doesn't offset. How much of the global economy is sort of on the other side of the, of the ledger, um, between the EU, uh, the US again, Japan, um, you know, it's just, it's a big, it's a lot, the it's a lot of the global economy that's kind of lined up on one side
Chana Schoenberger:
And what do we think is gonna happen to something like offshoring and outsourcing many, many companies do this as a matter of course now banks do it. Certainly whenever you call a bank call center, you're almost never talking to someone in the US and they also bank the sectors that are, are involved on all sides of this. So I, I wonder if in addition to, you know, containerships of goods moving back and forth, whether the whole idea of people, not only labor mobility, but also sort of virtual job mobility is gonna change now.
John Heltman:
Uh, you know, I, I'm not sure what this does for like US relationships, trading relationships with like South Korea, you know, like, uh, I think, or India on its face. Like, um, but what I would say is, uh, the, the most likely, I guess like the, the most likely kind of effect is that is really in, in production of essential goods. So like the semiconductor shortage that we've been experiencing and why like so many, like so many 20 21 right model year vehicles are like sitting in a parking lot in Detroit right now. Um, those are supply chain problems that, uh, I think a lot of countries are going to, should be looking to increase their domestic production capacity for again, some have more potential for that than others. Um, and so I think like what the sort of like the, the economic, or sort of like lending effect is that, um, domestic commercial and, um, lending, uh, is going to be, um, uh, far more attractive just because the risk will be so much less. The, you know, expenses, um, will be, will be less. So I, I think the biggest, um, and this is not just in the United States, but I think a lot of countries are kind of looking for ways to kind insulate themselves from supply chain disruptions, which maybe they should have been doing anyway. Um, 'cause I think we've just learned how fragile like the global economy is.
Chana Schoenberger:
And it's interesting too, because after two years of the pandemic, when there was so much supply chain disruption and not because of a war, finally, it's the end of it. And now we have this. So, um, and which, which interesting because it's the whole, the whole system has been re over the decades of trade liberalization so that things would be produced in low cost countries. And it, it underpins the entire idea of consumer choice that, you know, has its, its you know, height in America, but also is throughout the Western world and even parts of the non-Western world. The idea that you can. And I talked about this the other day, um, on a, a webinar that I did, the 70 kinds of cereal, it's great to walk into a Walmart and just see all the, the many, many things, most of which are made in China that we can get for practically nothing just because of that trade liberalization system. But if that's over, then we're gonna have to stop demanding those things 'cause the supply's not gonna be there and that's fine. Yeah. I mean, nobody really needs 70 kinds of cereal.
John Heltman:
Yeah. But I mean, but if you, if the kind that you don't get anymore is the kind you like, you know, uh,
Chana Schoenberger:
Well, bummer for you, but it's not gonna kill you.
John Heltman:
yeah, yeah. Yeah. I mean, I, I think that this again sort of goes back to like inflationary pressure, I think like, um, , you know, there's, uh, all these like things that have been very cheap for a very long time are not gonna be as cheap or there's reason to think they won't be as cheap going forward. Um, you know, uh, right. And again, this sort of just like adds to the sort of inflationary like spiral, which again is going to result in higher interest rates from the fed, which means higher cost of funds for banks. Um, all of which can be sort of managed, observed as long as you see it coming. And I don't think anybody doesn't see that coming at this point,
Chana Schoenberger:
Right? Yes. These it's, it's amazing how quickly people went from, you know, there might be inflation to inflation is here. It's not going anywhere.
John Heltman:
Yeah. Which
Chana Schoenberger:
Has been, been
John Heltman:
A very big one thing. I'd also sorry, go ahead.
Chana Schoenberger:
Oh no, I was gonna continue. And then I was gonna ask another question.
John Heltman:
okay, go ahead.
Chana Schoenberger:
Um, let's talk about the dollar. So there's been a lot of, of threats to the dollar recently. One of them of course, is the idea that we might have a, a digital, you know, a central bank, digital currency, um, as they're talking about in many places around the world and the other was sort of flat out crypto, um, mm-hmm, what happens to the dollar, which is still the reserve currency of the whole world in the week of, of this war.
John Heltman:
Yeah. I mean, that's a question that I have smarter people than myself. And most of what I hear is that, um, there, it very well may be that the administration sort of really, you know, is really kicking the tires on a central bank, digital currency and really kind of putting the onus on the fed to explain why they shouldn't do it rather than that they should. Um, however, I don't know, from what I've heard, it doesn't seem like this is actually making, uh, this more is not like proving the case for a digital currency per se. Um, the United States dollar is the reserved currency of choice. Um, and as long as you aren't invading Ukraine, uh, you know, it still works pretty good for you. Um, the, and there isn't really another alternative that you can trust more. So like what, you know, the, the Euro, you know, has its ups and downs, you know, that the European union sort of governance structure is always a little shaky, especially compared to the United States, which, you know, we have our moments, but you know, the EU has theirs too, um, you know, the, the Chinese one, uh, is pegged to the dollar.
John Heltman:
So that doesn't really an alternative. Um, you know, uh, and of course the Rubal, obviously isn't really, uh, a very good choice right now. So, and when it comes to crypto, you know, um, I think there's always gonna be a market for crypto or for like Bitcoin, Ethereum, whatever, but like, um, I think, uh, the, what we have not seen so far is that crypto has not really, um, proven to be a viable sanctions of evasion you for Russia. And, uh, I think that the United States, if there was never any war Ukraine was going to kind of start looking at, uh, coming up with some rules of the road for how crypto can kind of integrate itself into the financial system. Um, but, uh, but like that was gonna gonna happen anyway. And that maybe has some sort of, maybe that has, has made people who wanted to do it anyway, give a reason why we should do it. But, um, but it hasn't really proven to be a very useful sanctions of Asian, uh, um, road to date. So, um, so as far as banks, what currency is concerned, uh, and as far, like I think that the risk of the dollar not being the reserve currency of choice, um, is, is just not, uh, not a great, great likelihood.
Chana Schoenberger:
So we'll just put that one to the side. Why though, I'm, I'm curious why can't I use crypto two evade the sanctions on my oligarch properties.
John Heltman:
It's not so much that you, I mean, part of it is that you it's traceable. So like, um, that's the thing, the whole thing with the blockchain. Right. Um, and you know, and the, the government is actually pretty good at, uh, interfacing with crypto and kind of like clawing back, stolen money and stuff like that. Uh, like, um, and it, I, you know, I, I think it's just like, it just, hasn't, it's not something that has the volume, I feel like to facilitate that kind of, um, evasion, you know, and, and like, I'm not really sure why, but it just kind of hasn't, you know, um, I think, I think if you're an oligarch, you probably want to go find some, you know, uh, Maldives bank account or some other kind of way of getting around it.
Chana Schoenberger:
Yeah. Well, after, you know, somebody's, reposessed my mega yacht, what am I, I gonna do next? The example that I always use as an illustration for crypto. Um, and I, I tried this on a, a financial attorney the other day and he laughed. So I guess it's funny. Um, I, is it here in New York where, where I live, um, you see a lot of people fighting on the subway, you see them yelling at their spouses or their significant others. You see them yelling at their kids, you see kids yelling at their parents and people do this in a way that's completely out in the open because they have no privacy, but total anonymity and crypto is like that. Right? So if I am a teenager and I'm on the subway and I'm yelling at my boyfriend, everybody says there's a couple fighting, but no, nobody knows who we are.
Chana Schoenberger:
So there's no social penalty to me. I'm not embarrassed because you don't know who I am. If you see me again the next day, you won't remember having seen me in this context, it's not gonna follow me around mm-hmm . So crypto is, is like that. In that way, you can see every single transaction and it will, the record will always be there. It'll be on the blockchain. It'll be in all of these distributed servers everywhere. And no one controls it, but you don't know who's behind this transaction, which is how we still can see the blocks that Satoshi Nakamoto, whoever that is created, you know, however many, 14, 15 years ago, those blocks are still there. We can see that nobody's touched them since then, but we don't know who Nakamoto is.
John Heltman:
Mm-hmm . Yeah. I mean, the thing is, though, if you're, uh, if you're on the subway and somebody shoots somebody else and nobody knows who that is, and then they run out of the subway, the police have ways of kind of like asking for kind of descriptions, what were they wearing? And, and so you can kind of do a similar thing with blockchain where you can be like, okay, well, they bought this here. Let we, and we know who this counterparty is. And so we can triangulate. So it's like, it takes some doing you're right. It's kind of anonymous, but it's not like perfectly anonymous. And if you not perfect, ironically,
Chana Schoenberger:
And, and in fact, the government is extremely good at doing all sorts of, and this is, uh, anti my, any laundering, you know, they're very good at tracing the money and, and figuring out where terrors financing or, or state sponsored malfeasance is, is coming from. They're
John Heltman:
Great at that. Right. And it's like the whole point of stealing, you know, money is so that you can spend it right. And like, if you steal a bunch of Bitcoin, or you use a bunch of Bitcoin to like evade sanctions, uh, and you just sit there then, like, what have you really evaded, what have you really accomplished? Um, so if you, if you're going to use them, then you're coming up with some sort of a profile in some sort of a, you know, um, the, the more, the more you actually use it for a, what it's for the more identifiable like you become. So again, Satoshi Nakamoto never did anything with his Bitcoin or his, or her, their it's, you know, Bitcoins. Right. Um, which is why it it's just kind of like a nothing. Right.
Chana Schoenberger:
um, so another question that sort of comes out of all, this is, what does this mean for investing in frontier markets in general? The, the reason frontier markets have have higher yields is because they're riskier, obviously that's the whole point mm-hmm and investors who go there know they're taking a greater risk. They know that sometimes things get nation in places like that. Russia was seen as a bit more of a safe bet because it was a country with a stable progression and until seven weeks ago, mm-hmm . But, um, I, I wonder if this is gonna make people more skittish about other frontier type markets,
John Heltman:
You know, I think different people are gonna have different attitudes and different appetites for risk, but in general, as I said, the, the biggest kind of, you know, question that is, has yet to sort of be definitively answered is just how, um, is, is just kinda like how, what, what, how China is going to kind of play this and how, um, you know, again, India is, you know, to a lesser extent, um, you know, how these other kind of like large global economies intend to kind of play their cards. Um, I think the risk of their, this kind of like this kind fossilizing into a, uh, calcifying into like a, a block on block kind of situation where you have kind of the us versus, you know, Russia and its, you know, trading partners, um, could create the potential for a sort of, again, the kind of cold war, you know, nonaligned countries kind of playing off each other.
John Heltman:
Um, so they'll take, you know, some investment from China and then they'll say like, haha, just kidding. Now we're gonna take some investment from the United States. Um, but in general I think it just makes like a lot of these nonaligned countries, you know, sort of a frontier markets are dependent on global trade, um, global trade, which is right in peril, you know, like, because of this conflict. Um, and so it just makes those markets riskier. Um, now that means that the rewards can be greater. I think there's probably a lot of people sitting there being like, as soon as this is over, we're just going right back to Russia because like it's, you know, it was fine before it did all this and whenever this blows over, you know, there's gonna be money to be made, you know, in Russia, but that's, you know, that's also risky and I, I don't think that's probably like a minority opinion, but you know, that's how investing works, right. Is, um,
Chana Schoenberger:
Make me a market. Poof, you're a market. Yeah.
John Heltman:
Yeah. I mean, um, I, I think that in, in general, in the short to medium term, again, totally dependent on how this plays out on the ground. And if there is sort of like a peaceful settlement, uh, or, you know, or what some kind of like soft landing for this in the nearest future, but barring that I think, uh, domestic investment is going to be feel much safer and um, much more preferable. Right. So if like, if you have, if you want to have money, you're going to invest in like Morocco, um, you know, well maybe you don't wanna invest in a Morocco bread factory because you know, it doesn't have any raw materials for like wheat and stuff, you know, like, um, that's
Chana Schoenberger:
Problem,
John Heltman:
It's risky, you know, like, and, and I think it's, it's, it's always been risky. It's always been high risk, high reward, and it's just getting those risks are growing and are harder to anticipate. So that's what, that's the difference. I feel like.
Chana Schoenberger:
Um, one thing that I do think is gonna happen is that if you look at the international response to Russia's invasion and the way they conducted this were over the last two months, I would not say that other countries that are thinking of doing some sort of border incursion to take back land, that they feel that they should have. I, I think that they would think twice at this point, because Russia has been able to withstand a lot of it and smaller countries simply couldn't
John Heltman:
Yeah. I mean, you know, this, the obvious sort of analog here is, uh, Taiwan, right. Um, right. Which China has sort of designed, has made sort of stated goals of, uh, reclaiming. Um, right. I think in that case, um, there, isn't going to be set to kind of like coy, you know, effort from the United States to get out of, um, get out of a direct confrontation with China as there is with Russia. Um, part of that is because, I mean, um, Taiwan is a, uh, one of the large just trading partners with the us, for, uh, semiconductors. Um, that's a vital thing, again, something that maybe in the future, we're trying to boost our domestic production of, but for the time being, um, a lot of that comes from Taiwan. Uh, so they're not, there's, there's not gonna be a kind of like, well, you can invade a little Taiwan, you know, like I think there's gonna be a much harder line there, um, than there has been with, uh, Ukraine. Um,
Chana Schoenberger:
It's also a difference of alliances. You know, we have a, we have a formal alliance to defend Taiwan.
John Heltman:
Yeah, yeah. And as you said, I mean, uh, what what's happening in Ukraine is terrible, but like, is it more terrible than like Syria? Is it more terrible than like the, uh, the war in Ethiopia? You know, it, it is. And it's just, we're talking about like size of the counter of the countries involved and the sort of global geopolitical importance, um, of those countries. Um, I mean, but a
Chana Schoenberger:
Human suffering is pretty much the same everywhere, you know, war is bad. Yeah. I mean, it's for
John Heltman:
Everybody it's yeah, no war bad. Um, that question, but it's a cynical way of looking.
Chana Schoenberger:
That's our conclusion to day.
John Heltman:
, uh, we, uh, we're firmly anti, uh, you know, human
Chana Schoenberger:
Anti-war here at American Banker. Yes.
John Heltman:
That's a bold stand. Um, but yeah, I mean, it's, I, I, I think it's gonna, I don't know, it's the exception of Taiwan. I can't think of like a kind of another, you know, another incursion that's like feels imminent, you know, like even with, you know, Hong Kong
Chana Schoenberger:
Sort of the looming Korean peninsula thing. Um,
John Heltman:
Yeah. That's always kinda
Chana Schoenberger:
Hong Kong. They already own that. They don't need to invade it. That's theirs.
John Heltman:
Yeah. Yeah. Right. I mean, uh, again, that's sort of a different set of circumstances there entirely again, get a very different kinda world reaction. Um, so I mean, this is a, in some ways like the, the, uh, the invasion of Ukraine, um, is a really unique, and I think hard to replicate set of circumstances that has yielded a extremely unprecedented global response. Um, and just going back to the, the thing about the global dollar and, you know, I think a lot of countries are kind of watching what's happening and saying like, I really don't want what happened is happening to Russia to happen to me. So I better try to like, do stuff to mitigate, you know, those impacts thing is like Russia thought they were doing that already. Like they've been spending a long time thinking about this and sort of yeah. Trying to reduce the impact of sanction that sanctions that they expected to come would have on their economy. Um, and, uh, I think that other countries are rightly kind of like, well, okay, so, you know, the US now has this power to just kind of like flip the off switch on anybody's economy. But the thing is they don't really have that. Um, the coalition does, like, you know, these partners all together can kind of give you nowhere to turn, but like that doesn't happen very much. And it takes a pretty, you know, naked power grab, um, to, to kind of yield that kind of result. So,
Chana Schoenberger:
Yeah, well, we're nearly out of time. But thanks, John, this has been super interesting. Always fun to talk policy with you, and thanks, everyone, for joining us today.