Carney: Russia Got Canceled and China Got the Benefit

This week saw the introduction of a new phenomenon in international relations: canceling an entire country.

Two weeks ago, Russia was a normal and minor player in the international financial system and global economy. Its central bank had reserves in global currencies, its commodities traded on exchanges in London and were delivered into ports in the Gulf of Mexico and Hawaii, and pension funds for public sector workers in places like Connecticut owned bonds issued by the Russian government.

Not any more. There have been a host of government sanctions imposed on Russia, including restrictions on technology imports, restrictions on its major banks, and limits on its central bank access to foreign reserves that it could use to defend its currency. But even more strikingly, Russia has largely been rejected by much of the private sector in a series of moves that some are calling “self-sanctioning.”

Chevron and Exxon Mobil announced they were getting out of ventures in Russia. BP said it plans to exit its near 20 percent stake in Rosneft, said to be worth $25 billion. Boeing has said it will not service planes owned by Russian airlines. Walt Disney and Warner Brothers are not releasing their newest films in Russia. Apple has turned off its App store and paused sales in Russia. The World Bank has suspended all operations. General Motors said it would stop exporting cars to Russia. Ford suspended its joint-venture in Russia.

Some of these exits are easier than others. Apple’s iPhone sales in Russia reportedly amount to less than two percent of worldwide revenue. Russia accounts for one percent or so of the Apple app store. GM only exports 3,000 cars into Russia a year, according to the Detroit Free Press.

It will not be as easy for Rosneft or Exxon. For the same reason European and U.S. companies are looking to exit, they will have trouble finding buyers outside of Russia. Even if they were to find a willing buyer, it would be different to find a bank willing to finance the acquisition of assets in Russa. Russia has banned foreigners from selling Russian securities, so publicly traded shares cannot be divested. The restrictions on Russian financial institutions will make it very hard for Russian entities to buy these assets. And, in any case, taking billions of dollars from a Russian company for a Russian asset probably is not much better than just owning the asset.

One option is just to walk away. Exxon reportedly plans to hand over its stake in a Russian oil development firm to Rosneft and its other partners. BP may have to do the same. But simply giving away billions of dollars of assets to a state-owned, Kremlin-controlled entity seems suboptimal. Certainly, it seems a weird way to punish the Russian government for invading Ukraine.

Holders of Russian government or private sector bonds are also in a tight spot. Western sanctions prevent investors from buying Russian bonds on the secondary market, so anyone who already holds the bonds is stuck with them. The Russian central bank has instituted capital controls that prohibit payment of rubles to foreigners. And increasingly U.S. financial intermediaries are trying not to accept payments from Russian counterparties.

For the third day in a row, Russian oil reportedly failed to attract bidders on Wednesday even as Brent crude and WTI hit the highest price in a decade or so. Apparently, some traders are worried that further sanctions could prevent them from accepting delivery of Russian oil or interfere with their ability to pay for it. Others, reportedly including shippers and refiners, are simply balking at dealing with Russian products given the international outrage over the invasion. This is cancel culture on the level of international affairs.

It seems likely that China will be a big beneficiary here. It would love nothing more than for the rest of the world to shun Russian oil, leaving it as one of the only customers left. And it would likely be all too happy to purchase the assets, financial and otherwise, that U.S. companies are looking to shed – at a steep discount, of course. Meanwhile, the restrictions on exporting technology and other products to Russia will create a market ripe for Chinese dominance.

In other words, the global effort to cancel Russia is a big boon to the communists who still rule China.