In years past, it was an axiom that sanctions against a country did not really work. Intended beneficiaries would cheat, secretly find other sources for what they needed, and so forth.
But it seems like these days, technological advances have changed that equation. One area where we have recently seen a significant effect of sanctions — real or threatened — is in currencies. Take these three situations:
The Turkish lira has been on the ropes all year anyway, down 24 percent since January, but 3 percent of that drop came in the last few days as the administration threatened sanctions against Turkey due to its detention of an American pastor. These sanctions were limited – prohibiting financial transactions with and freezing the U.S. assets and properties of two Turkish government officials – but they could be ramped up if there is no resolution on the pastor's detention.
The Russian ruble is down 8.5 percent this year, with more than one percent of that drop coming earlier this week. The catalyst is the possibility of new sanctions on Russian sovereign debt after Facebook announced that it found and deleted 32 fake accounts and pages likely tied to Russian operatives.
The most eye-popping of these situations is Iran's rial, which lost 18 percent of its value in just two days this week. That occurred as sanctions reimposed on the country related to its nuclear program start to be applied next week. Iran is also coping with inflation of more than 200 percent.
The primary reason these currencies are dropping in value is capital outflow. So clearly, economic sanctions do have some impact, even if they are simply in the news and under discussion.
Countries whose currencies are considered cheap may benefit from stronger exports, which are less expensive on the global market. But on the downside, imports to those countries are more expensive - and foreign investors may pause before pouring money into those countries, as repatriating profits could be problematic. The other major effect of course is inflation. Having to spend a lot more money for imports pushes the central bank to shift into hawkish mode and possibly raise interest rates, which by definition will slow down the economy.
My View: It is not easy, but if you are going to watch the global economy, you have to keep up with a lot of things happening at once. We talk a lot about tariffs, but currency movements like this can have even bigger impacts in the long run. As always, we will keep you in the loop as events develop.
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