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Princeton's James: Sanctions Against Russia Could Lead to Banking Crisis, Shooting War

By    |   Wednesday, 16 April 2014 11:05 AM

Financial sanctions against Russia could lead to a banking crisis in the West and even a military war, warns Harold James, a professor of history and international affairs at Princeton University.

Financial war could hurt the West's highly complex and interconnected financial system much more than it would hurt Russia's relatively isolated financial market, James writes in an article for Project Syndicate.

Just look at how Lehman Brothers' bankruptcy sparked the 2008 U.S. financial crisis to see how banking integration creates vulnerability. And Lehman was small compared with the Austrian, French and German banks that are extremely exposed to Russia, points out James, a specialist in German economic history and globalization.

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"Given this, a Russian asset freeze could be catastrophic for European — indeed, global — financial markets."

With that in mind, Russian President Vladimir Putin believes the West can't possibly be serious about financial war, James writes. Putin hopes to destabilize Ukraine while simultaneously exploiting European financial vulnerabilities.

"Indeed, Putin sometimes likes to frame it as a contest pitting him against the power of financial markets."

Based on past experience, financial war could presage real war, he cautions. That's what happened before World War I.

Prompted by a dispute over control of Morocco in 1911, France organized a massive withdrawal of investments from Germany. But Germany was ready for the attack, he says.

"Indeed, German bankers proudly noted that the crisis of confidence hit the Paris market much harder than markets in Berlin or Hamburg."

Recognizing the importance of financial warfare in the early 20th century, countries increased banking supervision and gave their central bank's more power to provide emergency liquidity. Some Federal Reserve founders cited a military need.

Policymakers back then believed financial buffers would make the world safe. However, they didn't prevent war.

"Instead of being an alternative to war, the financial arms race made war more likely — as it may well be doing with Russia today."

The Obama administration is preparing to strengthen sanctions against Russia, but the European Union, worried about its already fragile recovery, is reluctant, to go along, Bloomberg reports.

"The level of trade between the U.S. and Russia directly is quite limited,” Simon Mandel, vice president at a brokerage and research firm Auerbach Grayson & Co., tells Bloomberg. "Whatever sanctions the U.S. comes out with, unless the Chinese government or the EU are willing to support them, they will still have a minimal impact on the Russian government."

The European Union has blacklisted 51 Ukrainian and Russians but is worried that tougher actions could prompt Russia to stop gas and oil deliveries, Bloomberg notes.

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Financial sanctions against Russia could lead to a banking crisis in the West and even a military war, warns Harold James, a professor of history and international affairs at Princeton University.
James, Russia, war, market
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2014-05-16
Wednesday, 16 April 2014 11:05 AM
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