Personal Wealth Management / Market Analysis

Ken Fisher on The Real Impact of Economic Sanctions

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher believes the real impacts of economic sanctions against Russia will be weaker than intended. Targeted countries often circumvent sanction’s intent. For example, many Western nations banned Russian oil imports. Yet as Ken says, many other countries who aren’t participating in Russian sanctions—including China and India—continue purchasing Russian fossil fuels and commodities.

Ken observes how history proves sanctions do little to impede despots like Vladimir Putin, though he acknowledges sanctions will affect Russian citizens with higher prices and increased supply chain disruptions. According to Ken, the only way for sanctions to be effective is if all participating countries stick to the full scope of the sanctions—an unlikely occurrence today.



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Ken Fisher: So, of course, because of the very largescale sanctions imposed by Western nations in particular, but also many others on Russia tied to its war on Ukraine, the logical question becomes, what are the economic impacts of this? Now, I'm going to try to make this as simple as I can. Imagine a bowl made out of Swiss cheese. Pour some water in. What happens? Well, I'm pretty sure you get some wet Swiss cheese. And the argument that sanctions do very much is actually pretty much all wet.

Ken Fisher: The fact is, we have a very long history of sanctions. The believers in sanctions always think they do more than they do. But when we think about just to think of endgame, when we think about despots dictators, behaving badly, a la, Mr.Putin, for example, and we see sanctions for that kind of character applied in history, they've never changed the despotic behavior of those people. You could see that with Fidel Castro. You could see that with Kim Jong-Un. You can just go back and back and back. And there's a reason why, and I'll get to that in a moment. Will the sanctions hurt the average Russian citizen? Yes. How much? I'm going to talk about that in a minute.

Ken Fisher: Sanctions, in theory, would really only matter very much if pretty much everybody stuck to the sanctions. As soon as you get to the point that many countries don't, even a relatively few of them, surprisingly few of them, you get to that Swiss cheese function in the water. So, when we look at the world today, we can see a couple things. One of them is that over half the world's population currently is in countries that are not participating in the sanctions against Russia. Most of these, not all are among smaller economies and many Third World economies, but not all China, for example, India, for example, Israel.

Ken Fisher: But the reality is, what happens in a world like that, is things that Russia can't sell to the west, as they traditionally did. They're prone to sell to these other countries who then turn around and at a mark-up, sell similar things back into the Western nations. That is sometimes what can be referred to as the black market. And it raises costs somewhat, for sure, but beyond that, it has relatively little impact other than that it also is raising those costs because it's slightly disrupting supply chains. The thing that used to go from A to B now goes from A to D to B or something similar does.

Ken Fisher: So, for example, as I speak, Russian oil is selling at a $30 discount to Brent prices. And those not having sanctions against it are buying it on the cheap. And many are reselling through water transport. Because water transport is cheap, once you get something on ship and on the water, it doesn't cost that much to move it a little further and get it into places that otherwise wouldn't get it directly from Russia. But likewise, things get sold into Russia at a higher price from those same countries. Now, the biggest exports that Russia has are all commodities. Russia is a very backward economy. It is one whose GDP before the war started was at the same level that it was 15 years ago. Yes, let me say that again. Nominal GDP in Russia is no higher than it was 15 years before the Ukraine war started. That's a dismal history in this period.

Ken Fisher: It makes almost all the rest of the world look great by comparison. And the main exports are commodities. And the biggest, most important one of those, of course, is fossil fuel. And the fossil fuel, which was heavily sold into Europe, making up 27% of Europe's needs, will become more circuitous for Europe and, in fact, may raise costs there enough to actually cause European recession. Although we have a lot of history before of similar function and similar pricing, not tied to a Russian war, in Europe, leading to European recession that did not become global recession. The most classic period during when the pigs problem occurred, and oil was over $100 a barrel at the same time in terms of recent history.

Ken Fisher: But when you think about that, the US banned oil imports. Well, that's not really very important because the US is the next net exporter of fossil fuel. And the actual amount of Russian fossil fuel product that it buys is tiny, tiny, tiny, tiny, and easily replaced elsewhere. Britain has a higher component as a banner of buying Russian fossil fuel. But there, too, its fossil fuel is coming to it on the water and will not cost it much more for this. The other European countries, of course, right now, to the extent that Russia will sell them, will buy direct from Russia, and that's not really so bad for them economically. It's one of the facts that because it's a high percentage of European needs on the continent, they will not stop that flow, because they need it. They don't want it to rise and hurt them too much.

Ken Fisher: So, the reality of all of this is, um, sanctions. Let me just go a different direction with the sanctions. If you think of someone like Kim Jong Un, terrible, despot, Fidel Castro, long-time despot, neither one, Fidel Castro wasn't supposed to have Mercedes, wasn't supposed to be allowed to have Mercedes had legendarily, 50 of them. Kim Jung-Un has a wide array of luxury cars and products. Doesn't really care about his citizens. Keeps them poor. Keeps them poor as dirt. Has almost no actual and literally almost no actual asphalted roads in his country. That the amount of asphalted roads in North Korea are less than almost any country in the world as a percentage of the population or as a percentage of the square miles of land in the country. It's very backward. But that doesn't stop him from having all kind of luxury products he wants imported by and through countries that don't honor the sanctions.

Ken Fisher: That's my point about the Swiss cheese and the water. You get wet. Swiss cheese and the water goes through. Thank you very much for listening to me.


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A series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.



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