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Sanctions on Russia will backfire, expose the failings of U.S. dollar, and may kill current global monetary system

Kitco News

(Kitco News) - Sanctions against Russia are a tool of warfare and will backfire against the U.S. and its allies, leading to food shortages and potential food rationing in the short term, and damaging the U.S. dollar's dominance in the long term, according to Michael Wilkerson, founder of

"Russia has worked, for the last almost decade, to sanction-proof its economy…sanctions rarely work because the impact tends to be born by the sanction-imposing country," Wilkerson told Michelle Makori, Editor-in-Chief and Lead Anchor of Kitco News. 

Wilkerson is an emerging markets investor, contributor to several publications, including Barron's and Market Watch, and has over three decades of experience as an investor, financial advisor and executive, including the CEO of Helios Fairfax Partners and managing director of Lazard.

The U.S. and other G7 countries met in late June in Germany to discuss further sanctions to enact on the government of Russian President Vladimir Putin. Among these punitive measures is a ban on Russian gold imports.

Additionally, the G7 countries deliberated imposing a cap on Russian oil prices, which would effectively place a ceiling on the price of Russian oil exports.

Russia has condemned such ideas of controlling their oil price, with Deputy Prime Minister Alexander Novak saying last week that "another attempt to intervene into the market mechanisms which may only lead to market's disbalance … which would lead to [a] price increase."

The impact of the sanctions will in fact be more heavily felt by the U.S. than by Russia, Wilkerson said, and will damage the countries imposing the sanction in the short term and long term. Wilkerson stressed that sanctions have a long history of not achieving the intended outcomes.

"You can look at a long history of sanctions imposed in the 20th century, or even before, if we're going back in history, they rarely work as economic matter. They often backfire. They're clearly a political tool that says, 'alright, we're not prepared to engage in a war, a hot war, at least. What can we do to signal to the enemy, to ourselves, that we're not going to stand for this? We're not going to trade with the enemy, certainly, what can we do?'," he said.

These sanctions bear economic consequences beyond just the energy markets, Wilkerson said.

"We're likely to see it when food shortages and rationing the summer, which will be a terrible and unnecessary event," he said.

"I think the thing that we have to remember, and it's not being said to the American public, or European public, is that sanctions are a form of war. Blockades, embargoes, sanctions, short of a hot war, they are a wartime activity, and I don't believe the American people have voted for that or support it. Most Americans don't want us to engage in a war over Ukraine, but we've done so. So, I think we have to remember that context, that certainly from Moscow's perspective, they see this as an act of war," he said.

Importantly, since sanctions are an act of war, they have the potential to escalate tensions into a hot war.

"My concern here is that we seem to be doubling down on an effort to completely take out the Putin regime, undermine Russia as a nation altogether. Any cornered rat will fight to the death and by pushing Putin and the government into a corner with no diplomatic off-ramps, no chance to negotiate a solution, I think we're making a mistake. We were at an eerie parallel to 1914, sleep-walking into disaster," he said.

Wilkerson's comments come as NATO recently invited Finland and Sweden to join the alliance.

This would only exacerbate the situation given Putin's invasion of Ukraine was most motivated by his fears it would join NATO, Wilkerson argued.

"There was a strong argument that says that the entire reason that Russia actually invaded Ukraine was because of this push by the West to bring Ukraine on Russia's borders into NATO. And now, we're again doubling down on that by bringing in two countries, very approximate and very much in Russia's strategic sphere, which is only going to intensify the issue, the original motivation behind the resistance," he said.

Instead, the West should pursue a policy that creates a neutral zone between Western Europe and Russia.

"I think what we could have done and what John Mearsheimer pointed out almost 10 years ago now was to abandon that strategy and to allow a buffer zone to exist, where Ukraine was neither tea or coffee, somewhere in between, and a neutral non-threat. I think that's the only way that Ukraine was going to stay independent, and that independence is very unclear today," he said.

Sanctions on Russian gold will have even less impact on Putin's war effort, Wilkerson said.

"Compared to oil and gas, [gold] is their third largest or one of the largest export items. I don't think it's that consequential, just like with oil and gas. I imagine that Russia will find another home for it," he said. Pointing out that Russia has in fact been adding to its own gold reserves.

Wilkerson's comments come as the gold price dropped 2% on Tuesday on the back of a strong U.S. dollar.

However, long-term, investors can expect an erosion of the dollar's strength. Weaponizing the U.S. dollar is going to damage its status in the long-term as the sole global reserve currency. 

"Under Keynesian economics, the West was increasingly convinced that it needed to move off the gold standard to become a fiat currency that was based solely on the good faith and credit of its governments. That worked for a long time, but it also enabled those governments to increasingly run deficits, increase their debt," he said.

Russia's plan to combat excessive government money creation and inflation is to back its national currency with hard assets, like gold, Wilkerson said.

"What Russia has done is they have announced the intention…to back the ruble by gold and other commodities. So, not exactly going back on the gold standard…but basically to make the ruble for the first time of any major currency actually backed by something real," he said.

The value of the ruble will be supported by the value of underlying hard assets held by the central bank, whereas the U.S. dollar and the euro are backed only by the "faith and credit" of the issuing governments, whose inflationary policies are coming into greater and greater disrepute. If successfully implemented, it will be the closest thing the world has seen to "hard money" in over a century, according to Wilkerson, 

Wilkerson argued that by taking this step, Putin effectively is calling the bluff on the entire house of cards of the Keynes-inspired fiat monetary system.

"In addition to his role as pillager of Ukraine, Putin may well be destined to kill off the current global fiat monetary system", said Wilkerson.

For information on how the dollar will lose its status as the sole global reserve currency and how the global monetary system will change, as well as for the investments and commodities that would likely benefit from the current geopolitical environment, watch the video above.

Follow Michelle Makori on Twitter: @MichelleMakori

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