On April 6, the Trump administration announced a new round of sanctions imposed upon certain Russian officials, persons, and businesses. Treasury Secretary Steve Mnuchin announced their purported purpose in a letter: “The Russian government operates for the disproportionate benefit of oligarchs and government elites.” Russia’s currency, the ruble (RUB), fell sharply after the announcement as well as over the days following.

By April 10, RUB had fallen to 63, which was the lowest since November 2016. Russia has spent the last almost four years gripped by desperate currency woes. These latest geopolitical maneuvers are the latest “transitory” factor to mask what is likely behind a whole lot more than this one particular exchange rate.

For many EM economies, 2008 was a deep but short contraction. It followed the classic “V” shape. Not so in Russia. The contraction part was the same as the others, about -10% Real GDP for three straight quarters, but what followed was an “L” recovery.

Like the economies of the developed world, the Russian system rebounded but only partially. In linear or absolute terms, Real GDP was growing again but not nearly as the same rate as before the Great “Recession.” That event marked a clear change in trend here as so many other locations.

It was only the first one, however. The “dollar” re-crisis of 2011 marked another shift that culminated in 2014’s “rising dollar.” Russia’s economy contracted again in 2015 as a result, this time while it was shallower than 2009 it lingered on for seven to nine quarters (the last two of the nine, Q4 2016 and Q1 2017 were not negative but basically flat in GDP).

As has become typical, the Russian economy began growing linearly in 2017 but in reality, it has followed along in a second “L” pulling circumstances even farther off track.

It is widely believed that Russia is highly dependent upon oil prices for these marginal changes in direction. There is some truth to it, as the energy sector does play an increased role in their economic fortunes. The close correlation between WTI and RUB, for instance, may appear to confirm the substance of the idea.

That connection, however, is a more recent outcome. It only came about in the middle of 2014 and lasted until around June or September last year.

Rising oil prices since then have not translated into a rising ruble, nor a recovering Russian economy. As noted at the outset, geopolitical events make it more difficult to isolate and confirm exactly why. It may be the case that continuous threats (back and forth) have enforced something of a limit on RUB’s retracing. Escalating sanctions would surely be a risk for the country.

But Russia’s currency, as I’ve pointed out before, is not the only one displaying this break with oil. Brazil, one of Russia’s fellow BRIC’s, has seen its currency, the real (BRL), drop in recent weeks, too. BRL today touched 3.50 for the first time since June 2016.

Now Brazil has its own share of political instability to factor. Where the Russians have to contend with largely external political problems, Brazil’s are entirely internal. The country is trying to undertake a momentous Presidential election where the frontrunner has already been sentenced to a lengthy prison term for a past bribery scandal.

Earlier this month, Luiz Inácio Lula da Silva, also known as simply Lula, surrendered to authorities to begin his 12-year custodial sentence. He had vowed to resist it for the remainder of the campaign, injecting turmoil into an already tumultuous situation. It’s not yet clear how his imprisonment might alter the complexion of what is already a toxic, highly contested race.

Lula’s popularity stems from his past administration of Brazil. Serving as President from 2003 until 2011, he had been elected as the head of the leftist Workers’ Party which he had formed. It was during this very period in which Brazil’s rise to seeming prosperity was achieved, giving him the reputation as a leader who can deliver good economic fortune. Such is now in very high demand.

His successor, Dilma Rousseff, was impeached in 2016 amidst massive nationwide protests. Brazil’s changed economic circumstances seems to have unleashed more than usual disenchantment and street theater. Dilma, as she is known, a former protégé of Lula, was followed by Michel Temer.

Temer had been Dilma’s Vice President, though he was classified as right-of-center his support was necessary to obtain a ruling quasi-coalition. He, too, has become embroiled in corruption charges, presiding over unrest rather than economic recovery. Though Temer remains in office, he is purported to be as unpopular as any major Brazilian political figure in decades. With an approval rating perhaps as low as 7%, there is no clear direction for Brazilians.

Many people want to write off what’s happening down there in South America as a case of Brazil reverting to prior form; it’s flirtation with modern economic success atypical to its national pattern. For much of its history, the economy has been a complete mess. Having now re-attained that state, so it is easy and lazy to believe this way.

What we find in Brazil is similar enough to what we find in Russia. The former has more to offer to the global economy than the latter, therefore in 2008 it experienced a “V” whereas the Russian’s did not. There was no escape, however, from the “rising dollar” 2014-16 which was far worse for the Brazilian economy than the Russian.

In both cases, over time the results are largely the same. Both are in considerable distress for far more than financial terms. Their continued and shared struggle should concern us very much. The “rising dollar” may not yet be done, whatever of the notion of “globally synchronized growth.”

We have to understand the nature of that 2014-17 correlation between oil and these currencies not for what everyone thinks (Brazil and Russia are oil exporters) but what really happened. For that, we can recall the Swiss, a topic I wrote about in December 2014 as the “rising dollar” truly started to shake up the world:

What was largely stable and even appreciating slightly turned into rapid devaluation just as “dollar” funding grew problematic. And while the scale of the ruble’s collapse is much bigger, it still aligns too well with its BRIC cousin the Brazilian real. The common theme is economic weakness exposed by “dollar” tightening. That this didn’t occur to this dangerous degree in 2013’s “tightening” is another indication of how 2014 is far, far worse – with no end yet in sight.

All of this leads back to, of course, Switzerland. The Swiss National Bank this morning announced that it would start charging for sight deposits (with some limitations) as the Swiss franc threatens to unwind at the peg. SNB officials are also using the Russian problem as an excuse, but as I have endeavored to show here there is no “Russian problem” but rather an entangled “dollar” mess striking pretty much everywhere and anywhere.

The Swiss connection mattered for several reasons, but mostly because it directly contradicted the narrative of late 2014. Then, as now, the global economy was thought finally ready, and able, to sail off into the Hollywood sunset of accelerating global growth (they added “synchronized” I think to better market the idea last year). What was happening at opposite ends of the “dollar” demanded far more attention than the word “transitory.”

In that respect, the SNB is now in the same kind of conundrum (in opposite directions) as the Banco do Brasil in trying to ward off a currency problem that is not its own. The “dollar” missteps in the past six months are too immense for any one central bank to address. That is the problem here as this is not just a run of “dollar” disorder, though that is the primary symptom and means of “contagion”, but rather the global financial system is in a state of high pessimism and contraction.

Because of the incorrect economic expectations embedded within +$100 WTI (and other crude benchmarks) it was susceptible to becoming the perfect medium for spreading that pessimism, contraction, and contagion. Currencies like RUB and BRL began to suddenly correlate almost perfectly with WTI not because they were oil exporters and their economies dependent upon energy sector performance, but because that was the path of least resistance for the “rising dollar.”

If there is one thing we should have learned by studying the global monetary system over the last eleven years, it is that it doesn’t ever stand still. The eurodollar constantly evolves even in this state of chronic dysfunction. It is more Asian and more FX now than before, but there are innumerable other alterations we may not yet be fully aware of.

This decoupling of oil from other indications may be similar along these lines. In other words, Russia and Brazil are being given “reflation” via slowly rising oil prices but it doesn’t, or at least hasn’t, translated the way it did (in the opposite direction) more directly during those particular years. Both countries have problems much bigger than even a WTI boost could fix.

That’s because the single biggest issue in terms of restraint, or secular stagnation, continues to be the “dollar.” Just ask Russia, Brazil, China, Europe, etc. WTI played a central role in that part specific to 2014-16, but there is increasing evidence that it may not in whatever comes next – just as it was much farther in the background 2011-12. In the end, maybe Janet Yellen was right, only not at all in the way she expected. Oil may have been transitory after all.

If only the economic effects of the “dollar” were. What might have replaced WTI as the path of least resistance this time? Hard to say, but there is a reason we have been watching the events in Hong Kong with particular interest. There remain heavy consequences to so many unanswered “L’s”; not just “dollars”, either.

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