Sanctions against Russia’s central bank mark a ‘break-the-glass moment,’ economist says

Harvard Economics Professor Kenneth Rogoff joins Yahoo Finance Live to discuss U.S. sanctions on Russia's central bank and the outlook for global markets amid the Russia-Ukraine war.

Video Transcript

BRIAN CHEUNG: Well, investors have a lot to assess right now with the Russia-Ukraine crisis. And our next guest says the risk is not simply blowback to our own economy through energy and supply chains, but something that he describes as an unintended escalation dynamic. Ken Rogoff is an economics professor at Harvard and the former chief economist of the International Monetary Fund. Professor Rogoff, it's great to have you on the program this morning.



BRIAN CHEUNG: Tell us a little bit more about exactly what you mean by an unintended escalation dynamic. And what do you fear is the outcome of this crisis as it relates to the global economy?

KENNETH ROGOFF: Well, I mean, clearly, Putin is either going to double down or back down. He's not going to simply turn the other cheek if the sanctions start to bite. And so the challenge is how to calibrate things so that he gets a tough message without having things blow up. I mean, yesterday you saw putting his nuclear arsenal on high alert.

People have been worrying about a cyber war for a long time, and everybody says, well, that's not going to happen because Russia has more to lose than they have to gain. But there's a concern that, you know, it's not just rational. It involves emotions.

They have a lot of capacity to hit our infrastructure, to hit our financial system. We can do worse to them, but, I mean, that's just an example, [? tech. ?]

I don't want to sound hysterical, but this is still early days. I mean, Putin's in there to win. And we have to make sure he feels pain. But it's-- it's a very, very volatile situation.

BRIAN SOZZI: Professor, you're a noted expert in financial crises and understanding them and explaining them. What do you think the blowback of Russia being isolated increasingly, what does that mean for the US? Does that set the stage for some form of US economic crisis?

KENNETH ROGOFF: Well, not yet where things are. I mean, the fact is Russia is very important in energy markets, but it's a midget in the global economy. And Ukraine's even smaller. You know, of course, it matters for some markets.

But the real concern is just the uncertainty this breeds, the whole change and the post-war stability, et cetera. I mean, that's-- that's really the concern. I mean, I think if it stops here, nothing much has happened in the global economy. There's going to be worse inflation and lower growth. I think that's baked in a cake at this point with what's happening, but it's still a very, very volatile situation.

BRIAN CHEUNG: Can you, I guess, walk us through the significance of some of the actions that were taken specifically against the central bank of Russia, very clearly designed to make sure that they can't tap into international reserves at a time that's very important, which explains the ruble's movement. What does that mean in terms of the Russian economy being able to do this type of thing? And how significant is it that they're doing this because we don't usually see these types of actions?

KENNETH ROGOFF: No, it's an absolutely radical measure to try to freeze assets at a major central bank. It's a break-the-glass moment. They're trying to thread the needle. So they're putting restrictions on. They'd like Russia to keep pumping its gas, because the Europeans want that, and sending out wheat, but to make it hard for them to use it when they get it. They want to make it hard for them to thread the needle.

There's a sort of-- it's, it's very delicately used. They didn't go full blast in SWIFT in freezing the central bank, but they've ramped it up radically. And, you know, again, the question is, you know, what's next?

But it's a major thing. I mean, if you want to look at the long-run picture of dollar dominance in the global economy, believe me, China's looking at this. They have, I don't know, $3 trillion in dollar reserves. And someday they may well do a similar thing in Taiwan. And they're thinking about how to shield themselves. And it could have very big, longer-term ramifications for the global economy, dollar dominance. But, you know near term, the volatility is really what's going to happen, will things stop at the border, et cetera.

BRIAN CHEUNG: I want to drill down on the dollar dominance thing. You're an expert in this field, and I've never seen so many people care about SWIFT before or want to learn about exactly what SWIFT is doing. But, you know, SWIFT, in addition to all the other measures, is clearly designed to isolate Russia, which has required them to not have as much of a reliance on US dollars or US dollar denominated assets. And we know the central bank was already trying to reduce their exposure by kind of getting into gold in the years leading up to the pandemic.

What do you feel as the risk of everything that's been going on here to the dollar dominance? I mean, you said that Russia's not too substantial in the global economy. But if they start turning to, let's say, a digital yuan or cryptocurrencies here, would that do anything for the US dollar, dollar's strength?

KENNETH ROGOFF: Well, absolutely, this isn't going to happen overnight. The fact is there are not a lot of moves they have. I mean, SWIFT isn't the whole global clearing system. It's about half of it, but it's a very important half. And, yeah, there are ways around it, but it's a very expensive and very hard. It's absolutely a crippling move.

And it's a very big deal because the whole infrastructure of the global financial system-- trade, finance, everything-- about pensioners getting their money, everything-- is built around SWIFT. And so the question, you know, if you're using it in this way-- which I fully support-- but you don't quite know whether it's going to accelerate a move away from SWIFT. I'm sure the SWIFT, you know, is looking at this very closely themselves because we are in a very dynamic world where there eventually will be a move to more digital assets.

BRIAN SOZZI: And Professor, eventually-- and it's hard to see this now-- this will end in some form. What do you think Russia's standing in the world will look like?

KENNETH ROGOFF: I mean, at this point, Putin is a pariah. I mean, I have many Ukrainian friends, Russian friends who are just utterly distraught. They're look at being cut off from the world for a long time. It's really hard to know how to come back from this until Putin's gone.

I just-- I-- I-- you know, he's going to be looked at as a mass murderer. People are going to be looking at genocide charges. They're suddenly treating him like North Korea, Venezuela. He's painted himself into this corner.

It's a very dark place where we are. And, you know, I'm not sure how we get to an end of it until Putin and his cronies go. And, you know, if we look at North Korea, that's not happening. I'm not sure how fast it will happen in Russia.

BRIAN CHEUNG: I mean given the situation that you've just kind of painted there, what more can be done? I mean, the sanctions that we've already done and other Western nations have done have been pretty dramatic, as we discussed earlier in the segment. Is there anything the International Monetary Fund, for example, where you used to work, can do? I mean, special drawing rights are an enormously important part to that region of the world. Would it help to give Ukraine more SDRs or, you know, do something to target Russia's SDR? I mean, is there anything more that can be done at the international level?

KENNETH ROGOFF: I mean, a little bit. They already have somewhat cordoned off Russia's SDRs. Russia-- Russia is not allowed to use them directly. They have to use them through the IMF, which, you know, leads to problems. The I-- the IMF's not a big player in this.

They may be in some of the fallout that happens. We're already in a very fragile state in the global economy. Emerging markets, particularly the smaller ones, developing economies are all in debt distress. As interest rates rise, it's going to get worse. And having this extra volatility is certainly going to make things much worse. We're entering-- we were already entering a difficult situation after the pandemic, and this is going to amplify things.

You asked about financial crises. I don't know about in advanced countries, but certainly in emerging markets and developing economies, it's going to be a problem. And coming back to Russia, one thing they might achieve with the SWIFT-- I don't know how it will go-- is to create banking crises in Russia because there's a lot of dollar-denominated debt internally. And if people try to withdraw it, they're going to have to freeze it. There are going to be back runs because they don't-- the central bank can't use its dollars to bail them out. So-- and again, how will Russia react as this goes on?

BRIAN SOZZI: And Professor, you mentioned the potential for cyber-- cyber attacks moments ago. Are you confident the US could thwart any cyber attacks on our infrastructure?

KENNETH ROGOFF: We-- we kind of know we can't. We do what we can. This is really mutually assured destruction. We can do a lot to them, maybe worse. So that's really the risk of their ramping up on cyber. I think it's, you know, pretty clear we can't stop them at every point.

I mean, I don't know. It's a fast-moving situation. Maybe we're at a brief moment of technical dominance, but I kind of doubt it. There are all kinds of vulnerabilities. We've tried to patch them up. But the big risk to Russia doing something is that we can do it to them worse.

BRIAN CHEUNG: Kenneth Rogoff, economics professor at Harvard and the former chief economist of the International Monetary Fund in a wide-ranging discussion. Thanks so much for stopping by Yahoo Finance this morning.