This post Get Lost, Uncle Sam appeared first on Daily Reckoning.

The U.S. has led the most aggressive sanctions regime ever in its efforts to punish Russia for invading Ukraine.

The first round of financial targets included obvious attacks such as freezing the U.S. dollar accounts of Russian banks and oligarchs. The second round raised the ante by freezing the dollar accounts of the Central Bank of Russia itself. This was unprecedented except in the case of rogue states such as Iran, North Korea and Syria.

Suddenly the central bank of the world's ninth largest economy and third largest oil producer with over $2.1 trillion in GDP found itself shut out of the global payments and banking systems.

The sanctions went beyond finance and banking to include bans on Russian exports, freezing Russia out of insurance markets (as a way to effectively prohibit oil shipments) and bans on critical exports to Russia including high-tech equipment, semiconductors and popular consumer goods.

Major U.S. and other Western companies from Shell Oil to McDonalds were pressured to shut down operations in Russia, and many did.

Leave Me Out of It

But, a large part of the rest of the world has refused to join the U.S./EU/NATO financial sanctions. This was best evidenced at the recent G20 finance ministers summit conference held in Bengaluru, India.

Financial sanctions are difficult to impose at the best of times. They require large-scale cooperation from many nations to prevent leakage and workarounds that defeat the purpose of the sanctions.

The U.S. knew that it could count on vassal states such as Germany, France, Japan, and the UK to go along with the sanctions. The G20 finance ministers conference was the perfect place to firm up the cooperation and gain consensus from important countries such as Brazil, India, China, and Saudi Arabia.

U.S. Treasury Secretary Janet Yellen attended the G20 event and pushed hard to form a united front of all participants against Russia. She failed.

Key economic players such as China and India refused to endorse the proposed final statement. For only the second time in its history, the G20 was unable to issue a final communique reflecting the consensus of the participants. There was no consensus.

Strength In Numbers

The U.S. may be the world's largest economy ($25 trillion), but its share of global GDP measured as a percentage of the total has been shrinking even as large developing economies including India, Brazil, China and Indonesia keep coming up in the ranks.

In fact, the world's four largest developing economies (China, India, Russia and Iran) have a combined GDP larger than the United States. When the next three (Brazil, Mexico and Indonesia) are included as part of this developing economy G7, the gap over the U.S. grows by another $4.6 trillion. Collectively, they're far too big to ignore.

And it's not all about size. Those same developing economies and a few others can influence world prices in key commodities such as oil, natural gas, soybeans, and manufactured goods including automobiles and communications technology. That's why the participation of these economies in the financial sanctions against Russia led by the United States is critical.

If these developing economies don't participate, that leaves far too many trading partners with Russia for sanctions ever to be effective. And these nations aren't participating.

Sorry U.S., Business Is Business

The fact is, the world is far more fractured than the U.S. anticipated. It's not that these countries necessarily support Russia's invasion. It's just that they don't want U.S. sanctions to disrupt their trading relationships with Russia, which they depend on. They're not willing to harm their economies over something that has no bearing on them, on the other side of the world in many instances.

Look at India and China. They're the biggest buyers of the oil that Russia might otherwise have sold to Europe. China itself is selling automobiles, semiconductors, and machinery to Russia.

Meanwhile, Turkey has greatly expanded its exports to Russia, while Iran is selling weapons to Russia including ?kamikaze? drones that act like slow-motion cruise missiles that can linger over targets.

Apart from inherent flaws and limitations in the U.S.-led sanctions process, this lack of cooperation by major developing economies severely weakens the impact of the sanctions.

The Sanctions Boomerang

And importantly, the more these neutral economies trade with Russia, the less any of them will need U.S. dollars as a medium of exchange. So, the U.S. sanctions are not only failing, they're contributing to the long-term decline of the dollar as the world's leading payment currency.

This is a good example of what I warned about a year ago shortly after the Russian invasion. Not only have the sanctions failed (Russian growth has greatly exceeded expectations and the Russian ruble is stronger than before the war began), but they have boomeranged on the U.S. and its partners.

They're causing damage to western economies and fracturing the multilateral institutions that have been carefully built over the past fifteen years since the global financial crisis of 2008. So what is the U.S. getting ready to do next? Double down on failure?

Where Are the Adults?

In keeping with a dangerous pattern of escalation, the U.S. is considering secondary boycotts. This is where the sanctions target is not the enemy but is doing business with the enemy in ways the U.S. does not approve. One of the highest profile secondary boycott targets is China.

China is considering providing military aid to Russia including drones, which have proven highly effective on the battlefield.

The U.S. has warned China that if it provides such aid to Russia it will face ?serious consequences,? and that the U.S. will impose ?real costs? on China.

It's not clear how effective U.S. sanctions on China would be considering that Russia and China have cooperated closely in recent years and that China is actively decoupling its economy from the U.S. economy (and vice versa) in any case.

More likely, secondary sanctions imposed on China will simply drive Russia and China closer together and marginalize the U.S. even more. We all know that escalation on the military front is highly dangerous and could provoke a nuclear war.

But escalation on the financial and economic fronts is equally dangerous and could contribute to a global recession. U.S. policymakers seem to be too dumb and too shortsighted to consider either prospect.

Where are the adults?

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