Ice-nine is the fictional material appearing in Kurt Vonnegut's novel Cat's Cradle. Ice-nine is supposedly a polymorph of water more stable than common ice; instead of melting at 0 °C, it melts at 45.8 °C. When ice-nine comes into contact with liquid water below 45.8 °C, it acts as a seed crystal and causes the solidification of the entire body of water, which quickly crystallizes as more ice-nine.
Restrictions in the international payments system and sanctions can have the characteristics of ice-nine. Assets and institutions that are sanctioned can freeze up the financial system because everything that it touches may turn into a frozen asset. If you hold Russian assets or currency and it cannot be transferred or uses as collateral, other assets will freeze or become illiquid. Banks, funds, or indices that hold or have Russian assets are impaired. If the Russian central bank cannot employ its assets, liquidity is frozen across Russia.
The situation will get worse if energy payments are included in sanctions. We are already having the situation that Western countries do not want to buy Russian energy products. Oil is selling at deep discounts and there are limited buyers for refined products.
So why hasn't the ice-nine effect fully kicked in? A close look is that there is a difference between sanction and bank restriction announcements and reality. There have been delays in implementations and carve-outs that reduce the financial freeze and allow banks and firms to get prepared for the freeze; nevertheless, it is happening and there are going to be repeats to what was seen during the GTC. Like the Lehman event in 2008, the ripple effect can be much greater than just the size of the obvious assets. Financial ice-nine exists.
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