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| The adversaries during more cordial times. |
Unbeknownst to many, one of the linchpins of the post-WWII global infrastructure is coming under sustained attack... from its main beneficiary. The United States has been extraordinarily fortunate that its national debt is regarded as being among--if not the--safest investment around. IOUs in the form of US Treasuries are a standard dollar holding across the world, and this demand allows the US to run an unimaginable debt of $34.58 trillion at the time of writing.
Would it be strange if the US were to put its debt's status as a safe asset in jeopardy? Well, that's precisely what's going on with the House of Representatives advancing legislation--the REPO Act--meant to use Russia's Treasury holdings and suchlike for funding Ukraine's defense from Russian invasion.
The REPO Act, which would authorize Biden to confiscate the frozen Russian assets in U.S. banks and transfer them to a special fund for Ukraine, is part of the foreign aid package that was stalled for months in the House. More than $6 billion of the $300 billion in frozen Russian assets are sitting in U.S. banks. Most of the $300 billion are in Germany, France and Belgium.
To be sure, Vladimir Putin hedged his bets by keeping much more euros than dollars in his reserve holdings:
[F]ollowing Putin’s invasion of Ukraine, all of the Group of Seven (G7) countries including the U.S., U.K., Canada, France, Germany, Italy and Japan banded together and froze all of the $300 billion dollars of Russian foreign currency reserves held in banks in those countries, most of the money in Europe.
“The Russians were surprised when, right after the war started, the Europeans took the exact same measures as the United States, freezing all of the reserves that were there and the Japanese did the same, which is why most of Russia’s reserves today are frozen in western banks,” said Chris Miller a professor at the Fletcher School at Tufts University.
Now, there are two main takes on the implications of giving Ukraine the confiscated reserves of Russia. Critics say that other countries will lose faith in investing in American sovereign debt since the US does not have apparent qualms about taking away other countries' investments. For instance, here is Christopher Caldwell:
If Russia, China and other diplomatic rivals were to decide that their dollar assets were vulnerable and that they could no longer trust the dollar as a means of exchange, we would feel the pain of that $34 trillion in debt in a way that we don’t now. Retaining the advantages of a reserve currency depends on our behaving as a trustworthy and neutral custodian of others’ assets. If we start stealing people’s money, that could change...
For decades now, the United States has been deferring hard decisions at home and abroad and papering over partisan divisions with the tens of trillions of dollars that our advantageous international position has allowed us to borrow. Our options, though, are narrowing. If [Speaker Mike] Johnson thinks the United States is “projecting weakness” now, wait till he sees it without its reserve currency.
Meanwhile, the REPO Act's champions high-mindedly echo Michael McFaul. In the NBC News article in the initial link:
McFaul, whose been lobbying for the REPO Act for months, clapped back at Caldwell’s assertion and said the use of Russian assets for Ukraine would send an important message to autocratic nations around the world. “There are those that say, 'Well, this will hurt the dollar. It’s bad for our reputation.' I have a pushback to that. I don’t want criminals investing in American Treasury bonds,” McFaul said.
Actually, I side more with the REPO Act skeptics in the sense that "beggars can't be choosers": The US is able to fund its chronically huge budget deficits by not being too picky about its creditors. There are any number of regimes with questionable good governance records--you can easily identify them yourselves from a list--that lend tens of billions of dollars to the United States. Will they take fright if the US proceeds with legislation meant to strip Russia of billions?
You know, we may find out real soon... and the consequences of an answer in the affirmative could literally reshape the postwar global infrastructure.
AN ASIDE regarding the EU: With the bulk of Russian foreign exchange reserves in the EU, the latter are understandably resistant to US President Joe Biden's pleas to also donate frozen Russian assets to Ukraine. With the relatively new euro single currency in a precarious state ever since global financial crisis, its users are not exactly excited about the Yanks pressuring them to also use seized Russian monies to fund Ukraine. Having the bulk of the frozen Russian reserves and being right next door, the EU is collectively nowhere near as gung-ho about the matter. At most, EU suggestions are half-hearted like just using interest on frozen Russian reserves to fund Ukraine. People act in their interests, and the Europeans are understandably reticent despite (or because of) their enormous distrust of Russia.