Showing posts with label Sanctions. Show all posts
Showing posts with label Sanctions. Show all posts

Should Frozen Russian Assets Fund Ukraine?

♠ Posted by Emmanuel in ,, at 4/20/2024 09:23:00 PM

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.

The Fate of French-Made Warships Ordered by Russia

♠ Posted by Emmanuel in ,, at 9/19/2014 01:30:00 AM
Like giving matches to a pyromaniac? French-built warships ordered by Russia.
It is no secret that the French economy is not doing so well. Its President Francois Hollande faced a no-confidence vote just this week, largely due to discontent over the state of the economy. After famously applying top taxes rates over 50%, his administration is backing down somewhat on the more socialist elements of his economic plan. A pro-business Hollande; who'd have though of it? I guess approval ratings south of, oh, 15% concentrates the mind.

Aside from class warfare taking a backseat to economic reality, another concerns the recent controversy on what to do with French-built Mistral-class amphibious assault ships ordered by Russia. (Just the ticket for showing up unannounced on certain neighbors' shores.) After applying sanctions on Russia as part of NATO, France selling sophisticated weapons systems that can aid Russia's territorial ambitions undoubtedly goes against the spirit of punishing Russia for military adventurism. The Putin-friendly Russia Today reports on the surreal scene of Russian sailors testing one of two vessels. Of course, we are not even sure if these will be delivered:
A 400-strong Russian crew is manning a French-built Mistral-class warship as it conducts sea trials. It comes after Paris announced the possible cancellation of the contract due to the conflict in Ukraine. The Vladivostok left the harbor of Saint-Nazaire in western France on Saturday for the ship’s fifth training and trial trip. The warship is manned by some 400 Russian officers and sailors, who had arrived in France to learn how to helm this kind of vessel.

The number of crew far exceeds the 170 necessary for Mistral-class ships, but the Russians are preparing to have at least two ships eventually and are therefore preparing more sailors to man them. The trial was meant to start Wednesday, but was postponed by several days for technical reasons. The Vladivostok is scheduled to have a total of six trials, before it is handed over by the French shipbuilders to Russia later in November.

The deal is far from being assured, however, after French President Francois Hollande announced a suspension of this part of the contract following a NATO summit in Wales. He said he would decide on whether to respect French obligations or breach the contract [gotta love these loaded terms] with Russia in October. Russia signed a $1.6 billion contract to build two Mistral-class warships in 2011. The second one is scheduled to be completed next year.
So, will France breach its contract by non-delivery of the warships? Also note that there are technology transfer stipulations which may help Russia's currently decrepit shipyards to build their capacity:
The Mistral contract also includes a technology transfer program, which would see French expertise and technology applied to the modernization of Russian shipyards, ostensibly for the construction of a third and fourth Mistral carrier by Russian shipbuilders.

[Head of Rosoboronexport (Russia's arms export/import concern) Anatoly] Isaikin said the technologies in question are related to hull construction, command and control systems and communications. "The idea is that all these technologies can be used in Russia for the construction of warships for the Russian navy," Isaikin said. The technology transfer is not contingent on the construction of a third and fourth Mistral carrier, he added, an option that no longer appeals to a defense establishment set on replacing foreign defense imports with Russian production.
From a geopolitical standpoint, it's a no-win situation:. If France does not deliver, it loses $1.66 billion in revenues from the sale of these ships and gains the ire of the shipbuilders. If France does deliver, its allies will chastise it for giving the aggressors the tools for aggression. (Also see this running commentary by Defense Industry Daily.) Russian propaganda is focused on showing how French shipbuilders want these warships delivered lest shipbuilders lose their jobs.Their concern for the French workingman is so....touching.

Ruble in Trouble; Russia Raids SWF Soon?

♠ Posted by Emmanuel in ,, at 9/18/2014 01:30:00 AM
Sorry, Vlad, but your currency is more worthless than the dollar right about now.
No, no, it's not what you may think--Russia may raid its sovereign wealth fund, AKA stabilization fund or rainy day fund, soon. To be precise, it's the "Russia Direct Investment Fund." But first, a little bit of background from current events: new and recent EU sanctions have sent the Russian ruble tumbling to all-time lows. Whereas US sanctions had limited direct effect on Russian trade, EU sanctions have hit it squarely in the gut since the grouping is Russia's largest trading partner:
Russia's currency dropped to an all-time low against the dollar on Tuesday as investors fret about long-term economic damage from Western sanctions...The Russian currency fell more than 1 percent to 38.80 rubles against the U.S. dollar by noon Moscow time Tuesday. The ruble has lost over 2.7 percent in just two days...

Economist Alexei Kudrin, who served as finance minister under President Vladimir Putin for 11 years until 2011, said Tuesday that the sanctions could send Russia into a long recession. "The sanctions that have been imposed are going to have an effect (on the economy) for the next one or two years because they have limited opportunities for investment in this uncertain environment," Russian news agency Interfax quoted him as saying...
Capital flight is taking off anew amidst all this economic uncertainty. Certain Russian geniuses even manage to cut off their nose to spite their face by banning EU agricultural imports which the country does not produce in significant amounts:
Market jitters were further fueled by reports that the Russian government is preparing more retaliatory import bans, which could ultimately hurt Russian consumer spending. Russia in August banned imports of dairy products, meat and vegetables from the EU and the U.S., causing price hikes for some items.

Amid the uncertainty, investors continue to pull money out of the country at an accelerating pace. Experts like Kudrin predict some $110 billion could be withdrawn this year, almost twice as much as last year's $61 billion.
What's a developing country to do? First, Russia is reportedly protecting the SWF against Western sanctions by reincorporating the fund into the central bank. Ironically, some of the investors in Russia's SWF are the very same countries applying sanctions against Russia. Strange but true:
Russia is preparing to transfer the ownership of a $10 billion sovereign wealth fund to the central bank from a sanctioned [Western sanctions] state-development lender, according to two people with knowledge of the plan. Russian Direct Investment Fund’s co-investors, which include sovereign funds in Europe and Asia, are concerned that sanctions may affect their investments in Russia if the state lender controls the assets, according to one of the people, who asked not to be identified because the information is private.

The fund, created in 2011 to stimulate investments in privately held businesses and wean the state off its dependence on commodities, has secured the backing of funds including France’s Caisse des Depots et Consignations and Japan Bank for International Cooperation and last year hired Goldman Sachs Group Inc. as an adviser. Penalties over Ukraine have led Russia to invest in state-owned lenders VTB Group and Russian Agricultural Bank, whose access to international funds has been curbed, and the measures may also impede co-investors from dealing with RDIF.
Next, having secured access to RDIF away from Western sanctions and possibly freezing, I suppose there's no "rainy day" for Russia like today. With oil prices falling besides, "stabilization" is certainly on the cards. Net result? Don't bet against Russia raiding RDIF soon:
[T]he Finance Ministry is allowing, if the need arises, for the possibility of taking funds from the sovereign wealth fund next year for the first time since the aftermath of the global crisis. The Reserve Fund, which collects windfall oil revenue and was set up to cover budget shortfalls, stood at $91.7 billion as of Sept. 1.

"To ensure the unconditional fulfillment of all of the obligations in 2015, in a situation if federal budget revenues come short … the government will have the right to direct the resources to fill the shortfall of up to 500 billion rubles from the Reserve Fund," the Finance Ministry said in the budget.

Economists have warned that once the government starts digging into the stash, it can be depleted within around a year if Moscow is hit with more punitive measures by the West and if oil prices drop significantly.
Let's just say Russia will be in for a fairly severe test over its actions in Ukraine soon. While Putin's macho man act against Western sanctions may win plaudits at home in the meantime, we'll see whether the same holds in a few months' time when the combined force of sanctions--devaluation, recession, etc. hits.