It is disappointing to see anti-globalist commentators who normally give astute commentary distort a story by force-fitting it into their existing framework, here the decline of the dollar. The widely-told tale, based on a Financial Times story, is that a paper by US officials to try to build G-7 consensus on appropriating the $300 billion of Russian central bank assets frozen in Western countries participating in the sanctions would be devastating to the dollar if its ideas were implemented. In fact, as the very same article showed, these assets are overwhelmingly Euro assets, in the hands of European depositaries and banks.
Moreover, the pink paper made clear that EU finance officials and bankers, particularly in France and Germany, which have big exposures, are leery of this type of US adventurism. And it’s not as if every US idea for aggression against Russia gets done, such as the $60 billon of spending stalled in the House.1 Recall the flop of a NATO summit last summer at Ramstein, where there was much discussion in advance of increased commitments to Project Ukraine. In light of that, it’s not hard to see the latest US ploy as an effort to change the topic from “And what happened to all the reconstruction funds you promises?” Remember that Penny Pritzker is in charge of the initiative to round up investor monies to rebuild Ukraine, with BlackRock in a leading role.2 On her last trip to Kiev, she effectively told Ukraine not to expect much from the US. From Ukrainska Pravda in November:
Penny Pritzker, US Special Representative for Ukraine’s Recovery, has suggested that officials imagine how the country could survive economically without US aid during her first visit to Ukraine….
Ukrainska Pravda stated that her first visit to Ukraine had left “a rather disturbing aftertaste in many government offices” here.
One of the sources, familiar with the course of Pritzker’s meetings, said that she tried to “lead [them] to the idea” of how Ukraine could survive economically without American aid.
Quote from the source: “At the meetings, Penny tried to get people to think, like, let’s imagine that there is no American aid: what do you need to do over the next year to make sure that your economy can survive even in this situation? And it really stressed everyone out.”
Now to turn to December 20 Financial Times article, The legal case for seizing Russia’s assets, which I confess to not reading at the time due other distractions and assuming it was accurately reported elsewhere, so there was no point in my weighing in late. Ooopsie!
One issue commentators stomped on, correctly, was the absurd pretext for an asset grab, that these would amount to reparations. But reparations, in the context of war, are paid by losers for the damage done. This war is not over (so in legal terms, the matter is not ripe). And more important, does anyone think Russia will lose, absent a black swan event or not credible redefining of terms? The Financial Times describes the latest attempt at a justification was a “countermeasure”. But again, the direct precedent suggested was “compensation” after Iraq invaded Kuwait…and then the US subjugated Iraq in Project Desert Storm.
But as for who would be most likely to be severely damaged with this sort of plundering, it’s the EU and Euro due to them accounting for the vast majority of exposures. Yes, Russia would probably make sure the US also suffered consequences, particularly given its role as presumed instigator, although Ursuala von der Leyen has made “Seize, not freeze” part of her brand. But it is European institutions who control the vast majority of the holdings, and they can’t pretend not to be independent actors (it’s not as if the EU depends on the US financially, as it does militarily with NATO). From the Financial Times:
About €260bn of Moscow’s central bank assets were immobilised last year in G7 countries, the EU and Australia, according to a European Commission document seen by the Financial Times.
The bulk of this — some €210bn — is held in the EU, including cash and government bonds denominated in euro, dollar and other currencies. The US by comparison has only frozen a small amount of Russian state assets: some $5bn, according to people briefed on the G7 talks.
Within Europe, the bulk of the assets — about €191bn — are held at Euroclear, a central securities depository headquartered in Belgium. France has immobilised the second-largest amount, some €19bn, according to the French finance ministry. Other holdings are far smaller, with Germany holding about €210mn, according to people briefed on the figures.
A December Reuters story paints a similar picture, but is based on start of 2022 figures from the Russian central bank. The disparity between the total in dollars versus the total held in the US is likely due to the Russian central bank holding dollar balances in non-G7 central banks, such as Switzerland. From Reuters:
At that time, Russia’s central bank held around $207 billion in euro assets, $67 billion in U.S. dollar assets and $37 billion in British pound assets.
It also had holdings comprising $36 billion of Japanese yen, $19 billion in Canadian dollars, $6 billion in Australian dollars and $1.8 billion in Singapore dollars. Its Swiss franc holdings were about $1 billion.
So oddly, the Financial Times (presumably following the US concept paper) did not cite the British pound assets, which at least at the start of 2022, were bigger than the amount of dollar assets supposedly held by the US. So if this is directionally correct (UK banks now hold more in Russian frozen assets than US banks too), the UK is also volunteering to go ahead of the US in the “shoot yourself” line.
Note the Reuters story mentions Swiss Franc holdings of $1 billion equivalent; the Financial Times chart, which admits to being “known” as in potentially incomplete, shows a Swiss total of %7.8 billion. That means at least $6.8 billion in non-Suisse assets. It is conceivable that the Swiss dollar holdings are as large as the dollar holdings in US banks.
So where might the other dollars be? Recall there was a brief flurry of reporting a way back that (mumble, shuffle) the Western power actually could find only part of the $300 billionish that they’d frozen. That talk stopped and the story reverted to the notion that the Western powers indeed had $300 billion, as in how they’d supposedly lost and then miraculously found the missing assets was never explained.
Recall also that when the sanctions were impose, the rouble tanked to about 120 to the dollar. The Russian central bank engaged in stabilizing transactions to push it up. How could the central bank have done that, as in sold dollars to buy roubles if its assets were frozen? Presuambly nearly all its dollar assets were in institutions participating in the sanctions. This suggests, as we said at the time. that in fact the money was not all properly locked up when the sanctions announced and Russia was able to access, as in sell or move, a part of it. That could apply just as well to that at least once $37 billion worth of sterling assets, that Russia was able to extract some because the sanctions weren’t applied as hard and fast as they were supposed to have been.
The Financial Times article cites legal experts who point out that plenty of countries have grievances with others, and “countermeasures” are generally used to try to change behavior, not impose damages. Further, as most people know or intuit, bank assets, particularly central bank assets, are perceived to be in safe custody when placed with a foreign depositary. Recall the consternation in the US when Wells Fargo was caught out pilfering from depositor accounts. Even though the stealing was nickel and dime level across many many accounts, the press official reaction was fury. This is the same principle, just on a different scale.
Now it is true that the US making off even with a mere $4.6 billion of Russian holdings would such a bad precedent that it could make many investors leery of holding dollar assets. But again, it is EU states that would be putting themselves on the firing line. Again from the Financial Times:
The ECB earlier this year warned member states of the risk of undermining the “legal and economic foundations” on which the international role of the euro rests. “The implications could be substantial,” it said, according to an internal EU note. It warned the bloc of the risks of acting alone and recommended for any action to be taken as part of a broad international coalition.
One EU diplomat said: “Every major euro-denominated economy is treading very carefully on this because of the potential effects for the euro and for foreign investment and clearing in euro.”…
Officials are aiming for a consensus among G7 countries to seize the assets, but France, Germany and Italy remain extremely cautious.
European officials fear possible retaliation if state immunity is undermined. One noted the US holds only a very small amount of Russian central bank assets by comparison. “From an EU perspective we have much more to lose,” the EU official said.
The late December Reuters article suggests Russia has the means to retaliate directly:
Some Russian officials have suggested that if Russian assets are confiscated then foreign investors’ assets stuck in special so-called type “C” accounts in Russia could face the same fate. Some foreign assets were effectively locked in the C accounts.
It is not clear exactly how much money is in these accounts but Russian officials have said it is comparable to the $300 billion of Russian reserves frozen.
Finance Minister Anton Siluanov said last week that there were significant funds on the C accounts.
Kremlin spokesman Dmitry Peskov told reporters last week that Russia would challenge any confiscation in the courts.
“If something is confiscated from us, we will look at what we will confiscate,” Peskov said. “We will do this immediately.”
Given that some recent bright US ideas, such as Operation Prosperity Guardian, quickly became an embarrassment, says that US incompetence and over-reach have suddenly become glaringly obvious to its allies. That plus US loss of moral stature over its refusal to check Israel’s slaughter of Palestinians should help give Europeans the needed backbone to resist being put in financial harm’s way to damage Russia…even before getting to the wee complication that the last big effort to harm Russia economically boomeranged.
One lost big ticket proxy war should be enough of a lesson for Europe. Perhaps Europeans have a saying like the Yankee staple, “Fool me once, shame on thee, fool me twice, shame on me.”
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1 The irony here is the spending in that bill is largely to replenish weapons sent to Ukraine, as in it is really a direct transfer to the military-surveillance complex. But Ukraine has become so toxic in some circles that even an arms pork bill dressed up as a Ukraine spending bill can’t get done. The flip side is with the Middle East hotting up and China still very much an object of US negative affection, it’s not as if defense contractors have to worry where their meal ticket is coming from.
2 Why BlackRock is beyond me, since BlackRock runs funds that overwhelmingly invest in liquid securities; it isn’t in the top 10 of infrastructure investors, which would be the germane market, and its position fell in 2023 versus 2022.
