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More Sanctions On Russia Will Destroy Europe
On February 21 Russia announced that it would recognize the Donbas republics. A day later it did so. The 'west' immediately announced sanctions which in fact had been prepared in advance. On February 24 Russian troops crossed the border into Ukraine.
The Russian ruble immediately took a big hit. It has since recovered a bit.
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Today's news will bring the ruble to a new heights.
Kommersant reports (machine translation):
Putin instructed to convert gas contracts with unfriendly countries into rubles
President Vladimir Putin instructed to issue a directive to Gazprom to convert contracts into rubles for unfriendly countries. In his opinion, supplying Russian goods to the EU, the USA and receiving payment in dollars and euros "does not make any sense for us." Against this background, the ruble moved to growth on the Moscow Exchange.
“Both the US and the EU have basically defaulted on their obligations to Russia. And now everyone in the world knows that obligations in dollars and euros may not be fulfilled. <…> It is quite obvious that in this regard, it makes no sense for us to supply our goods to both the EU and the USA and receive payment in dollars, euros and a number of other currencies. Therefore, I have decided to implement in the shortest possible time a set of measures to transfer payments for our natural gas supplied to unfriendly countries to Russian rubles,” Mr. Putin said at a meeting with the government.
The President instructed the Central Bank and the government to determine within a week the order of operations for the purchase of rubles on the domestic market by buyers of Russian gas. He claims that Russia will continue to supply gas "in accordance with the volumes and according to the pricing principles concluded in the contracts."
The dollar exchange rate on the Moscow Exchange fell below 100 rubles. for the first time since March 3rd. As of 15:37, the US currency is trading at 101.55 rubles. (-2 rubles). The euro exchange rate fell by 2.85 rubles to 111.65 rubles. The maximum dollar fell to 94.99 rubles, the euro – to 109.7 rubles.
The European Union, the United States, Great Britain and a number of other countries have imposed sanctions against Russia in response to the military operation in Ukraine, which has been carried out since February 24 on the orders of Mr. Putin. One of the measures was the freezing of about half of the Central Bank's gold and foreign exchange reserves ($300 billion).
To pay in ruble one first has to buy rubles. With higher demand for rubles and no change in supplies the price for the Russian currency will go up. As Russia is selling hydrocarbons and other resources for billions of dollars per day the ruble is likely to soon reach record heights.
On February 28 another round of sanctions hit Russia. The part of the Russian central bank reserves that were stored in the 'west' were frozen. The central bank immediately pushed its interest rate from 9% to 20% to prevent a flight from the ruble. This helped to lessen the damage but made credit expensive and has hit the future growth potential in Russia.
But with a high new rubles demand from the outside of Russia the central bank will soon be able to lower its interest rate to more normal levels. Credit conditions will ease and investment in Russia, to replace products that had so far been imported, will rise again.
Today's move to demand rubles for hydrocarbons is only on of the many steps Russia can, and likely will take, to retaliate for sanctions from the 'west'.
As I wrote previously:
All energy consumption in the U.S. and EU will now come at a premium price. This will push the EU and the U.S. into a recession. As Russia will increase the prices for exports of goods in which it has market power – gas, oil, wheat, potassium, titanium, aluminum, palladium, neon etc – the rise in inflation all around the world will become significant.
Meanwhile the New York Times writes:
As he heads to Europe, President Biden will press U.S. allies to help impose even more aggressive sanctions on Russia.
Biden demands that Europe suicides itself while he is protecting the U.S. industry. I hope that some people in the European capitals are still able to think clear enough to recognize the racket the U.S. is trying to run here:
Together with the economic devastation that U.S. and European sanctions on Russia are causing in their own economies this will end in regime-changes in several European countries. The U.S. is of course again protecting itself from as much as it can at the cost of others.
Source: Bloomberg – bigger
Tony Wood asks:
The question remains, why did all those who for so long foretold this war do so little to stop it, and so much to hasten the disaster Russia has now set in motion?
Indeed. Why didn't the government of Germany guarantee in writing that it would veto any additional NATO membership? It would have solved at least half of the problem. Why didn't any other NATO government do so?
And what are they doing now? Where are their initiatives for peace?
Wake up. Otherwise this will end in disaster. Not for Russia but for the rest of Europe.
In Lavrov’s presentation linked above is an important Q&A about the UN that ought to be read and digested as it contains info I’ll bet most barflies don’t know:
“Question: Can we say that now, within the framework of the international crisis and international relations, the UN continues to be an effective platform for resolving conflicts and emerging threats, especially against the background of absolutely thoughtless statements about the need to expel Russia from the Security Council?
“Sergey Lavrov: This is an important question. When we say that we are in favor of democratizing international relations, for the formation of a just polycentric world order, we propose (as many believed at one stage) not to replace the UN with something, but to return to its roots. The Charter of the Organization enshrines the sovereign equality of States. Americans flagrantly flout this principle. It is clear that the countries are different. There are very small ones. It is difficult for them to show independence. But the principle of the sovereign equality of states should be respected by all, at least with regard to giving each UN member the opportunity to obtain facts and determine its position. The Americans are now (I am not talking about small countries) putting pressure on large countries and threatening to break trade relations, new sanctions, if only they vote in the UN the way the Americans want.
“Recently, at the UN General Assembly, there was a vote on Ukraine. 145 countries voted in favor of the resolution condemning Russia. Of these, more than 100 have not imposed any sanctions against us and will not be imposed. But it was propagandistically important to show that Russia was “isolating,” as it were. That’s what the Americans are doing. I consider such behavior unworthy of a great power, as well as to use “below the belt” methods. I’ll say what I mean. I know many people at the UN – I worked there for a long time. Recently, when I arrived, I talked with colleagues. A country’s permanent representative to the United Nations is often forced to vote the way the U.S. wants to vote by reminding them that they have an account in an American bank, that they have children attending their university. They don’t shy away from anything.
“Don’t try to destroy the UN. They do this when they say that one should be guided by the “rules” “on which the world order rests” rather than international law. Such “rules” are created within the framework of all sorts of partnerships, some kind of “appeals”. There is international humanitarian law, the Office of the United Nations High Commissioner for Refugees, which is a universal structure. In the European Union, they create a partnership on international humanitarian law, where they come up with their own norms. There is the UN Human Rights Council, the European Court of Human Rights (from where we are now leaving, but without any damage to our citizens). For decades that the European Union has existed, we and everyone else have been pushing for it to sign the European Convention on Human Rights. The EU does not want to, arguing that some countries have already signed up, and their human rights standards within the European Union are much higher than in the Council of Europe. Therefore, they say, the European Union is not subject to the jurisdiction of this court. They will solve their own problems. That kind of “mood.”
“It is necessary to return to the UN Charter, where, among other things, there is respect for the sovereign equality of states. This is the main principle. There is the right of a nation to self-determination, along with respect for sovereignty and territorial integrity.
“Since the creation of the UN, there has been talk about what is more important – territorial integrity, sovereignty or the right of peoples to self-determination? There were special consultations and negotiations. They’ve been going on for decades. In 1970, they ended with the agreement on the most important Declaration on Principles of International Law concerning Friendly Relations and Cooperation among States in accordance with the UN Charter. It’s an extensive document. It has a section specifically devoted to the relationship between sovereignty, territorial integrity and the right to self-determination. I believe that this is very relevant, especially in the context of the Ukrainian crisis and what is now being discussed between our delegations. This is also important in the context of what the “fate” of Crimea and Donbass should be. Now it is often said that it is necessary to hold a referendum. This is aimed at delaying the process. The consensus of the world community, concluded in the 1970 Declaration, states: “Everyone has the duty to respect the sovereignty and territorial integrity of a state whose government respects the right to self-determination and represents all the people living in a given territory.” Ukraine considers its territory Crimea and Donbass, which it bombed for eight years, drove into basements, destroyed civilian objects, killed civilians. Does Kiev represent today’s Crimea or today’s Donbass? It is necessary to defend the values of the UN. A lot of useful things have been done there. It is necessary to return to this invaluable experience.”
Posted by: karlof1 | Mar 24 2022 5:04 utc | 310
So glad to read that Putin’s shaking things up again in the EU economy and getting on everyone’s last nerve.
Putin can afford to take some risks and stick it to the U.S., because he has a powerful friend in Xi. You know, I can’t overstate this, Putin’s a Dragon and Xi’s a Snake and that makes for quite a solid mutually beneficial partnership; they can offer each other a soft landing when things get rough. Plus, it helps that they’re both highly intelligent, driven by a similar global vision and think sanctions are evil.
I was reading this intriguing piece on just how China may be benefiting Russia and I couldn’t help smiling thinking how these two smooth operators may have pulled a fast one in plain sight.
Sorry for the source, but sometimes it’s good to snoop around on the other side in case some tweaking is necessary to throw them off the scent.
Back in 2018, there were startling reports in Western media that Russia had dumped nearly all of its Treasury debt. U.S. Treasury Department statistics at the time showed Russia’s holdings plunging from $96 billion to $15 billion over two months. We were skeptical that Russia had sold the $81 billion difference. After all, most international trade—and nearly 90 percent of foreign exchange transactions—involves U.S. dollars. Given that Treasuries are the investment of choice for any government with an imminent need for dollars, a selloff that size seemed implausible.
The Treasury Department’s data, however, did not mean that Russia had necessarily sold the entire $81 billion of securities. Russia could simply have moved the Treasuries outside the United States. We therefore examined figures from Russia’s central bank, which suggested a far smaller figure for Treasury sales—about $43 billion. That left $38 billion unaccounted for. Where had it gone?
Putin’s regime may hold tens of billions of dollars’ worth of U.S. Treasuries that cannot currently be traced to Russia.
We then examined holdings of Treasuries in the two most popular offshore centers: the Cayman Islands and Belgium, the latter being home to the international custodial bank Euroclear, which holds securities on behalf of depositors. Over the same two months of Russia’s alleged dumps in 2018, we found anomalously large rises in Cayman holdings of $20 billion and Belgian holdings of $25 billion. The $45 billion total was more than enough to account for the missing Russian holdings.
The Treasury Department does not disclose the identities of those actually purchasing securities, nor would U.S. officials necessarily have this information. Government surveys of brokers and custodians do not collect it. Euroclear itself might not even know the ultimate owners of securities it handles. Instead of dealing directly with Euroclear, the Russian central bank could, for instance, transfer its securities to a financial intermediary—such as a private bank, a shell corporation, or even a foreign government—and direct that entity to deposit them with the custodian. Such maneuvering could obscure Russia’s involvement altogether.
Regardless, in 2018 it should have been no surprise that Russia would move Treasuries offshore, as it was widely known that this option was available and effective. It had long been believed that China was parking Treasuries at Euroclear to disguise their ownership and shield them from scrutiny. In China’s case, it may have offshored the bonds to mask its interventions in foreign exchange markets, as it had long managed the renminbi’s dollar value by buying and selling reserves stored in the form of Treasury securities. Russia’s motivations, however, would be different.
Stashing dollar-denominated securities in offshore accounts makes them harder to target for U.S. sanctions. The Kremlin has keenly felt the threat from sanctions since its 2014 annexation of Crimea and subsequent military backing of pro-Russian separatists in eastern Ukraine, when Western countries froze Russian assets and restricted its trade. For this reason, then, hiding Treasuries offshore would be an attractive option for Putin. His $38 billion stash of dollar assets, if still hidden in Belgium, the Caymans, or another haven, could be critical for Russia’s ability to purchase essential imports or meet interest payments on its sovereign debt.
PUTIN’S WAR CHEST
Once Putin began preparing for a major invasion of Ukraine, the stage was set for another big move in Russia’s Treasury stash. According to U.S. Treasury Department numbers published on February 15, Belgium’s—that is, Euroclear’s—Treasury bond holdings surged in December 2021 by a whopping $47 billion. (The Cayman holdings stayed flat that month.) That spike is Belgium’s largest one-month rise since early 2014.
China was almost certainly behind the 2014 surge. Throughout that year, the assets of its central bank, the People’s Bank of China (PBOC), rose in tandem with Belgian Treasury holdings. The PBOC was evidently building up its war chest of dollar reserves and storing them in Treasuries, held through Euroclear. In 2021, however, the PBOC’s reserves stayed flat, indicating a different source for the sudden rise in Belgium’s holdings.
If the West aims to make Putin pay for his illegal aggression, then it should follow the money.
That source is likely Russia. By December, the Kremlin undoubtedly anticipated that if it invaded Ukraine, harsh Western sanctions would choke off its access to dollars. To stave off the worst effects of such sanctions, it would make sense for Russia, prior to invasion, to buy up dollar-denominated assets and stash them in offshore accounts. That would explain the massive uptick in Belgian Treasury holdings. In any case, no other single country with motive to disguise its holdings from U.S. authorities could possibly account for it.
Following Western sanctions, Euroclear has stopped clearing purchases of Russian securities and other ruble-denominated transactions. These moves align with other Western companies’ steps to counter Russia’s invasion, and as far as we can tell, Euroclear has followed all of its obligations under existing sanctions. But Euroclear has not announced restrictions on anyone selling non-Russian securities, such as Treasury bonds. And although the sanctions have banned transactions with major Russian banks, Moscow could easily have used non-Russian intermediaries when placing its Treasury holdings with Euroclear. In other words, the Russian central bank could have structured its transactions to bypass sanctions altogether. Mere months before being slapped with allegedly comprehensive financial sanctions, then, Russia may have secluded yet another $40 billion or more in Treasuries from which it can draw in a pinch.
CHINA’S HELPING HAND?
It is not yet clear which intermediaries Russia would have used to stash Treasuries offshore. One strong possibility, however, is China, with which Putin now appears allied. In December 2021, at the same time that Belgium’s Treasury holdings surged by $47 billion, Russia’s central bank reported a massive $41 billion increase in its currency and deposits held at “other national central banks.” That jump dwarfed all other monthly changes in this statistic since Russia began reporting it in 2005. And the most likely recipient of those deposits is the PBOC.
The Russian central bank and sovereign wealth fund hold an estimated $140 billion in Chinese bonds—about four times the total in early 2018. Data from June 2021 also show China holding 14.2 percent of Russia’s foreign reserves, the largest share of any country. And their partnership extends well beyond the financial arena: late last year, Russia and China held a series of joint military exercises and issued joint diplomatic statements aimed at the West. It would make sense, therefore, for Russia to deposit $41 billion in renminbi or assorted currencies with the PBOC. The PBOC could have then exchanged the currencies for dollars, crediting Russia for a $41 billion deposit, and used the dollars to buy Treasuries for storage at Euroclear. Chinese President Xi Jinping, who just last week condemned Western sanctions as “harmful to all sides,” appears fully supportive of that sort of maneuvering.
This money would not necessarily leave a clear trail in the PBOC’s massive $3.2 trillion balance sheet, as the central bank could have spread it across multiple line items. The PBOC could, for example, have deposited some with state-controlled banks and directed them to buy Treasuries for safekeeping at Euroclear. Such an arrangement would explain why the PBOC’s currency and deposits with China-headquartered banks jumped by an unprecedented $13 billion last December—at the same time that the anomalous Belgian and Russian financial data were recorded. Alternatively, the PBOC might have kept the transaction off its balance sheet altogether. It is impossible, based on the information we have now, to know how Russia and China might have structured such an arrangement, but regardless, Russia would be able to withdraw the dollars whenever it pleases. The PBOC would simply sell the Treasuries and transfer the proceeds to Russia. Western authorities would be none the wiser, while Western financial institutions would not necessarily have violated any sanctions policies. And by circumventing sanctions this way, China and Russia would work to erode Western financial and political influence.
china russia money
Maybe it’s just too good to be true, but the timing of the transactions fits. Putin must be Danny Ocean on the sly.
Posted by: Circe | Mar 24 2022 6:51 utc | 320
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