2 March 2022
Credit Suisse money market guru Zoltan Pozsar ominously warned this week that the response of the NATO alliance and its allies to Russia's incursion into Ukraine may have triggered a chain of events that eventually leads to the demise of the dollar as the reserve currency.
Speaking to Bloomberg, Pozsar, who also warned that shutting Russia out of the global financial system could cause central banks to pump fiat money into economies to stabilize markets, noted that wars tend to have huge impacts on global currencies, and with Russia's foreign currency reserves frozen, the message is that governments can’t count on money stashes in 'safe' economies to actually be theirs in the event of trouble.
Shockwaves quickly spread round the world when Western powers announced that the financial 'nuclear option' would be used to punish Russia for its invasion of Ukraine, sanctions against the country's central bank effectively freezing it out of global capital markets and targeted expulsions of key Russian banks from SWIFT, the international, inter - currency payments system, These sanctions were intended to lock Russia out of the western financial system and leave its oil export trade, a key lifeline for the Russian economy, crippled.
This
was the first time the global reserve currency was weaponized against a
G20 economy, creating a template for how the west would respond to any other nation that followed in Russia's footsteps , something which China is clearly contemplating vis-a-vis Taiwan. Unfortunately Russia and China forgot to indicate their acceptance of the T&Cs. So a few years ago, as this blog reported in our currency Wars page, in collaboration with China the Russian government created an alternative to SWIFT to serve as a workround should the western powers ever try to use financial sanctions to coerce nations into compliance with western policy. To date banks in over 100 nations have joined this system.
As a result of the sanctions shenanigans, and following this week's dramatic freeze of the Russian central bank overseas assets, some economists including the aforetementioned Zoltan Pozsar to question just why countries build foreign currency reserves at all and, more broadly, whether the unprecedented western response to Russia hasn't jeopardized the dollar's reserve currency status.
In taking what Reuters described as the "biggest hammer in the toolshed", to the biggest supplier or as commodity even more essential than oil and natural gas, the G7 and European Union governments by blocking certain Russian banks' access to the SWIFT international payment system and also went a step further than many expected by paralyzing about half the Russian central bank's $630 billion worth of foreign currency and gold reserves. In doing so, the west hoped to undermine Moscow's ability to defend the ruble - which has lost up to a quarter of its value in currency markets since Friday alone..
Unfortunately Russia anticipated this move too and in February quietly imposed a ban on the export of Ammonium Nitrate, the essential component in terrorist Improvised Explosive Devices, but also to active ingredient in commercial fertilizers. In getting is retaliation in first, Vladimir Putin has ensured those nations currently ganging up on Russia will face vastly reduced crop yields in 2022, rocketing food prices and a crisis that will continue into 2023 at least, assuming that Russia resumes exports of Ammonium Nitrate by then.
While the financial sanctions are a blow for Russia's economy, Reuters' Mike Dolan wrote that the
move not only revealed the weakness of the west's negotiating position with Russia and China but prompted questions about whether targeting reserve
holdings as an act of "economic warfare" may prompt a rethink by central bank economists in countries not inclined to toe the USA / NATO line over where to bank their national stash. Gold and Bitcoin are currently looking like good bets.
