Russia Counter-Sanctions “Unfriendly Nations” by Requiring Gas Payments in Roubles; Dallas Fed Predicts 2022 Global Recession if Russian Energy Supply Remains Restricted

Yesterday, Russia launched what amounts to a counter-sanction by mandating that all payments for Russian gas from “unfriendly countries” be made in roubles. Sadly most commentators missed what these measures amount to. And they also missed some potentially significant secondary effects, one of which may be to solidify the ties between India and Russia.

We’ll turn later to a new Dallas Fed paper that warns that keeping the Russian energy spigot turned off for the rest of 2022 will put the world in a recession.

“Unfriendly Nations” Rouble Payment Counter-Sanctions

Putin announced this move before the US and other countries were set to launch new sanctions against Russia at NATO and G7 meetings on Thursday. The gas payment counter-sanction is highly unlikely to change the West’s plans, but it might wind up superseding other discussions planned for these summits:

Recall that we said the very day that the US imposed economic sanctions on Russia, with the intent to make it unable to use dollars, that there was no point in Russia continuing to sell oil to the US under those conditions. It might as well be paying Russia with bags of feathers.

Now the US solved that problem for Russia by sanctioning all Russian energy purchases. But the EU also sanctioned some Russian banks by kicking them off SWIFT. That makes it more cumbersome to sell gas to the EU, particularly since the sanctioned Russian banks had to close all their operations in the EU. It can’t have been lost on Russia that the EU could try to use its control of the payment apparatus to inflict more pain and costs.

We are calling the Putin measure a counter-sanction because it is designed to unpick a key part of the Western sanctions, which is to subject Russia to payment arrangements under the control of the US and EU. It is not a sanction because Russia is not withholding supply. And separately, both Russia and China object to the US-EU sanctions because they were not approved by the UN. So expect any additional Russian actions, even if they have the effect of sanctions, not to be structured as sanctions.1

As we’ll explain, this counter-sanction does not amount to forcing (much) more demand for roubles (unless Russia sets an above-market rouble price for these gas buys). Russia has already imposed currency controls, including requiring major exporters to sell 80% of their foreign currency receipts and buy roubles. And contrary to popular mis-perceptions, the rouble is not collapsing. Russia reopened its financial markets earlier in March. The rouble, while still much lower than it was in 2021, has rebounded from its low as of when sanctions were imposed, as this chart from Trading Economics shows:

Let us consider how Europe is buying gas from Russia now:

EU buyer pays Euros, to say Gazprom via one of Gazprom’s banks.

Either that bank is one of the non-sanctioned Russian banks, or Gazprom transfers the funds from a Eurobank to a non-sanctioned Russian bank to convert enough of the Euros to roubles to satisfy Russian requirements. Note that there are not enough roubles circulating outside Russia for it to be very likely that a garden-variety European bank could acquire enough roubles to pay Gazprom.2

So what is different now?

The EU buyer is now required to deliver roubles, not Euros, to Gazprom at an unblocked account or an unsanctioned bank. Since there is very little in the way of roubles outside Russia, the buyer will now need to open and maintain rouble accounts in a Russian bank. That means Russia controls whether or not the account is blocked on its side.

To put it more bluntly: To sell Euros, the EU needs to keep the Russian banks sanction-free, otherwise it can’t trade Euros for roubles to procure gas.

Buyers that don’t play ball don’t get Russian gas. Trying to replace it won’t be easy. From Statista, share of gas supply from Russia in Europe in 2020, by selected country:

Bosnia and Herzegovina* 100%
North Macedonia* 100%
Moldova* 100%
Finland 94%
Latvia 93%
Serbia* 89%
Estonia* 79%
Bulgaria 77%
Slovakia 70%
Croatia 68%
Czechia 66%
Austria* 64%
Greece 51%
Germany* 49%
Italy 46%
Lithuania 41%
Poland 40%
Hungary 40%

If anything, some of these figures may be low. One reader at the Financial Times said that Germany now gets 55% of its gas from Russia and Italy is the second largest customer, by volume.

Some observers contend that the Russian change is of little consequence because Qatar, one of the world’s largest LNG suppliers, agreed to send more to Europe. But Qatar already said, at the beginning of February, that it could not unilaterally fill the loss of Russian-supplied gas. Moreover, most of the world’s LNG supplies are subject to long-term contracts and thus can’t be redirected quickly. I would be curious to see more detail as to how much LNG Qatar is expected to send to Europe and how much that could increase over time.

The EU buyer can whine about it if the contract with Gazprom doesn’t allow for Gazprom to be paid in other currencies. This is a Russian edict overriding existing agreements. After the West freezing $300 billion in Russian central bank assets and the US and to a large degree the EU refusing to take oil deliveries from Russian ships already bound for various ports, the EU does not have a very firm basis for complaining about being treated badly. If you want the gas, you need to pay in roubles.

IMHO the much harder part will be agreeing on a price or price formula for roubles, particularly for any gas deliveries set under a long-term price agreement as opposed to spot prices.

Some have suggested that the Russian requirement will allow buyers to change other contract terms, like shorten the length of their agreements. If you listen to Putin’s statement, the Russian position is that it is keeping the contracts in place. So it seems very unlikely that Russia would allow other changes in terms unless Russia deemed them to be in its interest.

Around the margin, the Putin requirement does increase demand for roubles, but this isn’t a game changer, since the sales of Russian gas abroad will now go from being 80% converted to roubles to 100%. And those operators do have expenses outside, so they will presumably need to and be allowed to convert some of those roubles back into foreign currencies.

Now it is still possible that some key EU players, in a fit of cussedness, again play the “I’ll hurt myself to hurt you” game and refuse to go along with the rouble payments. Perhaps I am missing something, but that would seem to be to Russia’s advantage, since it would accelerate the onset of energy shortages, particularly in Europe, that the IEA was warning are coming over the next four months, particularly of diesel. More economic distress sooner, particularly since a sudden shock is more clearly the result of Ukraine policies, has more potential to create domestic unrest. That in turn could lead to more willingness to negotiate with Russia, rather than require them to decisively win the war to sue for terms.

There was some very good commentary on a new Financial Times article on the Russian counter-sanctions, provided you had the patience to wade though the huge number of jingoistic and low-information-value remarks. From reader vlbuzz:

On top of this development:

– a RUBINR swap line is being established between Russia and India, effective as of the next week, allowing direct exchange of currencies and using bi-lateral settlement system
– Central Bank of Russia finally takes the lesson from the Fed and the ECB and engages in QE, targeting the RUB yield curve by direct purchases of government debt on MICEX from the local investors (foreign owners’ holdings are effectively frozen as of now and can not be sold in the market)
– a comprehensive set of capital controls stops the capital flight, USDRUB is down 30% from the recent post-invasion peak
– retail fuel prices are down 5-10% in RUB terms across the country as the excess export volumes of diesel go to domestic market
– export oil prices are up markedly, fully negating the Urals-Brent discounts in absolute terms, the same in thermal coal, fertilizer, wood and cellulose, copper and aluminium among others
– the heating and electricity bills for the population will be indexed by just around 8% y-o-y in nominal RUB terms (or effectively decreased by -4-7% in real terms), negating the higher food/FMCG price effects
– food inflation is rising due to increased stock-piling by the distributors and population (sugar, mostly, as widely used in home breweries to make moonshine), but the impulse buying has mostly subsided while the stocks are managed by temporary export bans for most of the agricultural commodities…

You’ll have to pay up a bit to buy a new Bentley and ship it from Azerbaijan or Kazakhstan to Moscow, but other than that, the impact on the larger part of the society is so far rather limited.

One possible partial way around the counter-sanctions would be to deepen the market for roubles outside Russia. From Financial Times reader no illusion:

This means that the buyers will need to go sell their euros in Russia and buy Rubles to pay for gas. This creates a big forex market here – with spot and derivative components.

Possibly, but the reason banks are willing to run big intra-day dollar exposures with each other that are settled out at the end of each trading day in the US is that large-dollar payments go through banks with US licenses that are on Fedwire. That means the dollar payment system is ultimately backstopped by the Fed.

It is over my pay grade to guess how much rouble trading would be done outside Russia save on a regulated exchange (with all sorts of trading limits and both trade and exchange margins required) or if OTC (which is how nearly all foreign exchange trading is done) or with a Russian central bank backstop…or with a bank in a country with currency swap lines with Russia’s central bank…which India will soon have. But I can’t see these transaction volumes being big enough to handle the very large payments that would be made for Russian gas.

One fascinating secondary effect of the rouble-pay scheme may be to increase India-Russia ties. Yet another Financial Times comment, this one from Anonymous columnist, writer:

Some days back a top forex trader and now monetary economist for HSBC Global Market remarked recently that following Russian Central Bank’s foreign currency dollar asset freeze order by US, it’s only a matter of time that the Russia would be forced to go for trading with the west in Rouble only or Rouble and Yaun/Renminbi currencies only to ensure it remains 100% risk free from sanctions and asset freezes, despite potential risk of inflationary costs at home.

India, one of the major economies and the largest democracy in the world has already been trading with Russia under Rouble – Rupee exchange agreements for many decades. Indian banking and finance lawyers privately say that India’s finance ministry along with Reserve Bank of India (RBI) and Bank of Russia is “racing against time” in exploring options to “internationalise” Russian version of the SWIFT version – SPFS, starting with India as a launch base outside Russia (being helped by the fact that India has reservations in dealing with China’s CIPS – China’s version for SWIFT – though it is ready to accept expansion of China’s UnionPay card payment system subject to restrictions).

In fact many Indian online retailers, like Israeli online retailers and service providers, have/are on the verge of setting up Russia’s Mir card payment system online to enable Russian citizens to trade with/buy products from India.

Israel has/soon to have similar arrangements in place. Turkey, Malaysia, Bangladesh, Argentina, Venezuela, Iran, Saudi Arabia, South Africa and many AU countries and of course China all have (or most already rushing to have) rouble + their respective currency exchange agreements in place.

A number of lawyers based at Indian corporate law firms in Mumbai say “they are working around the clock” like never before following the outbreak of Ukraine war, in advising number of governments of African Union countries on enabling rouble-based trades and also currently advising many of the corporations and conglomerates based in emerging markets on setting up rouble based contracts, given India’s half-a-century unsurpassed experience in trading with Russia under rouble – rupee exchange agreement/and or rouble – rupee swaps.

However, notwithstanding this, Indian corporate law firms are advising many large corporations based in the emerging markets to evaluate their governing contract and arbitration clause options and to seriously consider other major jurisdictions available as alternative to London, New York, Paris and Singapore, with the options of Dubai, Hong Kong being on the table among others.

Corporate law firms in India’s financial capital Mumbai say that government of India with the help of country’s premier members of the legal profession is also seriously considering to see current Russian-Ukraine crisis as “either or never” opportunity for India to emerge as future international arbitration centre alternative to London, Paris, New York, Singapore and Switzerland and evaluate whether it can become alternative to London and New York as governing law provider for English law or New York law respectively, by using India’s well established English common law system, though this is likely to take some time (Dubai, Singapore and Hong Kong provides a tough competition).

On another note, an Indian lawyer said they along with Hong Kong and Dubai based lawyers are advising banks in Bangladesh, UAE, Pakistan and African Union member countries alongside Bank of Russia in exploring options to consider rolling out/enable cross-border Russia’s Mir and China’s Union Pay systems in the said countries’ retail and commercial banking as well as to roll out rouble currency accounts for retail customers as FCY account options for customers wishing to open forex based rouble (or alongside limited capacity Renminbi Yua) fixed deposit schemes for the purpose of sending their children to Russia for education and medical treatments, given that Ukraine is out of the equation for many; until recently, Russia, Ukraine, Belarus, Georgia after the west, Turkey and the Far East was considered one of the most attractive cheaper alternatives for study medicine and study abroad for STEM subjects for middle class citizens from the emerging markets.

Sober Dallas Fed Forecast if Russian Energy Sanctions Persist

Even though the major financial news outlets like the Wall Street Journal and Bloomberg reported on the new Dallas Fed paper, The Russian Oil Supply Shock of 2022, seemed worth highlighting here. It is short and in large type, which worries me as a sign of the central bank’s assumptions about the intellectual level of its audience. Key sections:

In the immediate aftermath of Russia’s invasion of Ukraine in late February, early estimates suggested that perhaps 3 million barrels a day (mb/d) of petroleum production—almost 3 percent of world production—had been effectively removed from the global oil market, constituting one of the largest supply shortfalls since the 1970s…

Recent data from Energy Intelligence, however, indicate that the fall in Russian petroleum exports to date has been somewhat smaller than the initial estimate of 3 mb/d and coincided with oil price weakening after March 8.

What changed is that much of the Russian oil that continues to be exported from Baltic and Black Sea ports at steep discounts is not delivered to refiners, as is customary. Instead, trading houses are purchasing the oil and keeping it in commercial storage in Europe, from where it may be potentially resold, bypassing financial sanctions. Buying oil for storage is not prohibited under current sanctions.

Yves here. Let me stop for a second. Oil storage capacity is limited. Basically, contrary to what intuition would tell you, oil does not store very well. Hopefully readers can provide any update/correction if needed, but storage capacity relative to normal use levels back in the runup to the crisis was 51 to 55 days. That is why when speculators are stockpiling oil on a widespread basis, you read about full oil tankers wandering around like the Flying Dutchman. It’s normally easier to store oil by leaving it in the ground or by stockpiling finished product, particularly energy-dense diesel.

In other words, buying for storage has limits…but in reality, these traders are just taking oil into storage in one door and selling it out the other. I would hazard this intermediation mainly adds costs and complexity rather than amounting to meaningful stockpiling, particularly in light of the oil shortfall. Back to the Dallas Fed:

…the main reason Russian crude oil and refined product exports have been at risk since Russia’s invasion has been the refusal of financial institutions to back such transactions. In addition, oil tanker rates for Russian destinations rose to record levels, reflecting public pressure on oil companies to avoid purchasing Russian oil, fear of official sanctions on Russian energy exports at a later date and attacks on vessels in the Black Sea. This outcome was largely unanticipated, as U.S. and European Union sanctions originally deliberately excluded Russian energy exports.

Another dimension in which the current event differs from historical precedent is that the reduction in Russian oil exports was preceded by a cut in Russian natural gas exports to Europe. Natural gas is used for home heating, for power generation and in industrial production. For example, it plays a central role in the production of fertilizer. The resulting price increases to various degrees have spread across the globe through trade in liquefied natural gas.

The paper then goes through alternate suppliers, and how the Saudis and UAE (at least presently) won’t make up the shortfall or how, like US shale players, they can’t, at least not in a time frame that will have a big enough impact. Again from the article:

Thus, unless the Russian petroleum supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and to remain elevated for a long period to eliminate the excess demand for oil….

…if the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable. This slowdown could be more protracted than that in 1991.

For those of you who remember the 1991 recession, it was very nasty, hit the oil and gas sector hard (along with Citibank, which almost went under thanks to heavy exposure to speculative commercial real estate projects in the oil patch) but was short lived. The economy rebounded faster than most economists anticipated because Greenspan engineered a very steep yield curve that allowed damaged banks to repair their balance sheets fairly quickly via simple-minded “borrow short-lend long” which Greenspan made particularly profitable.

I don’t see any conjurer’s tricks for getting out of this downdraft easily if the Dallas Fed’s scenario pans out.


1 The conveniently timed damage to the Carpathian gas pipeline to Southern Europe and loss of supply though it for at least three weeks could fall in this category.

2 Note that once Gazprom got the Euros to a Russian bank, it could presumably transfer them to a sanctioned Russian bank if it also had bank accounts there. But that wrinkle does not matter much for the big picture.

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  1. Louis Fyne

    Written by a retired Indian diplomat. Essentially India thought it was getting to sit at the adults’ table when it joined the Quad. Found out it was merely given a booster seat and told to shut up and eat the US and UK’s broccoli.

    “…The cruelty and cynical complacency with which the Biden Administration and the EU conduct their foreign polices is absolutely stunning. And, mind you, all this is happening in the name of “democratic values” and “international law”…..”

      1. Colonel Smithers

        Thank you.

        Two days ago, the Hindu published a letter from EU envoys to India, condemning Russia and urging India to condemn and sanction Russia. The push back from Indian former ministers and officials was swift and centered on India having no argument with Russia and looking after its interests. Some also pointed out European hypocrisy and Biden family corruption.

        Imran Khan has said similar.

      2. RobertC

        To kickoff negotiations for their rapprochement, China’s FM is visiting India next week and India’s FM will visit China soon afterwards.

        April 1 is the 2022 EU-China Summit with the intention of calming the recently escalating trade and geopolitical tensions. One topic might be the EU-Taiwan business investment agreement favored by European Commission President Ursula von der Leyen. China will be focused on 16+1 Cooperation.

    1. Waking Up

      The retired career diplomat from India, M. K. BHADRAKUMAR, stated as indicated, “…The cruelty and cynical complacency with which the Biden Administration and the EU conduct their foreign polices is absolutely stunning. And, mind you, all this is happening in the name of “democratic values” and “international law”…..”

      Well, on March 21st, President Biden went before the Business Roundtable’s CEO Quarterly Meeting and stated:

      “And we reduced the deficit, we reduced the deficit — I want to say it again: We reduced the deficit by $360 billion last year, notwithstanding all that I hear on some channels when I turn them on. And we’re on track to reduce it by over $1 trillion this year.”

      I think most of us can concur that he isn’t talking about reducing the military budget. So, is he planning on reducing the Social Security and Medicare budget with more austerity?

    1. PlutoniumKun

      This is the crux of the matter. Quite simply, decades of decadence has rotted the brains of the ruling classes of the established countries. Ukraine is in a catastrophic condition because they elected into power an actor who couldn’t keep his mouth shut. He only had to make one mistake, because Ukraine is small and weak and poor. The rich and powerful countries have been able to get away with putting in place idiots (not just elected ones, technocratic ones too) for decades, because the US and Europe have been rich and powerful enough to get away with it. If you read some political history from the 1950’s or 60’s, there were of course plenty of idiots and ass kissers and corrupt politicians – but they were at least balanced out by a large bank of genuinely smart operatives at all levels of government, some of whom were not outright psychopaths. Right now, there are plenty of very smart people around, but they are all either sidelined or have decided its better to make social media apps or come up with NFT’s.

      We have, quite simply, dumbed down in the most crucial strategic sectors. Worst of all, we have idiots in charge who are hard working (see Kurt von Hammerstein-Equords categorisations) but unaware of their own limitations. This problem is coming home to roost big time.

      1. David

        It’s interesting to contrast this mess with the parallel shambles evoked by Scott Ritter in his interview linked to yesterday, which I’m in the process of watching. He points out that, for a generation now, there have been no actual Russia experts in charge of US policy on Russia, but only ideologues. The situation in other western countries is better, but even they have been infected by ideology to some extent. For a long time now, advancement in politics has required you to know what to say, not what to do. And here we are with a political class that is hopelessly ignorant about all aspects of this crisis, egged on by a media that knows even less. Happy days.

        1. Colonel Smithers

          Thank you and well said, PK and David.

          To David’s point about ideologues and advancement, I would add policy making with regard to the Middle East and rest of Asia, if not other fields and regions.

          For example, what were known as “Arabists” in the Foreign Office have been hounded out over the past two to three decades.

          David has commented about the fragmentation of foreign policy making in Washington, there is similar in the UK as the Downing Street machine, “sofa government” and hiring of special advisers (“spads”) has led to the sidelining of civil service and military professionals in the rest of Whitehall. Civil servants and service personnel wishing to get on must get with the neo con and neo liberal programmes and suck up and kick down accordingly.

        2. Lex

          In 2002 I passed the testing and was offered an FSO position at DoS. I declined because my conscience wouldn’t let me be a cog in the wheel of empire (even though it was my dream job). At the time, I had lived in Russia and was effectively fluent. I also walked away from an MA at the University of Michigan in Russian and Eastern European Studies. I guess I should have been part of this generation of Russia experts. Ritter is right and if you come from a position of relatively deep knowledge it is both frightening and exasperating.

          1. Ignacio

            …and that deep knowledge might not be welcome any more. I liked the expression that used David “infected by ideology”. May be we have come to a situation in which knowing Russian language is a liability.

            1. KLG

              Just as an aside, but one that is relevant these days, “deep knowledge” of biochemistry, physiology, cell biology, and molecular biology, beyond the latest techniques that make facile “advances” possible, is also considered superfluous, if not unwelcome, these days. Witness “Evidence Based Medicine” and “Big Data.”

              1. Ignacio

                Obligued for making me recall this KLG. May be not an aside but an extension of the same problem into the HC domain.

            2. The Rev Kev

              ‘May be we have come to a situation in which knowing Russian language is a liability.’

              True story here. When the Bush government was recruiting people to be the ones running the Iraqi government in the “Coalition Provisional Authority” after the invasion was over, they were looking for a certain set or type. So they might ask you for your views on Roe-Wade for example. If you told them that you knew the history and the culture of Iraq they would drop you. But if you told them that you spoke the language, they would throw you out of the interview straight away. And you know that I am not making this up.

              1. psv

                I knew at the time of the Iraq war a native English-speaker with mastery of Arabic and experience in Arabic-speaking countries. I naively thought that those qualities would have opened doors for a variety of government job positions. I was informed that people only got hired who agreed with the policies, the language proficiency meant little without the correct attitude. That was an eye-opener.

            3. lance ringquist

              all you need to do is look into the face of someone driven by a idiotology, nafta billy clinton. bomb’em tony blair, the current nit wit in ottawa, trudeau, their face says it all, they will look right at you and say, reality will never ever trump idiotology.

          2. Charlie Sheldon

            I had this idea in college (1965 -1969) a hundred years ago that if I studied Russian and Chinese and went into the foreign service I could work all my life, and so I studied Russian intensively for a year (9 hours a week) and realized I didn’t have the language aptitude or the hypersonic self discipline to tackle such a course load, especially because my main goal at college was to row and that took a lot of time, so I gave it up. Then a bit like Lex but in a much shabbier way, when I was 55 and had by then restudied my Russian a bit and also studied Chinese for three years because at the time I was often in China dealing with shipping executives (I worked for a Port), I decided once again to give it a try so I studied for and took the State Department exam at the University of Washington, by far the oldest in the room, and I passed. The next step was I think going down to DC for interviews, but by then I had looked a bit into things and it seemed that I would be retired anyway when 60, so saw that maybe this might not work out very well. Aside from revealing my own lack of good planning, one benefit of all this was a chance to study two wonderful languages (in very different ways) and maybe learning a little about the rest of the world, which today means that I listen to Scott Ritter and a few other people who know what they are talking about and I shudder when I hear what the bloviating MSM pundits say….

      2. Thuto

        “When the tide goes out, we learn who’s swimming naked” Warren Buffett

        Well, the geopolitical tide has gone out and we are seeing the intellectual and moral nakedness of the political ruling class. From a performance delta perspective, there’s functionally no difference between a genuine low IQ politician and a high IQ one who dumbs down their intellect to get ahead.

      3. Skip Intro

        I take issue with your characterization. What good is an actor who keeps his mouth shut? All his lines were scripted.

      4. KD

        I saw the best minds of my generation destroyed by Finance, gluttonous hysterical empty,
        dragging themselves through wall street at dawn looking for an angry fix,
        angelheaded hipsters burning for the newest derivative product to unload on credulous pension funds and insurance companies. . .

        1. Guild Navigator

          Down in 2022,
          did COVID ravage
          the fruited plain,
          whereupon big bad Putin
          did mansplain
          “Yo, call me Vlad,
          the denazifier of Ukraine”

          Said Zelinskyy
          on the tellie
          to Joyce Behar
          “Leave that NATO door ajar!
          Bring me nukes and Mexican tar”

    2. The Rev Kev

      I have wondered about that and came up with one explanation. After the collapse of the USSR, Washington had a clear field and had no major competitors. They did not need their best people anymore as they could do what they want and as an example, the entire establishment to study and understand Russia was more or less shut down. So for the past thirty years you have had people whose career in Washington was determined by two ideas. The first idea was winner-take-all which meant that they thought in terms of zero-sum games instead of win-win agreements. The second idea was complimentary to the first and you can state it as we-must-always-win. Every single time. So you have now a whole generation of Washington people who lived with those two ideas but now the game has changed. It doesn’t work anymore. So what we are seeing is a result of this Washington culture in face of the real world hence these idiotic decisions and maneuvers. Just my take here of course.

      1. Carolinian

        Add in an increasingly dysfunctional political system here in the US, and perhaps the UK as well, that makes incumbent politicians less accountable to the public for their erratic decisions. Instead the decision makers are under the thumb of special pleaders and wealthy campaign funders who have little concern for the taxpayers propping up their imperial fantasies. As many have pointed out the endgame of the current situation may result in regime change of Western governments rather than Russia.

        Indeed for all the talk about crazy Putin it often seems as though he is the only adult in the room. He offered the West a peaceful path of mutual agreement and they rejected it.

        1. lance ringquist

          one of the problems in america is that the elites in government, never have to pay a price for their crimes.

          so many are against a truth commission with teeth, but to get to the people who turned america into a kleptocracy, were elected in 1992, and today they are every where.

          many are still alive calling the shots, many are young taking the place of elders, but if we are ever to be free, they must be exposed and pay a price.

          robert scheer once said should we be surprised today at the shape of our government?

          he nailed it squarely on the shoulders of nafta billy clinton who has had free reign in america for over three decades to groom and insert thugs into positions of power.

        2. c_heale

          As a Brit I would say the political system which was already dysfunctional, completely jumped the shark with Brexit.

      2. upstater

        It gets back to the Clintons. A bunch of Ivy League lawyers that ran a small, poor state hitting the big time. The cronyism didn’t scale well. Backroom deals for benefactors in Arkansas were small ripples in a small pond. Applying the same governance to the entire world didn’t work out, unless you were an insider.

        1. cfraenkel

          All true enough, but that assumes that the system prior to the Clintons was ‘working’ in anything one would consider a positive direction. The S&L crisis, funding the mujahedin, Iran Contra, Star Wars (not the movie) come to mind. And before that, the Bomber/Missile Gap lies, Vietnam, killing off Bretton Woods. The rot in the system goes deep. Another take would be the Clintons saw which way the winds were blowing and decided ‘Lets ride this sucker into the ground’ before anyone else did. After all, this was roughly the end of the period when Wall St did the same to Boeing, IBM, Pittsburgh and Detroit. Looting, it’s the American way.

        2. lance ringquist

          one of the reasons tony blair has all of a sudden said i may have been wrong about iraq is, the day he was out of power in the u.k., he stepped on a plane to dubia. tony the neo-liberal knew the history of oliver cromwell well, he feared for his head, and rightly so.

          so now the neo-liberal tony is not viewed as a asset in the middle east, now he is viewed as a liability because its obvious we free traded away our super power status, its quite apparent today i am betting a snake like that see’s whats coming, he senses middle easterners backing away ever so slightly now, may cascade into him being handed over to someone.

          so now the neo-liberal is looking for some rock somewhere to hide.

          in america, nafta billy clinton sold us out lock stock and barrel to wall street and the chinese communist party.

          this was flat out treason, making anything previously done by other corrupt politicians seem minor.

      3. JohnnyGL

        “After the collapse of the USSR, Washington had a clear field and had no major competitors. They did not need their best people anymore as they could do what they want…”

        Yeah, I think this is the major factor at play. There’s plenty of examples from history of an overwhelmingly dominant power that can basically afford to be run by complete morons who spend all their time playing ridiculous internal political games because there’s little price to be paid for doing so. The level of dominance is just that big. The Crisis of the 3rd Century in Rome comes to mind. It really was one of the more remarkable periods of history. Roman Empire was so dominant that it basically didn’t matter that they spent decades at a time fighting internal wars, with break-away factions, civil wars and assassinations. The place was flat-out ungovernable for years. Then at the end, they still put the whole damned thing back together when they’re done and stabilized it…until the Huns rolled in, of course.

        To bring it back to our world, the US in 1945, and again in 1989, was overwhelmingly dominant (a classic double top formation for you traders in the comments section). That world just isn’t coming back. There’s both internal and external pressures being brought to bear. The populace keeps voting for change with these ‘wave’ elections. Sooner or later, someone is going to show up with good ideas and plans and make a pitch to the American people and they will get a real mandate to change things. The political establishment is very skillful at protecting itself, and has fended off change by using deception since at least 2008, when voters clearly demanded it. I don’t think the political class can keep winning this game for much longer.

        It take decades to re-orient and re-engineer institutions. The recent supply shocks have sent a clear signal with regard to the outsourced neoliberal economic model in the west. The resulting energy crisis is going to send a clear signal in the foreign affairs realm. Soon, it’s going to be time to stop all the ridiculous, preachy, moralizing horse-manure and get serious about running the place and cutting some deals. The longer we take to re-orient, the more power and influence slips away from us.

        We had our uni-polar moment….we wasted it.

        1. lyman alpha blob

          That’s a good comparison to 3rd century Rome. The US sure is producing a lot of Elagabalus types these days – lots of show but not so hot with the actual governing.

          Perhaps Putin will be the modern Aurelian, but instead of putting back together the old world order, he’ll be starting a new one. If you get past the Western propaganda and listen to what other nations are saying, that does seem to be the aim here.

    3. Thuto

      I think we are squarely in the territory of “throwing spaghetti on a wall and seeing what sticks” with these sanctions, the western political elites have clearly decided the chips will fall where they fall. This is a natural consequence of contemporary politics being all theatrics and no substance, that’s why any ideological position that rides the tide of popular opinion, no matter how self-defeating, is adopted by politicians with the zeal of a new religious convert.

      1. JohnnyGL

        A lot of other countries are watching us quietly while we throw our tantrums and food, and they’re backing away slowly and making other plans. The post certainly demonstrates that’s in evidence.

        It was happening before, and now it’s accelerating.

        1. Sausage Factory

          It is. The optics are all wrong in the West. It makes up 12% of the global population (and I’m including Japan and S. Korea in that calculation) The other 6.5 billion people see clearly what is happening and has been happening over the last 30 years, no one trusts the US and why would they? This round of sanctions has illustrated to everyone how unreliable they are, and what could happen to them, why would you do business with US. Everyone is looking for a way out and now that China is becoming more assertive, the EU weaker, we are going to see wholesale change. Pretty much 80%+ of the global population did not sanction Russia, pretty much 80%+ did not agree or back sanctions on Russia, the Saudis and Venezuelans are not playing ball with the US on oil issues and India is heading away from the quad. The West is looking mighty isolated to me, America massively so. Pointless having the biggest military in the world if you aren’t going to use it, or are afraid to use it. Its like running a protection racket but then never being around when the protection is needed. America cannot deal with peer ‘enemies’. As for NATO, well it has had one mission in its 75 years of existence and the first time it is called upon to act upon that mission it fails to do so. Nothing else to say about that. This isn’t a blip and things will never get back to normal for the West, the world has changed and will continue to, rapidly, and not in the 12% favour. At a time where REAL politicians are needed and real diplomacy required the West has disappeared up its own rectum and we see clearly we have no one in charge, or should we say no one with the skills to be in charge yet they still are.

          1. KD

            I used to think the Neocons had studied diplomacy based on Kaiser Wilhelm II, but I have come to conclude that even a narcissistic moron like that wasn’t stupid or reckless enough to match the Neocons.

            If only Victoria Nuland and Tony Blinken had worked for the Imperial German administration circa 1890, it is possible Germany would have collapsed before 1914 and the whole world war could have been avoided.

    4. Pavel

      “Never underestimate the ability of Joe Biden to **** things up.” — Barack Obama.

      I remember when the Dems and MSNBC et al were ranting about how dangerous Trump was and how he might start WW3. His foreign policy team was atrocious. But now Biden’s B team of Blinken and Sullivan et al have created the most dangerous situation since the Cuban missile crisis and also destroying the EU’s economy. (If we’re lucky that is all that will be destroyed.) But the US oil companies are cock-a-hoop no doubt. Meanwhile Russia, China, India and others are steadily pursuing de-dollarification.

      “How did King Dollar lose its reserve currency status? Gradually, and then suddenly…”

      We are going to have the mother of all inflation at this rate… petrol, fertilizer, housing, industrial metals… all because of this stupid senseless response to the Russian incursion/invasion (brought on by NATO recklessness).

      Thank god I’m not young.

  2. PlutoniumKun

    Thank you for this overview. I’ve heard a number of sources say that it won’t be possible to roll out Mir or Union Pay fast enough to help many countries in South America or Africa, but just maybe there have been preparations underway for this scenario.

    It was pretty clear from day one that the big winners of this would be centres like UAE or Tel Aviv or Singapore – it hadn’t occurred to me that India was in pole position to take advantage of the financial side, but it does make sense now. Increasingly, US (and some European) leaders are making serious fools of themselves in trying to persuade other countries to sanction Russia. One can only wonder what is being said in the corridors of power across much of Asia and the Southern Hemisphere. Welcome to the multipolar world.

    As for oil, it is very clear that there is no possibility of significantly changing existing trade routes or increasing supply to make up for shortfalls. Russia is in a very strong position now – but the Gulf States and others may benefit even more.

    Incidentally, here in Ireland the Green Party minister for Energy called at the beginning of the invasion for reduced speed limits and a return to work from home mandates to reduce diesel and gas use as quickly as possible. He was widely mocked by the press and the usual Twitter suspects for this. And he was ignored by his colleagues. He was of course, right. But dramatically reducing energy use as a matter of urgency is off the agenda everywhere.

    1. Ignacio

      Watching at media I see we are still all in all on ‘values’, ‘democracy’ Putin-phobia, Russophobia mode. Anyway I have seen some articles starting to say something about values being let down in favour of economic interests. As you say nothing on fuel restrictions. May be the leadership is thinking on a rapid return to normal commerce of energy products with Russia.

      1. juno mas

        Fuel restriction?! Who needs fuel restrictions! The price of gasoline is so high in my town that the gas stations don’t have signage numbers for the current prices (over $6). If it goes to $7 fuel will have effectively doubled in the past month. Lots more local bike riders now. And autos idling on stalled freeways is getting more expensive. Is road rage ahead?

        1. Sausage Factory

          meanwhile in Russia I believe it is $1.75 per gallon. Nobody in Russia will freeze next winter and no one will starve, vehicles will not stop, In Europe they will. The price of this ‘Banderite tax’ is going to be very painful for the 99% and thus for anyone wanting to get re-elected in the West. It was suicide from day one but thanks to the brimming with hatred Nulands, Blinkens, Bidens, Freelands, Kagans it still all seems like a good idea. On another foot interesting to see Bidens sons name getting a mention is the Ukraine bio warfare lab issue, papers continue to be released by Russian MoD and MFA. Biden is wired into some funding house acting as go between for the Pentagon and the Ukranians. Gets murkier and more disgusting every week.

    2. Ignacio

      In fact the measures being taken (subsidies for diesel and the like) are just opposite to restrictions apart from awkward for these countries supposedly worried about climate change. I just cannot believe how crazy are we growing.

    3. Waking Up

      Really enjoy reading your comments.

      In 2015, Michael Hudson wrote the following:

      “A nightmare scenario of U.S. geopolitical strategists is coming true: foreign independence from U.S.-centered financial and diplomatic control. China and Russia are investing in neighboring economies on terms that cement Eurasian integration on the basis of financing in their own currencies and favoring their own exports. They also have created the Shanghai Cooperation Organization (SCO) as an alternative military alliance to NATO.[1] And the Asian Infrastructure Investment Bank (AIIB) threatens to replace the IMF and World Bank tandem in which the United States holds unique veto power.”

      Also, “Most worrisome to U.S. strategists is that China and Russia are denominating their trade and investment in their own currencies instead of dollars. After U.S. officials threatened to derange Russia’s banking linkages by cutting it off from the SWIFT interbank clearing system, China accelerated its creation of the alternative China International Payments System (CIPS), and its own credit card system to protect Eurasian economies from the threats made by U.S. unilateralists.”

      Instead of finding diplomatic solutions which involve other nations, the U.S. decided to maintain “American Exceptionalism”. The SCO was created in 2001 by China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. India and Pakistan joined in 2017. (In 2021, the decision was made to start the accession process of Iran to the SCO as a full member, and Egypt, Qatar as well as Saudi Arabia became dialogue partners.) While we in the U.S. have gone around the world for the past two decades bombing and decimating other countries, China and Russia were working on forging relationships. We should not be surprised that they want a different financial system.

  3. RobertC

    Thanks for Dallas Fed explanation. Released before Biden’s Europe trip… Big type blunt conclusions… I’m seeing a message here.

  4. Adam1

    I have to admit that FOREX is not my expertise, but it seems to me one key element mentioned is the lack of Rubles outside of Russia. That implies Europe will quickly run out of Rubles to openly buy which means they’ll need to borrow from Russian banks or the Russian Central Bank in order to obtain Rubles and that assumes any lending is allowed. I’m doubting that with the sanctions they’ll be allowed to use Euros or Dollars as collateral, so what will be acceptable collateral?

    1. Yves Smith Post author

      No, they just need to go to Russian banks. That is the key here, these sanctions force Europe to deal with Russian banks that they then cannot sanction if they want the gas.

      They don’t need collateral. They just need to open a rouble account at a Russian bank. They then fund it by providing Euros that the Russian bank will exchange for roubles, no different than if you did so as a retail customer coming back from a trip with enough foreign currency left over that it made sense to trade it back into your home currency.

      1. Robert Hahl

        Was there some reason to believe that this move would not happen, or that it would not be effective – or did our financial types just not anticipate this. Are they as stupid as this surprising development makes them seem?

  5. eg

    I was hoping to see something on this posted here, and am grateful to see it. Yesterday we got the report about the Russian decision, but there is nobody competent in our media to analyze its implications.

  6. Dean

    A YT commentator on the ground in Ukraine had a more alarmist perspective on Russia requiring rubles for payment for natural gas. Basically this is the end of the dollar as a reserve currency and all the bad things that come with that.

    Does this change by Russia actually spell the beginning of the end for the USD? I admit FX is not my jam. Any insight to help me make sense of this compared to this article’s nuanced and cerebral analysis would be greatly appreciated.

    Thank you

    1. Yves Smith Post author

      No, IMHO the big self destructive move was the freezing of $300 billion of Russia’s central bank reserves (and if you think “freezing” does not mean “permanently expropriating” you are smoking something strong). That said Americans were willing to use their banking system abusively. No one who holds meaningful dollar assets (which you pretty much have to hold in US banks or foreign banks with big enough to have US banking licenses and therefore also subject to the reach of US regulators) is safe.

      To put this in context, that $300 billion represents dollar payments for past Russian exports. This is the functional equivalent of selling $300 billon of oil, gas, wheat, platinum, nickel, copper, you name it, making delivery, and having the buyer stop the check and keep the stuff.

      So Russia is in the process of implementing counter measures. They are in the midst of “Fool me once, shame on thee, fool me twice, shame on me” responses. Russia is doing plenty of other things that aren’t as headline-making and will take longer to implement, like working with China to develop non-dollar payment systems and mechanisms between them and other willing countries in Russia’s orbit, like Belarus and the ‘Stans.

      It might have been possible for Russia to keep some of its dollar reserves not in American and Euro banks. But I seriously doubt enough to have made a difference (anyone who has clever ideas, pipe up, and I do mean of DOLLARS, not other foreign currency reserves).

      But no one these days takes physical delivery of Treasury bonds, so it’s not as if Russiacould have kept them in a bunch of fireproof warehouses in Moscow. And you really do need to keep most as securities, dollar deposits are subject to default risk!

      1. JohnnyGL

        “No, IMHO the big self destructive move was the freezing of $300 billion of Russia’s central bank reserves”

        Yes, that was an absolute jaw-dropper. Asset seizures like that send a clear message to the world that property rights are not, in fact, sacrosanct.

        The revised business model for developing countries post-1998 Asian Crisis and Russian default was to run big trade and current account surpluses to build up a giant stockpile of foreign currency to avoid forex shortages and crises. That’s how you end up with most big developing economies like Brazil, China, Russia, Saudi Arabia, and even India slowly building their stash of UST’s to protect themselves.

        Now, it’s clear that those UST’s don’t offer the protections they once did.

        A lot of countries are going to look to re-orient their economies away from export led growth. It’s going to take decades but the timeline just got accelerated.

        1. TimH

          Wasn’t, I think Germany, pulling its physical gold reserves from US back home starting some 10 years ago?

          1. scraping_by

            Trying to pull its reserve.

            I remember reading about some technical problems in actually moving the bullion as opposed to paper representations of the metal. It’s obviously very complicated.

        2. Bill W

          Bank reserves are the property of the bank where you stored them. That is essential point of banking. The money is no longer yours. You have exchanged your money for a bank liability. That liability is called a bank deposit.

          You are right that export led growth is a bit of a sham. You lose the ownership of goods, and get payments in foreign currencies that you have no control over. Or better yet you buy foreign financial assets and companies, but you then live constantly with the risk of your property being nationalised.

          In most cases corporations take these risks.

          These risks are the reasons why corporations like “free trade deals”. Because these free trade deals give corporations the power to sue governments who would otherwise seize their assets.

          1. scraping_by

            An analogy to your statement about property rights happened in the early 80’s during that decade’s farm crisis. Until then, farmers would take their grain to the local elevator and store it there until they wished to sell. When some elevators went BK, the courts ruled that the grain was the elevator’s property, and that the farmers were junior debtors. The banks, not surprisingly, were the senior debtors.

            That’s why you travel through grain country today, you see huge sheet metal bins on every farmstead. Far more storage than you ever saw in the 70’s when I was a small town boy.

            Anyway, the question about ‘free trade deal’ is, are governments really giving up sovereign immunity? Not sure about that.

          2. Yves Smith Post author

            I am extremely confident that most of Russia’s FX reserves were not held as cash but as dollar securities, T-bills, T-bonds, maybe some Fannies and Freddies. Generally speaking, investors do not hold more in deposits than they need to facilitate transactions because large deposits are not guaranteed.

            Those securities would have been held by a bank with accounts with the Depositary Trust Company You have to be a licensed entity, a bank or a broker, to do business with the DTC. So Russia’s central bank would have accounts with primary dealers like JP Morgan or the biggest Eurobanks who would then make the entries for the Russian central bank.

            DTCC’s subsidiary, The Depository Trust Company (DTC), established in 1973, was created to reduce costs and provide clearing and settlement efficiencies by immobilizing securities and making “book-entry” changes to ownership of the securities.

            DTC brings efficiency to the securities industry by retaining custody of more than 1.3 million active securities issues valued at US$54.2 trillion as of 7/31/2017, including securities issued in the US and more than 131 countries and territories….

            DTC is a member of the U.S. Federal Reserve System, a limited-purpose trust company under New York State banking law and a registered clearing agency with the U.S. Securities and Exchange Commission.


            1. atharvaveda

              Even if Russia held most of its dollar assets in US government securites, it might have been possible to still hide them through a swap-like agreement in analogy with what I described in this earlier comment from this thread.

              They could have used repurchase agreements to accomplish this, if able to find an appropriate and willing counterparty (the People’s Bank of China and the Hong Kong Monetary Authority come to mind). They would have sold US government securities for other government securities, with the agreement to buy them back later.

              It could be Hong Kong securities for the same reasons I described in my other comment: Friendly jurisdiction (Hong Kong is an inalienable part of China, even if some Westerners are happy to forget this) and the USD is pegged to the HKD (so in this case, no divergence in the values of principals of the exhcanged securities). However, I am unsure if Hong Kong government debt provides a large enough liquidity pool to absorb the US dollar securities the CBR would wish to hide this way.

              Another alternative would of course be repo agreements with the PRC/PBOC, exchanging US treasuries for Chinese government bonds. At least the advantage of the exchange rate peg with the US dollar would be lost however.

              I am not sure about the accounting implications of this. Would it strictly be correct to count these new “Ersatz”-securities on the balance sheet as US dollar assets (assuming the CBR would wish to continue reporting an unchanged share of US dollar assets)? If I recall correctly, the BIS argues when they execute gold swaps, that they can keep the asset they are promised to be sold in the future, as the asset they record on their balance sheet, for what that’s worth.

              With all that said, I do also think the CBR could well have been comfortable holding reserves as cash, if they could deposit that at the issuing central bank. If they used for example the FX swap I suggested, they could have swapped US dollars for HK dollars, and then deposited those with the Hong Kong Monetary Authority. Unlike a deposit in a commercial bank they would not have to worry about an insolvency (but there would obviously be no guarantee against a rogue central bank counterparty arbitrarily seizing them).

      2. Colonel Smithers

        Thank you, Yves. I was planning to e-mail you about that.

        Having seen some recent commentary on this issue from former British official Alastair Crooke, I thought it prudent to check before contacting you and did so. A former trade association colleague works at the ECB, regulatory side, not monetary policy. She confirmed that the ECB opposed the freezing of Russian reserves and limiting Russian access to SWIFT.

        Crooke said the Fed also opposed such moves, but my former colleague had no direct knowledge of such a position. I don’t know anyone at the Fed and have not been able to get in touch with Bank of England contacts.

        Soon after his retirement from the Bank of England, Mervyn King spoke privately to Chinese officials and publicly to Chinese students, officials and media about such risks. One wonders what the Chinese have been working on to mitigate the risk.

        Another former colleague, at the same trade association and German TBTF, now based in Berlin and Frankfurt, said the CEO of said TBTF has been lobbying to water down the “own goals”. The CEO is an adviser to and member of the CDU, so my former colleague, a member of the SPD, has been using his own party channels as well as official ones.

        One person emboldened by that is the favourite to be the next CEO of said TBTF. He has long wanted Germany and German business to loosen their Atlanticist moorings and engage more with the rising economies and powers of Asia and sees the US market as losing its importance and association with the US a liability.

        I agree with you about the little difference keeping dollars in banks from outside the west and can’t think of a work around.

        1. Ignacio

          I am not as well educated as you are CS, anyway thank you. As I interpret you there is not an homogeneous reaction as it looks like and not everybody is in the same page regarding the reaction after Russian invasion of Ukraine. Particularly the financial world seems to be better prepared to see the risks of sanctions.
          It would be nice to identify the core of the ultra-NATOist Russophobe reaction and put some names in the list.

          1. Colonel Smithers

            Thank you, Ignacio.

            I work for another EU bank now, one heavily involved with commodities, an operation run out of the Chicago office.

            We transact with the likes of Glencore and Trafigura, but no longer with Vitol, all commodity producers and traders. It’s interesting to hear what they think and report.

            They are preparing for the new world, but are not wedded to any timescale. A fortnight ago, the thinking was that Minsk II could form the basis for an easing, but no longer. The western reaction and limited room for manoeuvre Zelensky has means a longer war and a probable partition of Ukraine.

            BTW, my former colleague now at the ECB is Polish. Her grandparents are from what is now Ukraine, Lviv. I asked her if Poland would want that bit back. She said some Poles do, but others fear the large number of Ukrainians would mean social and economic problems internally and continual tension with Russia.

        2. RobertC

          CS — you nailed it:

          One person emboldened by that is the favourite to be the next CEO of said TBTF. He has long wanted Germany and German business to loosen their Atlanticist moorings and engage more with the rising economies and powers of Asia and sees the US market as losing its importance and association with the US a liability.

          From my RobertC February 18, 2022 at 1:40 pm post

          I believe Putin and Xi gamed out and are executing a confrontation with Biden in Europe, splitting the Atlantic alliance, using Ukraine as their cat’s paw and commodity prices as their lever. And so far everything is moving according to their plans.

        3. atharvaveda

          As for Germany turning to Eurasia for the sake of its commercial future, I wonder if that ship hasn’t definitively sailed at this point? I cannot see any basis for Russia or China trusting (except foolishly) Germany ever again, barring a cataclysmic event which swaps out the state structures in their entirety (and all people in a decision-making capacity, private or public) like the revolutions Russia and China themselves went through.

        4. Yves Smith Post author

          I’ve seen multiple claims but not at the level of a direct quote in an MSM publication, that the Fed was not consulted before the Russian central bank asset freeze. This is conceivable because as you probably know, the Office of Foreign Assets Control, which is in charge of anti-money laundering operations and leads the implementation of sanctions v. places like Iran, is under Treasury.

          I imagine that Treasury had some lame excuse about not consulting the Fed like “Because leaks” as if the Fed is more leaky than the Administration. I am also sure the Fed was ripshit.

          I find it a bit bizarre that OFAC does not have strong obligations re coordination. The do coordinate on settlements, as we saw with Standard Chartered back in the day….the New York Department of Financial Services got permission from the Fed, which was also working on the settlement with the Fed. Benjamin Lawsky of the DFS got the go ahead to press ahead from the Fed, which suggests that OFAC likes to dump what it deems to be scut work on other agencies.

          1. RobertC

            I read this proposal at TheHill early February To prevent an invasion of Ukraine, threaten to sanction Russia’s central bank but dismissed it as absurd.

            One deterrence measure is both credible and sufficient. It is the threat to sanction the Russian Central Bank. It is credible because it carries low risk and is simple to execute. It is a strong deterrent because it is a weapon of massive economic destruction. It can ruin Russia’s exchange rate, the banking system, public finance and the economy at large.

            Even if it is uncertain whether or when the Central Bank sanctions will be executed, their threat alone is a credible deterrent because their potential outcome is so powerful. This raises the stakes much higher for Russia than for the West and should prevent war.

            The author Michael S. Bernstam is a research fellow at the Hoover Institution at Stanford University. Hoover Institution proposals are read within the halls of government.

            1. Yves Smith Post author

              More proof idiots are in charge. He did not understand that Russia’s banks deal in and are backstopped in roubles and dollar sanctions don’t affect that. And as we can see, the rouble has rebounded, strongly suggesting that the central bank sanction had little impact in isolation (you could attribute it all to the self-sanctioning of Western firms dropping or cutting business with Russia).

      3. Dean

        Thank you.

        I agree that the theft err freezing of $300b is the bigger issue. Until now we did this to less than consequential nation states.

        I believe the west has shot itself in the foot here. The loss of credibility and trust in the US financial system will have the world (more quickly now) extricating itself from an exclusive dollar orbit.

      4. atharvaveda

        There was an LA Times article claiming that the Central Bank of Russia might have “concealed part of their dollar reserves using foreign exchange swaps”. This got me thinking about how this would work. One possibility might be to use Hong Kong dollars (a friendly jurisdiction, and the HKD is pegged to the USD). The CBR could sell US dollars spot for Hong Kong dollars to a Hong Kong bank (or the Hong Kong Monetary Authority) and buy them back on a forward basis. If it wanted, it could still, for accounting purposes, count these holdings as US dollars on its balance sheet.

        With the sanctions hitting, the forward contract would be null and void, but neither they nor their Hong Kong counterparty might really care. The CBR would be “stuck” with (in this example) Hong Kong dollars that they could still exchange for goods and services, or for example Chinese yuan. The only US dollars “frozen” in this case would be the “tentative” US dollars in the forward contract.

        Here is the LA Times article:

        1. Kouros

          They really want to run the Russians into the ground, eh?? Boris is trying to find out how they can restrict the us of its gold by Russia. It would have been so much easier if said gold were hold by the BoE, like the Venezuelan gold…

    1. The Rev Kev

      I too was wondering about all those Euros that they will be stacking up and what they will be doing with them. I suppose they could convert them to dollars to pay back debts or maybe they will say that all such debts will only be paid in Rubles. No idea. Certainly they can use those Euros to buy stuff in other counties but then a thought occurred to me. They might want to spend them fast. Since the EU seems determined to wreck their economy, maybe those Euros will not be worth so much in a few months time.

      1. JohnnyGL

        A key item to keep in mind is that the EU (read here Germany) does NOT want the Euro to rise too much and damage their export competitiveness.

        One reason the ECB toyed with negative interest rates a few years back is to send a clear message to the rest of the world to stop piling up EUR reserves and hurting their competitiveness.

      2. Jose Freitas

        I think it may be possible to set up some sort of scheme where multinational European companies in Russia offset purchases of rubles, euros are used in Europe between the companies, and a corresponding account is set in rubles in Russia, and the companies evening them out (not sure if I’m expressing myself well, not my area of expertise).

    2. JohnnyGL

      Not a dumb question at all.

      First off, they’ve got ~$300bn in USD reserves. They do not need to purchase USD.

      Here’s the key part “Russia has 15 international bonds outstanding with a face value of around $40 billion.”

      So, they’ve got the USD on hand. It’s simply a matter of whether or not they’re allowed to make the payment. So far, they’ve been allowed to do so. A default would cause real disruption to financial markets and mandate selling, at a loss, by various institutions that hold these bonds. I am not knowledgeable enough to assess the degree of disruption it would cause, but it would certainly cause some.

    3. Anton Yashin

      AFAIK, Russian just going to send an order to US or to EU to pay coupon from frozen reserves. If US or EU can’t execute order then it’s going to be US or EU default. There was one payment on March 15. It’s passed.

  7. michael Hudson

    Your explanation was wonderfully clear, Yves. I’ve circulated it to my UN colleagues after a morning meeting with the Near East and India for a meeting. They are seeing dedollarization as a means of de-indebting themselves, especially in view of the rising energy and food prices that will make payment of their foreign debt impossible.
    The IMF is trying to give them SDRs to pay dollar bondholders, but the representatives I spoke with today look forward to a Eurasian-backed alternative set of institutions to the IMF and World Bank, starting with a kind of Clean Slate. That was their motive for inviting me to the meeting.
    The amazing thing is that it is the US itself that has chosen to dedollarie the world — and perhaps with it, its dollarized debt burden for the Global South.

    1. JohnnyGL

      I’m very curious to see how much, and how many, countries start looking to shift their economies away from export-led growth.

      Piling up huge stocks of forex reserves seems like a bad economic model, anyway. It requires restraining internal demand, and directing capital investment away from domestic needs and toward exports.

      1. The Rev Kev

        I can see an economics professor going before his university class right now and make the following announcement-

        ‘Look, here’s the deal. You can throw all your economics books away. They are now all obsolete and are only good for bird cage liner. Everything that I was going to teach you is no longer relevant. All the systems and models that you have heard about are all breaking down now and are destined for the trash heap. So, any questions?’

          1. JohnnyGL

            Honest econ prof: “That’s not an econ question, that’s one for the law school faculty.”

    2. Colonel Smithers

      Thank you.

      Further to your recent and great double act with Patrick Bond, one wonders what South Africa is doing.

      Bond has long been frozen out by the neo liberal and corrupt ANC. One should expect little from the world’s richest former trade unionist and the company he keeps and, after his brief appearance at last year’s G7 summit in Cornwall, the meagre crumbs from the top table that he’s happy to run after.

      One hopes Thuto and David pipe up about SA.

    3. Ignacio

      That would indeed be an interesting outcome. All I hope is that European land-grabbing in Africa would not to be simply substituted by Indian or Chinese land-grabbing. I might be going too simplistic here conflating the debt burden with exploitation and land grabbing.

      1. scraping_by

        I’ve never heard of the Chinese hiring mercenaries as part of acquiring resources. That seems to be almost universal, especially European or UK companies gaining mining rights. Might be happening, but I’ve never heard of it.

  8. StevRev

    “In other words, buying for storage has limits…”

    It’s not just storage. If pipelines from Russia are cut off, you can’t replace the volumes with oil from tankers. The pipelines from the ports in north Germany and Poland don’t have the excess capacity to what is being lost, and those pipelines may not even extend to the other refineries in Eastern Europe.

  9. RobertC

    At the risk of getting thumped I’m going to expand on the alternative I offered yesterday at RobertC March 23, 2022 at 2:21 pm

    Items of special note:

    1. Putin made his decision on a public stage rather than the quiet boardrooms of the financial world.

    2. Putin timed his announcement to match Biden’s trip to Europe.

    3. Putin targeted pipeline natural gas, a visible commodity of immediate, daily concern to consumers, industrialists and politicians.

    4. Putin set a short timeline (one week) for putting his rouble regime in effect.

    5. Putin set an either/or (friendly/unfriendly) criterion for relief from his rouble regime.

    Consumers, industrialists and politicians care less about some future possibility of de-dollarization than the existing inflationary effects of high-cost, low-availability natural gas.

    If one European country breaks from Biden’s sanction regime to meet Putin’s “friendly” criterion and receives below-market natural gas, it’s likely all (most?) European countries will follow.

    And if most of the Europeans break from Biden’s sanction regime, then there’s a good chance the “self-sanctioning” jamming up of ports, transports, etc will disappear.

    1. OnceWereVirologist

      Francesco Giavazzi, an economic advisor to Italian Prime Minister Mario Draghi, said at an event on Wednesday: “Paying in rubles would be a way to avoid sanctions, so I think we keep paying in euros.”

      Two senior Western EU officials told Politico the EU would not be able to accept these demands and have to abandon Russian gas entirely.

      Still the same old faithful European poodles as of now. And even if one country wants to break ranks, how could gas be delivered, if the rest of the EU refuses and the pipelines are shut down ?

      1. RobertC

        Once — hopefully a market and distribution expert will step in but it’s my understanding the distribution network is filled with fungible natural gas and is metered at the exit point according to each individual contract.

        1. OnceWereVirologist

          Yes, that’s how I imagine it’s done. But if you’re a lone country that wants to break ranks with the rest of Europe, your gas still has to pass through the pipe network in other countries. If those countries decide to tell Russia that we’ re paying in Euros, take it or leave it (as the European officials seemed to be saying), then Russia can either reveal itself to be bluffing or shut down the pipelines. I don’t see any way to make deliveries on a case by case basis to friendly countries only.

          1. Vomkammer

            Unless the country that breaks ranks is itself a major entry point of gas into the pipe network. For instance, Germany

          2. Yves Smith Post author

            I have to think the supply contracts contemplate non-payment and allow gas company officials to turn off the taps in particular locations.

            Alternatively, Russia reduces how much it sends proportionate to the non-payment and tells Germany, France, etc. to claw their supply out of Italy. That would be fun.

            1. OnceWereVirologist

              Well, contracts don’t seem worth the paper they’re printed on in this new variety of economic warfare, but I take your point. Modulate the flow to the rate that corresponds to what Russia’s receipts of what it considers acceptable payment and dare any transit countries to let it pass or seize it for themselves. Whichever they choose, breaks the front of European unity.

        2. Polar Socialist

          I think there are a lot of companies involved in delivering the gas from inlet to the customer outlet. The gas producer has to reserve forward capacity from the pipeline to even insert any gas into it. The gas in then moved from compression station to compressions station, not necessarily operated by the same company, until it is diverted to another pipeline operated by another company etc.

          There are probably technical checks and balances that the reserved amount has passed all the necessary nodes in the gas network, so that all parties are satisfied that the gas has been delivered.

          For example, when Ukraine has siphoned off gas it has informed other parties about the missing volume.

    2. Foy

      The timing was impeccable!

      I love the way he still leaves an option open for the return of belligerents to their senses, the choice is theirs, and divides and conquers with the same option “Once any European country is determined to be “friendly” and accordingly relieved of the roubles requirement, then all the remaining countries will feel internal pressure to change their sanctions behavior from “unfriendly” to “friendly” thereby salami-slicing weakening of Biden’s sanctions regime. “

  10. digi_owl

    I must say i chuckled when i first heard about this announcement from Putin.

    He may be a deadpan bastard, but i’ll be damned if he can’t be a glorious deadpan bastard ever so often.

    No wonder he was been at it for 20 years now.

    1. Maxwell Johnston

      I too laughed out loud: partly because VVP made this (actually quite momentous) announcement with his usual deadpan logic, but also because we discussed all this on NC’s comments section 2-3 weeks ago (whenever it was that the Russian forex reserves were frozen). That Russia would take this step was incredibly obvious, but the west’s leaders seem genuinely shocked. They should visit this site daily, perhaps they’d learn something.

      Interesting to note that VVP didn’t fire Nabiullina (head of Ru central bank) after the forex reserves were seized. There were also rumors that she unsuccessfully tendered her resignation, but apparently she’s still on board (unlike Chubais who fled Russia yesterday). A Russian colleague sent me a long Telegram post today explaining that in fact the Russians anticipated the possibility of their reserves being seized but decided to run the risk, partly because overall Ru foreign debt (govt plus commercial) is roughly $400bn so at the end of the day they can just default and it’s a wash, and partly because the forex seizure would be a perfect justification to split from the western-controlled financial system and give them freedom of maneuver going forward.

      The speed with which this is unfolding (the FT comments re India are fascinating) make me wonder if the Russians didn’t actually coordinate a lot of this in advance with China and India, possibly with others. Interesting times!

  11. guurst

    unfriendly EU countries – Synchronous (electricity) grid of Continental Europe – heavy EU infighting ??

  12. Mikel

    No wonder Jamie Dimon was spouting off this the other day:
    “…First, Dimon thinks the U.S. should work on increasing its natural gas production capacity, to have more gas to send to Europe and replace Russian supplies.

    Second, the U.S. needs to encourage Europe to expand its own liquefied natural gas facilities—an idea that is already moving forward in Germany, which has announced that it’s building two new “re-gasification” facilities to accept gas from overseas and transform it back into usable fuel.

    Third, Dimon thinks the U.S. needs to invest more rapidly in energy sources like hydrogen and carbon capture technologies.

    And lastly, Dimon proposed speeding up the process for installing renewable energy, including by reducing permitting times.

    Each aspect of Dimon’s idea has been floated before, without the rhetorical wrapping of a Marshall Plan. In that sense it’s old wine in new bottles. But it puts a spotlight on the current debate over U.S. energy policy…”

    “Marshall Plan” terminology really gives it that Cold War flavor. Don’t ya think?
    And I think their main attraction to the idea of a “Marshall Plan” is in riding the on the back of the warm and fuzzy reflections on the post-WWII global economic order that for decades has been propagandized about in the USA media .

    1. digi_owl

      Reheated cold warriors, the lot of them.

      The bear was not drunk and defeated, it was hibernating and sobering up.

  13. cobo

    Dear Yves, slightly off topic, but there has been a lot of trial and error with the spelling of “Rouble,” “Ruble” and others used less often. I see that you have settled on Rouble, and I know you do things for reasons, may I ask why you’ve settled on this spelling?

    1. Raymond Sim

      The Cyrillic spelling is ‘рубль’. The first four letters more or less correspond to ‘RUBL’. The final teeny ‘b’ being a pronunciation sign modifying the ‘L’.

      It’s pronounced something like ROOBYL, doing your best to swallow the ‘Y’ while pronouncing the ‘L’ as if you hadn’t. English speakers find many ways to mispronounce Russian, one being to make the ‘OO’ too much like ‘OOH’, which would I guess be the reason for ‘rouble’ instead of ‘ruble’. Personally I’m not sure it’s worth typing a whole extra letter.

  14. Dave in Austin

    Yesterday I said the Ruble had gone down by ¾ in the wake of the Ukraine invasion. I was wrong. Yves’s chart, above, is correct.

    On the gas numbers. the pipeline through Poland from Russia has been closed for a month because Russia stopped selling gas on the day market. It was reported that the pipeline was flowing backwards from Germany to Poland to meet Polish demand.

    On Qatar gas. The new German terminals on the North Sea will take 2-3 years to build. Worse, those LNG ships with the huge spheres popping out of the deck are insanely hard to make. To liquefy natural gas you cool it to 260F at one atmosphere and ship it in the big spheres at 7 atmospheres and -200F. And that takes special steel and welding. Most ships are produced in Korea and there is a long wait. High shipping rates = expensive gas.

    Finally, if Russia demands Rubles for gas and there is a shortage of Rubles, it makes sense for the Russians to act like the Fed and set the Ruble exchange rate to the pre-March 75rubles/dollar rate. Of course I’m a know-little about the plumbing of the money flows.

  15. joecostello

    Germans specifically declined to give amounts of the Qatar gas deal.

    Russian oil and gas exports cannot be easily substituted any time soon or ever depending on how large amount. Crushing demand will be only result to any significant Russian supply disruption.

  16. Charlie Sheldon

    As always, Yves is the best source of information, anywhere. I just watched Biden’s Europe press conference. It seems he and his administration are pretty convinced, or showing they are pretty convinced, that the US and the Europeans are more than ready to suffer the blowback from sanctions. They say;, Biden said, this is going to take months to hurt the Russians, but those are months hurting the west, too. They seem to be making the huge assumption that the general public will support the pain. This is an enormous assumption. Maybe they are behaving this way because they know something we don’t – maybe they have information showing Russia is about to collapse, or fail militarily, or Putin overthrown. But, absent that, it seems where we are going to be by this June (unless we are all in the ash cloud) is facing food riots around the world, furious citizens in the US and Europe screaming about inflation, gas prices, shortages in stores, a huge refugee crisis in Europe, and the awkward situation whereby Russia has won in Ukraine, removed its forces, and saying they will open the energy and materials trade spigots if the sanctions are removed.

    1. atharvaveda

      The words from Der heimliche Aufmarsch are apt: Dann steigt aus den Trümmern der alten Gesellschaft / die sozialistische Weltrepublik! (“Then rises, from the ruins/rubble of the old society, the socialist world republic”)

    2. c_heale

      By the tone deaf comments made by the Biden administration, I would say they have no idea what they are doing. All the options they have are bad. The least bad is talking to Russia and getting Zelensky out of the way.
      The biggest problem imo is the upcoming diesel shortage. That will result in a collapse in the supply chain.

    3. Yves Smith Post author

      Putin’s approval rate is 80% and the really pro-Western business types and Moscow intelligensia have fled. As Scott Ritter said, these sanctions were the biggest gift the West could have given to Putin.

      Russia isn’t going to collapse. The central bank chief Nabulina, who is very much seen in the West as a straight shooter, described the disruptions, which aren’t bad, and how they are being addressed. Biggest is food stockpiling which is creating localized shortages, but overall supplies are OK, there are just distribution issues.

      As I have said repeatedly, the big problems for Russia, if they come, will come later. There are certain key supplies Russia gets from the West like auto and aerospace parts. I suspect Russia will continue to be able to get them but at higher cost by laundering them through friendlies like India and the Middle East.

      Chips could be an issue. High end chips come from Taiwan and SKorea. SKorea is formally backing the US but not happy at all, so I suspect they’d be OK with cheating. At least early in the sanctions, Samsung was still supplying Russia. The US will try to pressure Taiwan not to ship to Russia, since that’s certain to escalate matters with China.

      1. Acacia

        What’s your take on Nabiullina?

        She was Minister of economic development and trade for five years and then Putin’s economic advisor. By 2016, Saker grouped her with the Russian 5th column, and recently I read that she tried to resign from her position at the CB — twice, even — but Putin wouldn’t accept it. I’m having trouble getting a fix on whose interests she represents.

        1. Polar Socialist

          Mainly from reading Helmer it would seem she represents the interests of the oligarchs, and the story about her resigning was a rumor started denied by Kremlin to send her a message that now is time to reconsider her loyalties and not stand in the way of mitigating the sanctions even if it hurt the oligarchs temporarily.

          But my guess is probably worse than anyone else’s.

  17. nothing but the truth

    with one stroke putin has converted ruble to a reserve currency and biden has made every non-nato country be have serous doubts about holding dollars/euros at their central banks.

    Running international realpolitik via emotionally charged social media campaigns is not a good idea.

    mr blinken should be fired. or promoted.

    it seems in everyone’s interests to bring the war to an early end. but no, we have to act out of spite.

    1. Yves Smith Post author

      No no no no. Don’t Make Shit Up.

      A reserve currency requires enough currency being held outside the issuing country that it can facilitate transactions. That requires running sustained trade deficits while not being required to constantly depreciate the currency (as in it serves adequately as a store of value, trade counterparties are willing to hang on to it).

      Russia does not run trade deficits. It runs surpluses. That is why its central bank had such a big foreign currency reserve.

      And the rouble has been such a weak currency that even Russians weren’t keen about holding it. Russians of any means typically owned dollars or euros. The Russian economy was somewhat dollarized. Many banks offered foreign currency deposit accounts.

  18. George

    I think it is fair to say just going to the CBR and opening an account in Euros or USD and exchanging those for Rubles is a non-starter. It would defeat Russia’s entire reason for requiring Rubles for its energy. For one, USD and Euros are sanctioned for Russia so there is no reason for them to acquire them. If they can’t be spent (SWIFT) why trade for them? So, Russia no longer needs unfriendly currencies held as reserves. Two, Russia, and by now the larger un-internationalized world have lost confidence in the USD because of its continued use as an economic weapon as well as ignoring the rate it is being inflated away by the US Fed. Freezing reserves, stealing gold and oil, yes people take notice. I can’t see how they are going to exchange Euros or USD for Rubles, that’s precisely the point. It is more likely means Europe and the USA will have to trade with commodities (gold), services, or manufactured goods.

    Imagine there’s no countries
    It isn’t hard to do
    Nothing to kill or die for
    And no religion, too
    Imagine all the people
    Living life in peace…

    1. atharvaveda

      This is exactly how I see it too. The only reason I can see for Russia to demand payment in rubles is that they will now get to decide what hostile counterparties may buy those rubles with. And if they allow them to buy them with dollars or euros, no matter the technical details of the currency exchange (OTC or on a regulated exchange), Russia ends up even further accumulating IOUs (dollars/euros claims on Western banks) from hostile nations who have already shown they are happy to rip those IOUs up once they get what they wanted in return. (Frozen central bank reserves, frozen commercial bank deposits.)

      This problem will just continue to grow in scope as Russia has a large balance of payments surplus with its Western energy customers, which should only grow further as these countries have also chosen to weaponize every Russian import of value from them (witness how they refuse to sell spare parts to Russian Airbus and Boeing aircraft). The only liquid, widely accepted, tangible asset these countries can offer Russia is their monetary gold. Longer term I think Russia should demand scrap metal, paintings and other antiquities, gemstones, palladium extracted from catalytic converters, and so on, from Western buyers of their energy. All these things wil find a better long term home in the East anyway.

  19. John k

    Can anybody explain how Russia can better use dollars exchanged for rubles at a Russian bank than dollars paid directly to Gasprom?

    1. Yves Smith Post author

      We’re talking about Euros, not dollars, since this is just gas.

      Euros are not paid directly to a company, ever. They do not have huge vaults of currency.

      They are paid to from an account at the buyer’s bank to an account at the seller’s bank.

      Russia wants to force the transactions to be made at Russian banks since European banks won’t be able to buy roubles outside Russian in enough size to execute gas purchases across the continent. Russia is doing that to halt the further sanctioning of its financial institutions. Russia does not want to have Russian companies stuck with dollars or euros in foreign banks which may be frozen or otherwise expropriated.

  20. RobertC

    Yves explanation of the RUBINR swap line is far superior but David Goldman at AT provides additional Russia and China relationship context India-Russia currency swaps bypass US sanctions — Deal if executed will be first open departure from the dollar-based system of international trade financing

    In another indication of New Delhi’s distance from Washington, India invited Chinese Foreign Minister Wang Yi to make a “surprise stop” in New Delhi on Friday, Reuters reported Wednesday. The Chinese official is in Pakistan for a conference of the Organization of Islamic Cooperation.

    This is the first Chinese visit at ministerial level since 2019, when border clashes aggravated relations between India and China. The purpose of Wang’s visit is “normalization of ties with India,” the Hindustan Times reported.

    Indian exporters also are eager to fill the gap in the Russian market left by the Western boycott, FIEO’s Sakhthivel told CNBC. “Export to Russia is not much, only in agriculture and pharmacy products. Now that the whole of the West is banning Russia, there will be lot of opportunities for Indian firms to enter Russia,” the trade official said.

    President Biden March 22 called India’s stance towards Russia “somewhat shaky,” but Undersecretary of State Victoria Nuland spoke more cautiously the same day in an interview with India’s NDTV. “We have been supporting the sourcing of security needs for Ukraine, along with our allies and partners, from around the world, including some Soviet-era equipment. And those are the kinds of things that we can do with India as it continues to evolve its position,” Nuland told an Indian interviewer.

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