In Act of Financial War, West Will Take Russia’s Reserves and Cause Panic

The Russian government will not be able to use the financial reserves it holds in the United States, the European Union, the United Kingdom and Canada, the European Commission confirmed on Sunday. That is, the Central Bank of Russia (BCR) will not be able to “withdraw” funds or sell financial assets it holds in these countries: deposits and public or private debt securities.

Of the sanctions announced so far by the “West” against the Russian economy, it is the most serious. It is, in effect, a scam. It is an act of war. Barely comparing, but not very much, it is as if, in earlier times, a country invaded its enemy and plundered almost all of its gold reserves (the standard or backing of ancient international payments).

Immediately, there could be a huge devaluation of the Russian currency and a spike in interest rates. On Friday, the dollar was selling at 84 rubles. Hours before the opening of the market in Moscow, the quote in some banks was as high as one dollar for 150 rubles.

The consequences for Russia go much further — read further down this text. For the world economy too.

If any country can have its reserves frozen or confiscated by another (like the US), everyone will think hard before putting their golden eggs in that basket. That is, several of them may want to create an alternative financial and reserve system. This is what China and Russia were already thinking of doing before the war. At the end of 2021, China had about $3.3 trillion in reserves, the largest in the world. Of that, at least US$1 trillion was on loan to the US government (it was in US debt. Brazil has US$244 billion in US bonds).

In more precise terms, the “West” will block the BCR’s access to the country’s international reserves, although technical details and legal documents of the sanctions have not yet been released. International reserves are a government’s financial savings in “hard” currencies, accepted on the international market (dollar, euro, pound, yen, gradually the Chinese renminbi). In general, they are mostly made up of investments in US or European debt securities (they are “loans” for these governments).

When a country is left with few reserves or without access to such resources, the confidence that it can make international payments (such as imports of goods, debt payments) diminishes or ends. The government is also left with little or no ability to intervene in the exchange rate: that is, to buy local currency with “hard” currency in order to avoid exaggerated devaluations, soaring interest rates, panics and possible crashes resulting from this turmoil.

Trading with such a depleted country of reserves or investing there is therefore a risk. If the reserves are scarce or that country also has no other way of getting hard currency, it may not be possible to take money from there or less (because of the devaluation). It may be that a Russian bank runs out of dollars or euros to pay foreign commitments, at the risk of going bankrupt (it would not have government help). These are borderline cases, which already happened in Brazil in the 1980s, by the way. But the example gives an idea of ​​the size of the problem.

At the end of January, Russia had the equivalent of $630 billion in “hard” currencies or generally accepted financial assets. It is the third or fourth largest reserve in the world (Brazil’s were US$ 358 billion).

About 38% of the total was invested in foreign government debt securities, 24% were deposits abroad, 21.7% in gold and just over 10% in non-government debt securities. These are huge reserves, but you need access to these resources.

The gold is in Russia. In June 2021, most recent data from BCR, 13.8% of total financial assets were in China, 12.2% in France, 10% in Japan, 9.5% in Germany, 6.6% in the US, 4.5% in the UK, to name the biggest shares.

In terms of asset currencies, 32.3% were in euros, 16.4% in dollars, 6.5% in pounds. On a global average, countries held 59% of their holdings in dollar-denominated assets and 20.5% in euros in the third quarter of 2021, according to the IMF. Russia is an exceptional case and is already taking precautions.

It should be noted that at least a third of Russia’s resources in “hard currency” were in the countries that are going to boycott it (the European Commission said on Sunday that it was almost half), at least in June 2021.

It is possible that the Russian government has transferred its holdings to other countries or to neutral institutions since the middle of last year. For the rest, “hard currency” still enters. Russia has a large external surplus (in the balance of payments): between foreign trade gains and the flow of capital and income, it had a record balance of US$ 120 billion last year, basically due to exports. In January alone, US$ 19 billion came in.

Finally, Russia can get help from China, either through normal means or with unorthodox operations between the two countries. But this is mere speculation.

That is, Russia can turn, in an emergency situation, to the basics of the basics, in the very short term: putting out part of the fire. At least until Friday, moreover, the country could still make and receive payments related to the production and trade of energy, agricultural products, etc.

But the problem goes further. As has been said, Russia will become an international financial pariah, like Iran or Venezuela. The investor does not put money in a country if he does not know if he will be able to get it out of there (disinvest, remit profits). There may be even more freezing of Russian resources. Nobody knows how far the currency devaluation will go. Several companies cut ties with Russia on Sunday. Financial asphyxia will slowly wreck the Russian economy (which will already suffer an immediate big impact, a financial meteor). Russia has become a very high risk business.