Janet Yellen may force Russia and, in some cases, the country’s corporate sector, into default.
Over the years, I’ve endeavored, with varying degrees of success, to explain that in a world where the vast majority of trade, financing, invoicing, borrowing and lending, involves the US dollar at some point, the US Treasury’s power is virtually unbridled.
For some, that simple observation is too unpalatable to countenance despite being self-evident. Critics of dollar hegemony would rather deny a tautology than concede that the sole legal issuer of a currency by definition controls that currency and everything to do with it. There are some exceptions — illicit transactions carried out in physical cash are the most obvious. But outside of the cocaine trade in the Americas as it existed from the 1970s through the mid-80s, such arrangements rarely work at scale and almost never for any appreciable length of time.
Despite years watching otherwise intelligent people deny reality, I was myself incredulous last month at the level of incredulity in the market when the West effectively seized the lion’s share of Russia’s foreign currency reserves. As it turns out, “claim” is a misnomer when what it is you’re claiming is the sole purview of someone else. Your claim is only as real as the entity which created it decides it is. (Who knew, right?)
There were two carveouts, though, one explicit and the other inherent in Europe’s beholden status vis-à-vis Russian energy. Russia could continue to service foreign currency debt, and some European nations’ reliance on Russian gas meant Moscow would retain access to hard currency — sort of. Russia is constrained in how it can use any G7 claims it’s allowed to retain.
That brings us to the story of the day. As of this week, Russia may no longer be allowed to use otherwise frozen dollars held at US banks even to make coupon and principal payments on dollar-denominated debt.
On Monday, Yellen stopped Russia’s correspondent bank (JPMorgan) from processing payments, including a principal payment of more than $550 million and an $84 million coupon payment on a 2042 dollar bond, according to a Treasury spokesperson, who told Reuters that Moscow “must choose between draining remaining valuable dollar reserves or new revenue coming in, or default.”
Russia made a series of payments since the war began, but now faces a stark scenario: Deplete the unfrozen portion of its reserves, divert export revenue, curtail spending on the Ukraine conflict or miss payments. This could affect the Kremlin’s decision calculus when it comes to demanding rubles for gas shipments. Some of Russia’s obligations have alternative payment clauses. For the portion that don’t, rubles won’t work.
As Bloomberg wrote Tuesday, Treasury’s new stance “sharpens the focus” on coupon payments due late next month on dollar and euro bonds. Those payments are due May 27, which the linked article noted is “two days after previously announced exemptions are set to run out.”
Russian corporates attempting to make payments on their own debt have been beset with logistical problems since the onset of hostilities. Citi, which provides payment services to Russian companies, reportedly spends days mired in the new, labyrinthine sanctions regime in an effort to check every box and avoid running afoul of authorities in Washington, London and Brussels.
That means some companies will likely default, not because they don’t have the money to pay, but because the sheer amount of compliance work required to clear the payments means the funds aren’t transferred on time. Indeed, that’s already happened. “Although flush with cash, the steelmaker was unable to settle a $12.6 million dollar-bond coupon within a five-business day grace period,” Bloomberg wrote late last month, describing the plight of Severstal, which was informed by Citi that the bank needed explicit permission from OFAC prior to green-lighting the interest payment. Multiple payments were similarly held up by Citi as of March 30. As one Bloomberg credit strategist put it, “They want to make sure everything is by the book with the US government.”
Effectively, Yellen is making it impossible for Russia to pay. Treasury’s decision to tighten the noose came in the wake of alleged war crimes in Bucha, which some European nations insist should be the last straw when it comes to going forward with an energy embargo. Although a phased-in ban on Russian coal was in the offing, there was still no agreement in Brussels on a move to sanction oil and gas. Germany’s opposition is becoming untenable, but after securing a victory at the polls, Hungary’s Viktor Orban will likely hold the line.
There’s been quite a bit of discussion about the purported “injustice” of financial measures aimed at cutting Putin’s Russia off not just from the global financial system, but from its own reserves. Typically, critics attempt to silo the debate — the war is so obviously wrong that it scarcely bears mentioning, so better to have a theoretical discussion about the purported right to transact and the ramifications of weaponizing the dollar in the service of foreign policy aims.
I myself have (repeatedly) argued that the biggest threat to the dollar’s reserve status is the capricious weaponization of the currency. In 2020, for example, I wrote that,
The dollar’s status as the world’s premier reserve currency is threatened more by US foreign policy than it is by any deficit, no matter how large. The constant weaponization of the USD and the US financial system through draconian sanctions aimed at punishing perceived foes along with the 2018 experience (when the rest of the world was again reminded that financial stability outside the US depends almost entirely on the Fed not erring by overtightening during a hiking cycle), are likely to be the key drivers of continued de-dollarization. Not deficits and not ‘money printing.’
In what I’ll call a small miracle, no one thought to cite my own words in arguing against my steadfast contention that de-dollarization is a virtual impossibility in the near- to medium-term.
I’d be inclined to suggest this is yet another example of why people trust what they read here. I give you both sides of the story, which in many cases means arguing against myself in order to help get at the truth. In this case, I’m afraid the truth, reduced and condensed, is more uncomfortable than almost anyone is willing to admit.
We lie to ourselves each and every day about almost everything, because to tell the truth is to strip life of any and all meaning. For example: There’s no such thing as “inalienable rights.” We made that up. It’s pure fiction. There are only our human sensibilities, which are in no way, shape or form, the product of any connection we have to the divine.
What does that mean in the current context? Well, it means that just as Putin isn’t required, by any power higher than an international tribunal, to respect Ukraine’s “right” to self-determination or even the people of Ukraine’s “right” to live at all, the US isn’t required to preserve Russia’s “right” to transact or Russian corporates’ “right” to pay debts they’re able and willing to pay.
It also means that nobody in Washington is compelled by any divine decree to avoid taking action that would cause the Russian people to experience acute suffering. Economic or otherwise.
Now that’s realpolitik.
I’ve always been a cynic about this stuff, but i’m currently suffering through my third year of law school, and it’s truly soul-crushing to witness first-hand how much of the profession is designed to hide this fact. Everything is optics, everything is marketing.
I appreciate your comment very much. A few points to share in response:
I’m sympathetic to the soul-crushing reality you’re experiencing as a third-year law student. Sounds very harsh. I did not attend law school. I studied liberal arts and sciences. But I have to opine that everything you’re learning provides important lessons about people, and lessons about realities in support of your aspiration to become an attorney. You’re learning how to use your mind, fundamentally. That is the value of education.
Some might say “I don’t know God, but I know the written word of God.” From my perspective it’s not dissimilar to how we know Heisenberg (aka Walt). The Divine is a matter of personal belief. There are people who would argue that our very existence implies a divine signature. It’s not an objective fact, but that does not mean it lacks value. Education taught me most importantly how to think. I am not an expert, and I don’t pretend to be. You’re learning to think in ways that I may not have learned. But those are our personal choices. We’re not gods. We are sentient and self-aware. But in some respects, I’m not so distant from the beasts of the field.
My second point is this: You’re not like a salmon beginning the swim upstream. You will have choices as you move through life. Sometimes your decisions will be driven by your very being, not unlike the salmon. And, by the way, there may be some aspects of your being that suggest a connection to the divine. But other aspects of your life will completely depend on your decisions about how you manage your choices. The fact is, it only becomes clearer that there is little if anything that you control.
The philosophical enlightenment that spawned the birth of our country revealed certain self-evident truths of our very humanity. I would not say we made up “inalienable rights.” As a some-time writer of stories, I would say we “make-up” life itself each and every day. The crippling experience you’re having in law school is part of your story. What it means to your life is up to you.
This is rather a non-sequitur, but about the salmon thing. My wife died in 2019 from a long battle with Alzheimer’s and in the later stages for over a year every day at 5:00 pm she would start to rant about having to “go home.” That was often followed by her trying to get out of the house physically and try to go home, wherever she thought that was. That phase of the disease, with a bit of medication eventually passed. Her father, who also died from this noxious affliction also spent more than a year trying to go home. Once he got out late at night and walked 25 miles towards where he was born before being found in a drug store parking lot two days after he left. In one of his previous lives he actually was a pharmacist. When I visited my wife in the nursing home for five years, I was exposed to dozens of residents with dementia who were in some phase of the need to go home. I came to the conclusion that not just salmon feel that primal urge.
Thanks so much for the thoughtful comments (from you and from the other folks below).
This is a good perspective. I mean, I agree that there are some fundamental qualities of the human experience that are so universal that they should be “inalienable” — something like Kant’s categorical imperative, I guess. But in my experience, the legal system seems entirely unconcerned with figuring out what those fundamental qualities are — in fact, it often seems more focused on escaping those questions entirely, in order to justify an expedient exercise of power. It’s a backwards, petty, structured sort of philosophy designed to spit out highly-polished answers that are built on so many layers of legal fiction that the average person can’t see the truth at the bottom — that it’s all just confidence men in suits (and robes).
But then again, it’s that public perception of legal objectivity which strengthens the non-violent norms of conflict resolution which we all depend on… so maybe ignorance is bliss?
Enough cynicism for one day, though. Here’s to finding a good path upstream!
One more idea to share: Voice, in its many forms, spoken through voice and action, is extremely important to success, whatever you do. Theoretically, your education enhances your ability to use your voice, helping you to navigate not only your career, but your entire life. Whether you work as an attorney, or in politics, international affairs, or in business, voice is absolutely vital.
Quite impressive that at your relatively young age, you are already questioning how the world works.
With virtue and ethics in your back pocket, you will be able to do amazing things.
Jon,
Best wishes for your success.
My son was an attorney and I can relate to your struggles and thoughts.
The world seems overwhelming and cynical a lot of the time, but don’t lose sight of the small simple things, like smiles or laughter, and those things that money can’t buy.
Freidrich Nietzsche nihilism,applied to economics.
Nothingness, the realization that without denial, the ultimate human survival mechanism, everything just happens to happen and we should be very grateful that we are so lucky.
As to Zolton, Dalio, et al., pure creative procrastination. Walking backwards to predict the future means you don’t even really bother to figure out what is currently the case. Denial, wrapped In ego.
Saul Good Man
No, it most assuredly is not.
I for one, am in favor of weaponizing the USD in this situation. The alternative is that any psychopath autocrat can destroy humanity on a whim.
Janet has drawn a line in the sand between acceptable and unacceptable behavior. Without her guts to do so, we may be forced to send our sons to defend humanity on Earth. This should be a last resort.
Maybe not all past instances of USD weaponization were appropriate- this is why it is so very important to elect leaders that put “the people” before “the man”. Leaders we trust with the power to know when to weaponize/not weaponize when to ignore/not ignore behavior and when to call a spade a spade. People of intelligence, knowledge and wisdom.
Anyone with character similar to Marcus Aurelius would have my vote.
I’m of the same mind, EN, and in favor of weaponizing the world’s dominant currency. In addition to Putin the Goon being a very bad boy, I’m concerned about ongoing implications of this matter in regard to the posture of China, which (so far) has not said that they set aside their support and partnership with Russia. Xi Jinping is playing in a sandbox with a very bad boy, and he’s very likely going to have some problems as a result.
i doubt that technical default “would cause the Russian people to experience acute suffering”. Russian trade balance is positive and the country is not planning to issue new debt anytime soon, so most likely will not matter much.
As you may be aware, the US doesn’t typically lift sanctions quickly. In all likelihood, Russia will remain the most sanctioned country on the planet until Putin is replaced. That will almost surely entail continued restrictions on access to, and use of, hard currency. That isn’t tenable.
Combined with additional, painful sanctions on Russia, and alongside your point that they are likely to persist until Putin is vanquished, there’s noise within our government about providing jets and more sophisticated tools for guarding the Ukrainian skies and the Odessa seaport. Putin wants to play war by his rules and on his terms. He’s shifting his forces to the east, which should have been his initial, tactical approach. But he has, indeed, shot himself rather badly in the foot, which means he has only one useful foot. If Ukraine receives the additional support it needs, the Russian forces will, at best, slog. Putin will behave like a cornered beast. My fear is that Putin will grow frustrated and resort to chemical or radioactive weapons. If the Chinese call themselves partners with Russia, they might be able to save themselves from the risks to their own image by stepping in to interrupt Putin’s psychotic imaginings and offer counsel that helps to mediate some form of resolution. It’s possible this could happen. But does Xi Jinping have the imagination to take this step? Any way it goes, China’s image in the “world order,” whatever that is, can benefit if Xi plays his cards right. Personally, I would just like to hear more from the Chinese about this lousy war.
Agree that Ukraine needs more sophisticated weapons to defend itself. The economic sanctions hurt Russians and do little to deter an absolute dictator like Putin. The original arguement that the weaponization of the dollar will backfire in the long-run is still valid.
We all have our own reasons to lie to ourselves with prejudice, mostly universal reasons, however the devil is in the details of the individual and relate to how they cope with their unique nature/nurture snowflake pattern.
How can all be forgiven on the other side? The ability to read the ancient crystalline structures of others at a glance and understand. The acknowledgement that the lying is over because we can no longer deceive anyone about anything anymore. The body and the worldly ambiance, dead as a door nail.
Yellen with a mullet in a rabbit fur high roller hat singing “Gimme Back My Bullets” in an ode to Skynard while fightin commies for her mommies.
“See how we shine we’re the last, we’re the last in line.”
H-Man, when your in a fight, you hit them where it hurts.
You’re right.
However, best not to get in a fight.
Returning here again because I wanted to respond to H’s take about the power of the dollar. It’s interesting to me because the dollar and the entire economy is, indeed, a product of imagination. The US dollar is an original American creation, modelled after Spanish pieces of eight. It is, indeed, powerful and something to be feared – for the Russians. It’s also a source of power that inspired and enabled social expansion, schools, businesses, city, state, and federal governments, social institutions, markets, and, of course, wonder, invention, and greed. And over a long time, all of the social expansions and institutions and businesses and schools and markets and local, state, and federal governments, and, of course, the results of wonder, invention, and greed all rolled up together, one on top of another, and cast a very large, dark shadow of massive power.
Russia, China, and the 45th President notwithstanding, we are a country at the peak of its power and influence. Even so, we have made some errors in how we manage our economy and society. We’re aging quickly, perhaps too quickly for our own long term good. We need people to work for our companies. Too many jobs go unfilled. Our immigration system, which has a great tradition, is utterly, completely facocta. China would love to replace the dollar and elevate the yuan as reserve currency. But dethroning the dollar won’t happen quickly. The dollar can remain strong, but US culture needs to change with our changing realities. We need to put aside oil and gas. We need to build safe, modular nuclear (it really exists) and/or Thorium reactors on a massive scale. And we need to have more children, so we reduce the average age of the population and solidify our workforce for the long haul.
The Chinese are trying to copy our ways of building power by using innovation. That’s definitely part of our story. But they fail to enable the values of freedom and encourage the dynamic variable of the individual. Sure, Jack Ma is a wealthy man. But he has been publicly demeaned and degraded by his government. It wasn’t just a mistake. They hurt Jack Ma and themselves.
All good- one caveat. The Eurodollar-overseas dollar. Unregulated,unattributable, uncounted. If there is anoyone in the US senate who understands this and knows the history, please raise your hand today….Remeber in the fall of 2019 the overnight market had a big, still unexplained problem? Why don’t you call up Jeff Snider (Alhambra) and ask him where the hidden vulnerabilities in our system are? We need to figure this out before the bad guys do…..
The only thing that limits power is power. Realpolitics is Russia is a failed state with the worlds number one stash of nukes. Russia should be rich with all the natural resources it has. The government has two roles- thief and bully. They get away with it by selling nationalism and religious bigotry. The thing to remember is there is no advantage to being the first to use nuclear weapons- nuclear war will cause the entire world to stave to death. So it’s binary- respect the rules of leaving other people alone, or threaten the end of the entire world. The history of Russia is not encouraging. The question here is simple- Putin is an existential threat to everyone- until he isn’t…