Walking the fine line of Russia sanctions
The FT’s Martin Sandbu directs our attention to the difficult position in which securities depository Euroclear finds itself. The situation is a nice illustration of the political-economic nature of the global monetary system.
Briefly: the Central Bank of Russia, manager of that country’s foreign reserves, has an account at Euroclear. Euroclear provides securities settlement services to its institutional and government clients, including acting as a limited-purpose bank. Prior to Russia’s invasion of Ukraine, CBR’s account with Euroclear provided a path by which earnings on Russia’s foreign reserves, interest payments for example, could be collected: the payments would be deposited into CBR’s account at Euroclear, and the Russian central bank could then transfer or spend the funds wherever it liked.
Interest and principal payments have continued to flow into this account as usual. However, financial sanctions imposed on Russia after its invasion of Ukraine have prevented CBR from accessing the funds. So the account’s balance has grown, by some $93 billion as of the end of 2022, according to Euroclear’s financial results (p. 15).
In financial terms, Euroclear is acting as a bank, accepting deposits from Russia (among others). The funds have to be placed somewhere, and that somewhere seems to be the European Central Bank, where the deposit facility currently pays 3.5% interest. These T accounts illustrate.
The relationships are not complicated in financial terms, but they have become complicated in political-economic terms. Euroclear has made a promise to pay the Central Bank of Russia, but that promise cannot now be honored, within the legal limits imposed by the sanctions. So Euroclear’s windfall profit, the interest income it is earning on the frozen cash, sits uncomfortably: arising as it does from the political economic environment, it has become the centerpiece of a great game of tug-of-war. Russia wants it back, the European Commission would like to seize it, the ECB worries about setting a precedent that deposits at the ECB are anything less than perfectly safe.
The bigger message, I think, is this: sanctions are a political-economic intervention, neither more or less. Russia’s reserves take the form of credit, promises that cannot be collected because a legal constraint has been placed on Euroclear. This is the stuff the global monetary system is made of.
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