War in the monetary system
Finance is always a factor in war, because money is the system we use to affect the flow of resources, and war demands resources. Some conflicts have been enough to spark major changes in the global monetary order. We can only wait and see if Russia's war in Ukraine will number among these. Already, though, it is striking how central the monetary system has been to the events of the last week. On this, three short observations.
1. On February 28, the US Treasury's Office of Foreign Assets Control moved to prevent US individuals from transacting with the Central Bank of Russia. It was a dramatic step, comparable to the removal of Russian banks from the SWIFT payments messaging network. But the policy has carve-outs for "certain energy-related transactions."
They are trying to have it both ways, creating a financial penalty without disrupting the flow of Russian fossil fuels. But the country's ability to accumulate gold and foreign exchange is the mirror image of its ability to sell oil and gas, as indicated in the sources and uses accounts below. To the extent that energy transactions are exempt, it would seem that the sanctions carry a fair bit of pretense.
2. We should think about sanctions targeting Russia's foreign exchange reserves together with the US's appropriation of $7bn in assets of the central bank of Afghanistan in February. One could make the case that both are exceptional circumstances. I do not see a post-dollar world as readily as does Rana Foroohar. Still, these events could turn out to mark a weakening of peripheral central banks' hold on their foreign exchange reserves. This could prompt some amount of disintermediation out of the global dollar system, though without a welcoming alternative I don't see that system coming to an end.
3. Take a moment to notice the moral and philosophical bankruptcy of crypto. Asked to block Russian IP addresses from accessing funds, crypto exchange Binance said that "[t]o unilaterally decide to ban people’s access to their crypto would fly in the face of the reason why crypto exists." The founder of exchange Kraken insists on a vision of "the world of crypto, where arbitrary lines on maps no longer matter, where they don’t have to worry about being caught in broad, indiscriminate wealth confiscation."
The reporting of Joshua Oliver and Philip Stafford in that piece mostly lets the horrific irony speak for itself, but let me spell it out: Many of us might dream of a borderless world. But wishing doesn't make it so. Crypto exchanges are just cravenly choosing wealth over life.
Good to get an analysis of the involvement of CB Russia’s dollar reserves on the short-term private, Eurodollar or other funding market. Adam Tooze indicated in his Chartbook that such probably was the case. And that the freezing of these assets thus would have significant impact on financial markets. Any idea?