Lesson of the Day: If You Weaponize the Dollar and Confiscate Assets, Expect Retaliation
Russia seized the local assets of Carlsberg beer and yogurt maker Danone. It now threatens Austria’s Raiffeisen bank.
Russia Seizes Western Yogurt and Beer
As backdrop to the Raiffeisen bank story, consider the Bloomberg report, Russia Seizes Western Yogurt and Beer.
President Vladimir Putin signed a decree in April allowing for “temporary” state control over the assets of companies or individuals from “unfriendly” states — which include the US and its allies.
Sunday’s move is the second time the Kremlin has used the decree to seize assets. Previously, Russia took control of utilities owned by Finland’s Fortum Oyj and Germany’s Uniper SE.
Russia and Ukraine accounted for about 13% of Carlsberg’s total sales and about 9% of operating profit in 2021. The company employs about 8,400 people in Russia and had previously separated the operations there from the rest of the group.
Carlsberg is assessing the legal and operational consequences. Fortum last week started a process of arbitration over the April seizure. But with Russia no longer concerned about appearing fair to western investors, it’s difficult to see how much recourse these or any other multinationals will have.
Procter & Gamble, Colgate-Palmolive and Philip Morris International have also remained. Coca-Cola HBC has the largest revenue exposure to Russia among European consumer-staple companies, Morgan Stanley said, saying the regional Coke bottler gets 12% of sales from that market.
Troubles at Raiffeisen Bank
Eurointelligence comments on Raiffeisen Bank Troubles.
After Russia took over Danone and Carlsberg, what fate is awaiting Austria’s Raiffeisen bank? The US and EU’s banking authorities pressure the bank for some time now to exit Russia, but progress is slow and risks are getting higher. After some failed attempts to swap assets with Russian banks in Europe, Raiffeisen is stuck between the rock and a hard place. They still serve western clients present in Russia and face the dilemma of either being hit by sanctions from the US and the EU if they stay or a hostile takeover from the Kremlin if they were to seek an exit.
Amongst western banks, Raiffeisen is the most important bank still operating in Russia, ahead of Italy’s Unicredit, the Dutch ING and the Hungarian OTP.
Half of the western companies still present in Russia have turned towards Raiffeisen since the outbreak of the war, according to Les Echos. Not yet subject to sanctions and still connected to the Swift interbank messaging system, Raiffeisen has been a valuable interconnection between the two worlds.
The result was an increase in its assets by 36% since then. Despite losing 500,000 customers, it still has a total of 3.2m, and deposits have risen by 28% to €20.8bn for their Russian subsidiary. The number of employees rose to 9,890. Its profits for the first three months of this year were up 214% on the first quarter of last year.
Could the Kremlin do to Raiffeisen what it has done to Danone? Taking over a systemically relevant bank has more repercussions than taking over a dairy producer. The moment Russia seizes Raiffeisen’s assets, their link to Swift would be cut off. It also would cause a domino effect to all those other western companies that still rely on Raiffeisen to protect their assets. Either it is done overnight or not at all. It depends on how valuable the link to the Swift system and the presence of those remaining western companies still is to the Kremlin. The move on Danone certainly was a shock and a reminder of how precarious the situation of companies still operating in Russia is.
Weaponization of the Dollar
Neither Bloomberg nor Eurointelligence mentioned retaliation for weaponization of the dollar as the prelude to these recent beer and yogurt events.
The only possible surprise in this story is why it took so long.
At the onset of the war, the Fed, under direction of the Biden Administration, illegally seized Russia’s foreign reserves. Illegal is the correct word.
Federal Reserve Act
The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
Nowhere does the act give the Fed the right or power to confiscate the reserves of sovereign nations. But that is exactly what the Fed did when it seized Russia’s US dollar reserves.
If the Fed can confiscate Russia’s reserves, who’s next?
Weaponization of Swift
Please consider the Richmond Fed article What Is SWIFT, and Could Sanctions Impact the U.S. Dollar’s Dominance?
The recent removal of Russian banks from the SWIFT messaging system has highlighted the importance of payments in supporting economies. But the weaponization of SWIFT has also left some commentators worrying about the loss of the U.S. dollar’s dominance, as it might drive banks and firms to other substitutes. This Economic Brief discusses the economics of SWIFT and explains why emigrating from the U.S. dollar may be more difficult than we thought.
The Richmond’s Fed’s assessment is self-serving. Yet, it appears accurate. Importantly the Fed even admits weaponization, the emphasis was mine.
Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US
On May 13, I commented Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US
Systemic Risk Assessment
The FDIC made a “systemic risk exception” for Silicon Valley Bank to protect depositor funds beyond its limit of $250,000 per bank account.
FDIC’s stated “insurance” is for US depositors only. But the exception to make all US depositors whole means foreign depositors bear 100% of responsibility for the collapse of SVB.
Since bond holders rate higher than unsecured depositors, and the FDIC had significant losses rated to SVB, foreign depositors may get zero cents on the dollar.
If you are a foreign depositor at any small or midsized bank, the FDIC is affirming that you better get your money out now.
What Does China Do With a Dollar That’s No Longer Risk Free?
In light of Fed actions against Russia, I pinged Michael Pettis at China Financial Markets some questions on China’s reserves on March 18, 2022.
Please consider my Pettis Q&A post What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold?
Q&A With Michael Pettis
Mish: Will China now hold more commodities and fewer dollars despite the pro-cyclical nature of it? More Euros or Yen over dollars? More gold?
Michael Pettis (emphasis mine):
1: “Given that so much of China’s “reserves” are now indirect and held by state-owned banks (all the increase since 2017) it’s hard to say what the currency composition of China’s reserves are.
2: “Officially the US dollar is still by far the biggest component, but it is slowly declining.
3: “I expect that this will continue as far as the official reserves go but, as you know, the hard part of reducing the US dollar component of your reserves is figuring out what the alternative should be, and with such high and growing reserves (once you include the indirect reserves at the state-owned banks) that is a very difficult question to resolve.”
Gold-Backed BRIC Silliness
Pettis’ comment on the hard part is precisely why all the discussion on BRICs and a new currency backed by gold or some sort of weighted or commingled currency is 95 percent hot air.
Launching a BRIC currency is, for now, somewhere between extremely difficult and impossible, in any meaningful sense.
I explain in detail in More Gold Backed BRIC Currency Silliness on Dethroning the Dollar
Thorsten Polleit, chief economist at Degussa, told Kitco, “For making the new currency as good as gold, a truly sound currency, it must be convertible into gold on demand. I am not sure whether this is what Brazil, Russia, India, China and South Africa have in mind.“
Marc Chandler, managing director of Bannockburn Global Forex, told Kitco: “Talk of BRICS gold backed currency seems like an echo chamber. They do not have the gold to back a currency meaningfully. Have we not learned anything from the EMU experience of monetary union without fiscal union. Color me profoundly skeptical.“
Importantly, there are no details to the BRIC announcement. The current discussion involves a “trading currency”.
A “trading currency” is a laughable construct because nations don’t trade, individuals and corporations do. It is the sum of individual and corporate actions that give rise to the concept of national trade deficits.
In essence, the proposed trading currency is a return to Bretton Woods, minus the gold, which surely will not be convertible on demand for the actual traders, individuals and corporations.
Details await. If you are honest about things, and understand trade at all, expect to be underwhelmed.
Not Now Does Not Mean Never
The demise of the current US-dollar financial system with SWIFT at the heart of it is underway. I just cannot tell you when the system crumbles, nor can anyone else.
Although the dollar avoidance the BRICs seek is much easier said than done, not now doesn’t mean never. The recognition phase has started.
Most do not realize the EU is involved even though it wants no part of the BRIC structure. Importantly, the EU’s annoyance at SWIFT is far more significant than any yapping by Brazil.
So, don’t be surprised if something truly significant starts with the EU, not the BRICs. That’s an idea I have not seen anyone else suggest.
The EU is hopping mad over US sanctions on Iran. Germany was hopping mad at Trump for threatening to sanction Gazprom. The latter point is now moot, yet still a sore point.
Regardless of where de-dollarization picks up steam, it will mark the end of global sanction madness by Trump and dramatically escalated by Biden. Bring it on.