Wednesday, March 2, 2022

UPDATED—"Zoltan Pozsar Warns Russian Sanctions Threaten Dollar's Reserve Status"

Original post:
Well duh. I'm starting to think this was the real purpose, over and above any effect on Russia.

From ZeroHedge:

Over the weekend, the world gasped in shock when Western powers announced that the nuclear option would be used against Russia in retaliation for its invasion of Ukraine - sanctions against the country's central bank and targeted expulsions of key banks from SWIFT, a move which has effectively locked Russia out of the western financial system and left its vast oil export industry - a key lifeline for the Putin regime - in limbo. But the real reason for the shock is that this was the first time the global reserve currency was weaponized against a G20 economy, setting a clear precedent for how the west would and could respond to any other nation that followed in Russia's footsteps (something which China is clearly contemplating vis-a-vis Taiwan, and is carefully studying just how the west responds to Moscow),

As a result, and following this week's dramatic freeze of the Russian central bank overseas assets, has prompted some to question just why countries build foreign currency reserves at all and, more broadly, whether the unprecedented western response to Russia hasn't jeopardized the dollar's reserve status.

In what one Washington lawyer described to Reuters as the "biggest hammer in the toolshed", the G7 and European Union governments blocked certain Russian banks' access to the SWIFT international payment system and also went a step further than many expected by paralyzing about half the Russian central bank's $630 billion worth of foreign currency and gold reserves. In doing so, the west has undermined Moscow's ability to defend the ruble - which has lost up to a quarter of its value since Friday alone - and recapitalize sanctioned banks as they face nascent bank runs. In fact, as some admitted, it was the explicit intention of the west to spark bank runs and to crash the Russian financial system from within.....
.....With Moscow and Beijing increasingly allied on the geopolitical stage and China refusing to either condemn the Ukraine invasion or join Western sanctions, China's yuan - currently accounting for just 2.7% of world reserves - may be one clear option for anxious reserve managers in Moscow or elsewhere.

Of course China itself - for all its fraught relationship with the West - has been the biggest reserve stockpiler since it joined the global trading system 20 years ago amid tight control of its exchange rate. More than $3 trillion of its $3.22 trillion hoard was amassed since 2000 - precisely to offset foreign inflows to keep a lid on the yuan.

But is that about to change, and did western sanctions against Russia marked the beginning of the end of the dollar as the world's reserve currency?

Berkeley professor and expert on world reserve management Barry Eichengreen reckons that of the two imperatives behind reserve stockpiling - to intervene or stabilize domestic markets or as a war chest against shocks, disasters or balance of payments crises - the latter may now be in question. "The main effect may be declining demand for reserves," he said.

"If countries see reserves and foreign exchange management as less useful and available, then they will have to accept the inevitability of that their exchange rates are likely to move by more," Eichengreen added. "In which case they need harden their financial systems and economies against exchange rate related disruptions, for example by discouraging corporates from borrowing in foreign currency."

That in itself could have a profound impact on world markets and on the model for emerging markets and developing economies.

An even more alarming take comes from former Goldman economist Jim O'Neill who said the Western sanctions could ultimately lead to major reform of the global system.

"Amongst the fallout some countries may see less need to accumulate FX reserves," he said, adding that could indeed seed "peak reserves" worldwide. "It might (also) make some of the bigger emerging markets think more seriously about reform and opening up their domestic markets, liberalizing and moving away from the U.S-centric system."

But the most surprising take comes from former NY Fed staffer, current repo guru and Credit Suisse money market guru Zoltan Pozsar - who on any other day would be a stalwart advocate of the status quo - and who ominously said that the response to Russia may have set off a sequence of events in motion that eventually leads to the demise of the dollar as the reserve currency.

Speaking to Bloomberg, Pozsar - who this weekend warned that the lockout of Russia from the global financial system could prompt central banks to aggressively pump liquidity to stabilize markets - said noted that wars tend to turn into major junctures for global currencies, and with Russia losing access to its foreign currency reserves, a message has been sent to all countries that they can’t count on these money stashes to actually be theirs in the event of tension.

As such, he echoes the opinions voiced above that it may make less and less sense for global reserve managers to hold dollars for safety, as they could be taken away right when they’re most needed.

Of course, Russia wasn't the first country to learn the hard way that dollar reserves can be weaponized at a moment's notice. Last year, the Biden administration’s move to seize Afghanistan’s cash assets and confiscate the country's gold held at the NY Fed to prevent access by the Taliban, was another such signal that reserves can be frozen.

Pozsar, similar to O'Neill, argues that this recognition will encourage central banks to diversify away from the dollar, or try to re-anchor their currencies to assets that are less susceptible to influence from U.S. or European governments. As such, recent tensions could usher in a new monetary order in which countries are far less interconnected through international bank accounts and reserves.....


It has been a long cherished dream of - for want of a better word, "Globalists" - to take the U.S. down a notch or two and especially to wrest ultimate control/final veto from the hands of the American electorate. The plebs get in the way of the grand vision.

De-Dollarization Incoming: "India Exploring Rupee Payment Mechanism For Trade With Russia"

The Alphaville Long Read On SWIFT and Russia (and reserve currency status)

Reminder: "One thing and one thing alone enables global dominance...."

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