Pakistani-American banker Yawar Shah is the Chairman of the SWIFT Board of Directors. SWIFT stands for The Society For Inter-Bank Financial Telecommunications. SWIFT has been in the news recently for cutting off Russian banks to punish Russia's invasion of Ukraine. Russia is now disconnected from the global financial system used to settle the vast majority of payments in international trade.
In addition to his role as the Chairman of the SWIFT Board of Directors, Yawar is also a Managing Director in the Institutional Clients Group at Citigroup. Before joining Citigroup, Yawar was at JPMorgan for over 20 years. Positions there have included Global Operations Executive for Worldwide Securities Services, Retail Service and Operations Executive, Chief Operating Officer of the Global Private Bank, and General Manager of the Treasury Management Services business. He received his BA from Harvard College and his MBA from Harvard Business School.
Another Pakistani-American, a woman named Saira Malik
, has recently been appointed the chief investment officer (CIO) of a $1.3 trillion Nuveen fund. Saira held a variety of positions since joining Nuveen in 2003. Prior to being named CIO, she was head of global equities portfolio management, and before that, head of global equities research. Previously, Saira was with JP Morgan Asset Management, where her roles included vice president/small cap growth portfolio manager and equity research analyst.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was founded in 1973 to replace the telex system. It is now used by over 11,000 financial institutions to send secure messages and payment orders. Disconnecting an entire country from SWIFT is considered the nuclear option of economic sanctions, according to South China Morning Post (SCMP)
. But even limited action can have a big impact. Any bank disconnected from SWIFT will have a very difficult time sending money to other financial institutions, and its customers will struggle to conduct their business.
The only alternative to SWIFT is China's CIPS, the Cross-border Interbank Payment System. CIPS was launched in October 2015 to boost international use of China’s currency in global trade settlements. The use of the yuan has increased since its inclusion in the International Monetary Fund’s Special Drawing Rights basket in 2015. In January this year, CIPS had 1,280 users across 103 countries, including 75 directly participating banks and 1,205 indirect participants. The operator said last year overseas indirect participants account for 54.5 per cent of the total.
The central banks in western nations and Japan hold the bulk of the Russian foreign currency reserves
of about US$630 billion which they have now frozen. But China is the single-biggest foreign holder of Russian central bank reserves as of June 30, 2021. 13.8% of the total of Russia’s reserves, held in gold and foreign currency, are located in China, roughly the same share of assets held in Chinese currency Yuan Renminbi.
Latest round of western sanctions on Russia reinforce a growing perception that the United State is abusing its extraordinary financial power to arbitrarily punish different countries through its unilateral financial sanctions. This power stems mainly from the fact that the US dollar is the main international reserve and trade currency. It allows US to control multi-lateral financial institutions like SWIFT, World Bank, IMF and FATF. Many countries, including major US allies in Europe, are now looking to find alternatives to SWIFT. This has been specially true since former US President Donald Trump existed the JCPOA (Joint Comprehensive Plan of Action) agreed among the 5 permanent members of the UN Security Council (P5) plus Germany. Here's an excerpt of a recent New York op ed
by Peter Beinart:
"By deluding themselves about the extent of America’s might, they are depleting it. A key source of America’s power is the dollar, which serves as the reserve currency for much of the globe. It’s because so many foreign banks and businesses conduct their international transactions in dollars that America’s secondary sanctions scare them so much. But the more Washington wields the dollar to bully non-Americans into participating in our sieges, the greater their incentive to find an alternative to the dollar. The search for a substitute is already accelerating. And the fewer dollars non-Americans want, the harder Americans will find it to keep living beyond their means."
Chinese analysts see the SWIFT sanctions on Russian banks as a wake-up call for Beijing. “As seen from Russia’s Swift exclusion and the China-US trade friction in recent years, it is necessary to reduce reliance on Swift to ensure financial security,” Dongguan Securities analysts Chen Weiguang, Luo Weibin and Liu Menglin wrote on Monday, according to SCMP. The move to ban certain Russian banks from Swift is likely to accelerate expansion of CIPS, Beijing’s cross-border payment and settlement system, analysts say.
Pakistan's State Bank and National Bank are members of both SWIFT and CIPS. CIPS has been used by Chinese and Pakistani banks for trade settlements in Chinese Yuan. In 2018, the China-Pakistan currency swap agreement was extended for three years, and the size was doubled to 20 billion yuan or 351 billion Pakistani rupees, as China became the largest trading partner, and the bilateral trade increased on yearly basis, according to China Economic Net
After Russia's invasion of Ukraine, the White House slapped sanctions on exports of technologies to Russia's refineries and the Nord Stream 2 gas pipeline, which has never launched. So far, it has stopped short of targeting Russia's oil and gas exports as the Biden administration weighs the impacts on global oil markets and U.S. energy prices.
"We don't have a strategic interest in reducing global supply of energy ... that would raise prices at the gas pump for Americans," spokesperson Karine Jean-Pierre said at a White House news briefing.
The administration warned it could block Russian oil if Moscow heightens aggression against Ukraine. "It’s very much on the table, but we need to weigh what all of the impacts will be," White House spokeswoman Jen Psaki told MSNBC earlier on Wednesday.
The National Economic Council's deputy director, Bharat Ramamurti, told MSNBC that the White House does not want to make a move just yet.
"Going after Russian oil and gas at this point would have an effect on U.S. consumers and actually could be counterproductive in terms of raising the price of oil and gas internationally, which could mean more profits for the Russian oil industry," he said.
"So we don't want to go there right now."
The White House deputy national security adviser, Daleep Singh, told CNN the Biden administration was looking at cutting U.S. consumption of Russian oil while maintaining the global supply of energy.
"There are other producers in the world that could backfill for any Russian oil we don't import," Singh said.
The Biden administration has taken pains to say it has not yet targeted Russian oil sales as part of sweeping economic sanctions it has slapped on Moscow since last week. read more
Even so, traders and banks have shied away from Russian oil shipments via pipeline and tankers, so as not to be seen as funding the invasion, sending energy markets into disarray. read more
And some U.S. lawmakers have pushed legislation that analysts said could lead to higher gasoline prices.
The top Democrat and a Republican on the Senate energy committee floated a bill that would prohibit the import of Russian crude, liquid fuels and liquefied natural gas. The United States imported an average of more than 20.4 million barrels of crude and refined products a month in 2021 from Russia, about 8% of U.S. liquid fuel imports, according to the Energy Information Administration.
Democratic Senator Joe Manchin and Republican Senator Lisa Murkowski are working on getting support for their bill, a Manchin spokesperson said.
The United States did slap sanctions on Russia's oil refineries, banning the export of specific technologies, a move that could make it harder for Russia to modernize those plants. read more
Nearly one week after Moscow invaded Ukraine, U.S. crude oil ended Wednesday at $110.60 per barrel, the highest close since May 2011, while global benchmark Brent settled at its highest since June 2014, at $112.93. read more
Meanwhile, OPEC+ oil producers meeting on Wednesday agreed to stick to their modest output rises, offering little relief to the market or consumers. read more
On Tuesday, the United States and its allies agreed to release 60 million barrels of oil reserves to help offset supply disruptions.
"We want to minimize the impact on the global market place ... and the impact of energy prices for the American people," Psaki said. "We’re not trying to hurt ourselves, we’re trying to hurt President Putin and the Russian economy."
West's media reporting is one-sided hence suspect. EU& UK have taken RT Russian TV channel off the air.
Some journos are treating Nuclear threat as a bluff
Harsh economic sanctions & propaganda war against Russia are pushing Putin's back to the wall. NATO nations are becoming arms suppliers & safe havens for Ukrainian fighters. It's an extremely dangerous situation that has the potential to trigger WW3
Russia has stated NATO expansion into Ukraine was a red line.
-They knew their invasion of Ukraine would be inevitable and would have strategized that the US/West’s response would be SWIFT $ system exclusions/sanctions.
-Reasonable to expect that Russia’s next step would have been to shut off oil/gas pipelines to Europe, as Russia has built up huge Yuan, gold & commodity reserves.
-This will cause massive price and supply disruptions (war level) to the western markets & monetary system.
- For years Russia & China have looked for ways to re-monetize gold & exit abuses of SWIFT system as a geo-political tool against them, but how to do it, how to exit, without West declaring it an act of aggression or war against West?
- This Ukraine invasion just accomplished that end for them. And the West is doing it themselves.
-Now, freed to declare themselves SWIFT system outcasts by the western govt hands, Russia can now say “we will turn oil pipelines back on, but not for dollars.”
- Russia then declares that Europe or anyone that wants Russian oil (as 3rd largest global producer) or Russian/Ukrainian wheat (1/4 of worlds production) must pay in gold, or use the ruble-yuan gold backed payment system.
- Their leverage as an oil producer (who cuts off supply) will cause almost immediate price shocks to the western world. A good part of the population could immediately be unable to heat their homes.
- Almost equal to the oil shock they’d cause is their ability to cause food shortages and price spikes through the disruption of wheat production.
-Unmentioned in all this is China. Who has been silent & not condemned Russia.That means silent approval & cooperation.
- China will act to soak up Russian production of oil and wheat to soften the blow to their “strategic partner”.
- This will again be through the Yuan-Ruble facility and at some point overtly-stated gold backing of that system by Russia and China.
- The West will of course declare those last two bullets as acts of global aggression and direct threats to the “world monetary system”.
- At this point that there will be a clear fracture of the world’s monetary system into 2 competing East/West structures, circling back to the initial point that the 50 year global petrodollar system has just officially been ended by Putin.
If the above analysis is indeed correct,then the threat 2 the petro- $ is no different 2 the time of Charles De Gaulle or Gaddafi,but on larger scale.They can't remove Putin as easy as they did with previous leaders who challenged their fraudulent petrodollar monetary system.
[4:04 PM, 3/3/2022] Shams Naqvi: All this is too complex and too risky. They have two other tools.
1. Ransom virus lock on SWIFT.
2. Crypto currency.
The fist one is more simple. Iran recently locked up NASDAQ for hours in retaliation for the US sanctions.
The second option unfortunately hands the ball back to the US. Americans are world’s largest hoarder of crypto.
So option 1 would be their choice.
Two weeks ago, Russia’s companies could sell their goods around the globe and take in investments from overseas stock-index funds. Its citizens could buy MacBooks and Toyotas at home, and freely spend their rubles abroad.
Now they are in a financial bind. Soon after Russia invaded Ukraine, another war began to isolate its economy and pressure President Vladimir Putin. The first move was made by Western governments to sanction the country’s banking system. But over the course of the past week, the financial system took over and severed practically every artery of money between Russia and the rest of the world, in some cases going further than what was required by the sanctions.
Visa Inc. V -3.35% and Mastercard Inc. stopped processing foreign purchases for millions of Russian citizens. Apple Inc. and Google shut off their smartphone-enabled payments, stranding cashless travelers at Moscow metro stations. International firms stepped back from providing the credit and insurance that underpin trade shipments.
This unplugging of the world’s 11th-largest economy opens a new chapter in the history of economic conflict. In a world that relies on the financial system’s plumbing—clearing banks, settlement systems, messaging protocols and cross-border letters of credit—a few concerted moves can flatten a major economy.
Russia now faces a repeat of one of the most painful episodes in its post-Soviet history—the financial crisis of 1998, when its economy collapsed overnight. In the decades that followed, Russia earned its way back into the good graces of financiers in New York, London and Tokyo. It is all being undone at warp speed and will not be easily put back together.
The ruble has lost more than one-quarter of its value and is now virtually useless outside of Russia, with Western firms refusing to exchange it or process overseas transactions. Moscow’s stock exchange was closed for a fifth straight day on Friday. The Russian Central Bank more than doubled interest rates to attract foreign investment and halt the ruble’s free fall. Two firms that are crucial to clearing securities trades, Euroclear and DTCC, said they would stop processing certain Russian transactions.
With their interest payments stuck inside the country—following the sanctions, Mr. Putin also ordered intermediaries in Russia not to pay—some Russian companies and government entities could default on their bond payments to international creditors. That could make the country toxic for investing for years. Shares of Russian companies, even those without obvious ties to the Kremlin, were booted from stock-index funds, which will further isolate them from pools of Western capital.
Analysts expect Russia’s economy to contract as much as 20% this quarter, roughly the same hit the British economy took in the spring of 2020 during the pandemic lockdowns.
Russia began trying to sanction-proof its economy. It built its own domestic payments network—called Mir, Russian for “peace”—to function alongside and, if needed, replace those run by Western firms. It shifted its overseas holdings away from the U.S. and its European allies and toward China, which has been relatively more accommodating of Mr. Putin’s efforts to expand his influence and territory. It doubled its gold reserves.
Those efforts to wall itself off may prove insufficient. At least 40% of Russia’s $630 billion in foreign reserves are in countries that have joined in the latest sanctions. The rest, mostly in China, it is free to spend—but only in China. Moving those reserves out of the country would require first converting them into a Western currency like dollars or euros, which no global bank will do.
From its base at a former Arctic gulag, Russia’s MMC Norilsk Nickel PJSC digs up a large portion of two metals that are essential to greener transport and computer chips.
So far the U.S. and its allies haven’t sanctioned the company, or its oligarch chief executive, underscoring the dilemma some analysts say governments face in seeking to punish Russia without hurting their own access to key commodities.
The mining company is responsible for about 5% of the world’s annual production of nickel, a key component of electric-vehicle batteries, and some 40% of its palladium, which goes into catalytic converters and semiconductors. Nornickel, as the company is known, also supplies energy transition metals such as cobalt and copper.
The price of those metals has jumped since Russia invaded Ukraine amid concerns that Western sanctions or logistical difficulties stemming from the conflict could choke supplies. On Friday, nickel traded at its highest level for a decade, and is up 37% so far this year. Palladium is up around 57% year to date.
Despite the rally in metals prices, Nornickel’s share price—like that of other Russian commodity companies—has dropped, and is down 17% so far this year. The fall is likely to be more severe, given trading in Moscow listed stocks was suspended several days ago as they began to plummet. On Saturday, Fitch Ratings downgraded Nornickel’s debt to junk, reflecting the tougher environment in Russia and weakened financial flexibility of its commodity companies.
Several Western companies say they are looking to diversify their supply away from Nornickel. That mirrors a trend across several commodities, including oil and steel, as Western buyers steer clear of Russian suppliers amid concerns they could be hit by sanctions or simply have problems getting products out of the country.
A spokesman for Nornickel said the miner is committed to fulfilling its obligations to customers, partners and employees. Chie Executive Vladimir Potanin, who also holds a 31% stake in the company, declined to be interviewed.
Western sanctions in response to the current conflict have so far largely avoided companies that provide the West with oil, gas and other key commodities.
Few companies are as pivotal in large commodity markets as Nornickel, particularly for palladium.
“If we have sanctions and we can’t access that palladium, you have to expect disruption globally,” said Gabriele Randlshofer, managing director of the International Platinum Group Metals Association, a trade group whose members include buyers and suppliers of palladium.
“At the moment all companies are looking at [who supplies them], they have to,” she said.
Among the companies looking for alternative supplies of nickel is Outokumpu Oyj, one of the world’s largest stainless steel manufacturers. The Finnish company said around 6% to 7% of its nickel comes from Nornickel, with the rest coming from recycled steel. “Given the situation in Ukraine, we are looking for alternatives for Russian supply for nickel,” a spokeswoman said.
Germany’s BASF SE, meanwhile, said it would fulfill existing contracts with Nornickel but not pursue any new business with the Russian company. The chemicals giant described Nornickel as an important supplier of nickel and cobalt for its production of cathode materials as well as a source of palladium and platinum.
China Considers Buying Stakes in Russian Energy, Commodity Firms
Beijing’s talking with state-owned firms on opportunities
Any deal is to bolster energy, commodity imports: sources
March 8, 2022, 3:31 AM PST
China is considering buying or increasing stakes in Russian energy and commodities companies, such as gas giant Gazprom PJSC and aluminum producer United Co. Rusal International PJSC, according to people familiar with the matter.
Beijing is in talks with its state-owned firms, including China National Petroleum Corp., China Petrochemical Corp., Aluminum Corp. of China and China Minmetals Corp., on any opportunities for potential investments in Russian companies or assets, the people said. Any deal would be to bolster China’s imports as it intensifies its focus on energy and food security -- not as a show of support for Russia’s invasion in Ukraine -- the people said.
The discussions are at an early stage and won’t necessarily lead to a deal, the people said, requesting anonymity as the discussions aren’t public. Some talks between Chinese and Russian energy companies have started to take place, according to separate sources.
CNPC and China Petrochemical -- known as Sinopec Group -- declined to comment, according to the companies’ media officials. Chinese state-asset regulator Sasac, Aluminum Corp. of China and Minmetals didn’t immediately respond to requests for a comment. Representatives for Gazprom and Rusal didn’t immediately comment during a national holiday in Russia.
Russia’s war in Ukraine has increased the pressure on Beijing to secure imports as the cost of energy, metals and food skyrocket to unprecedented levels. Worried about the impact surging prices will have on the economy, China’s top government officials issued orders to prioritize commodities supply security, Bloomberg reported last week.
China has vowed to continue normal trade relations with Russia despite a massive corporate exodus from European and American firms. BP Plc, Shell Plc and Exxon Mobil Corp. took the energy industry by surprise by walking away from Russian assets worth billions of dollars.
Meanwhile, China Foreign Minister Wang Yi said earlier this week that China-Russia ties remain “rock solid,” even as Beijing expressed concern about civilian casualties and called for peace talks to end the war. Among China’s current energy investments in Russia, CNPC has a 20% stake in the Yamal LNG project and a 10% state in Arctic LNG 2, while Cnooc Ltd. also owns 10% of Arctic.
The two countries had already been strengthening ties, with Presidents Xi Jinping and Vladimir Putin last month signing a series of deals to boost Russian supply of gas and oil, as well as wheat. Gazprom and Rosneft PJSC were among Russian energy giants sealing agreements as the two leaders met in Beijing ahead of the Winter Olympics.
Still, any investment in Russia is fraught with risks that go beyond the geopolitical balancing act that Beijing faces. Russia has become a nearly un-investable market for global firms as the nation’s economy rapidly deteriorates. Sanctions have wiped billions of dollars from Russian assets and bonds have plummeted as default risks intensify. The yuan has surged against the ruble, raising questions over the strategic relationship of both countries.
An investment by China could help solidify Moscow’s effort to accelerate a so-called “Pivot to Asia” with oil and gas supply deals. China has doubled purchases of Russian energy products to nearly $60 billion over the last five years.
The Power of Siberia pipeline began sending gas to China in 2019, and Gazprom is already in talks with China over another route that could be signed this year, eventually allowing it to ship fuel from gasfields that supply Europe.
A relentless surge in U.S. inflation reached another four-decade high last month, accelerating to a 7.5% annual rate as strong consumer demand collided with pandemic-related supply disruptions.
The Labor Department on Thursday said the consumer-price index—which measures what consumers pay for goods and services—in January reached its highest level since February 1982, when compared with the same month a year ago. That put inflation above December’s 7% annual rate and well above the 1.8% annual rate for inflation in 2019 ahead of the pandemic.
The so-called core price index, which excludes the often volatile categories of food and energy, climbed 6% in January from a year earlier. That was a sharper rise than December’s 5.5% increase and the highest rate in nearly 40 years.
Prices were up sharply in January for a number of everyday household items, including food, vehicles, shelter and electricity. A sharp uptick in housing rental prices—one of the biggest monthly costs for households—contributed to last month’s increase.
High inflation is the dark side of the unusually strong economy that has been powered in part by government stimulus to counter the pandemic’s impact. January’s continued acceleration increased the likelihood that Federal Reserve officials could speed up a series of interest-rate increases this spring to ease surging prices and cool the economy.
The yield on the 10-year Treasury note hit 2% for the first time since mid-2019 on the prospect of tighter monetary policy, while stocks slipped.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said what started as pandemic-specific inflation has now “broadened out across many, many categories both on the goods side of the economy and on the services side.”
“It reflects supply constraints both in the goods market and the labor market but it also is a function of still strong demand, particularly from U.S. consumers,” she added.
On a monthly basis, the CPI increased a seasonally adjusted 0.6% last month, holding steady at the same pace as in December.
Used-car prices continued to drive overall inflation, rising 40.5% in January from a year ago. However, prices for used cars moderated on a month-to-month basis, a possible sign that a major source of inflationary pressure over the past year could be easing.
Food prices surged 7%, the sharpest rise since 1981. Restaurant prices rose by the most since the early 1980s, pushed up by an 8% jump in fast-food prices from a year earlier. Grocery prices increased 7.4%, as meat and egg prices continued to climb at double-digit rates.
Energy prices rose 27%, easing from November’s peak of 33.3%, but a jump in electricity costs was particularly sharp when compared with historical trends.
Higher prices are putting pressure on consumers, with inflation adding as much as $250 a month to living expenses, and businesses, which are scrambling to keep up with rising materials and labor costs.
Alex Mishkit launched her salon, Alex Cher Beauty, a year ago. Since then, she has increased prices to keep up with the rising costs of key supplies. First it was the nitrile gloves, which leapt as much as 30%. Then the price of waxing sticks shot up, followed by the price of wax itself, which rose around 15%.
“To a small-business owner going on her second year, it adds up. So I’m hyper-aware of the slightest increase because every dollar counts,” she said. With overall supply costs running between 10% and 15% more than they were when she opened her doors, Ms. Mishkit in December nervously announced a price increase of around 10%. To her surprise, she said, customers were supportive.
See new Tweets
Zoltan Pozsar head of short-term strategy at Credit Suisse shocked #WallStreet by his report titled Brent Wood III.
After this Crisis, the US #Dollar should be much weaker and, on the flipside, the #renminbi much stronger, backed by #commodities.
Keeping Russian banks from using SWIFT is not the financial nuclear weapon some have suggested.
While the United States might fear the growth of new messaging services in the future, this case isn’t likely to bring significant blowback. Russia is unlikely to use alternative financial channels, because the existing ones all have problems. For example, executing transactions over telephone or fax, or by using credit or debit cards that fuse communications technologies with transactions. That’s outdated and will not scale to the degree Russia would need.
Alternative financial communication networks are either in their infancy or depend on the SWIFT network. The Bank of Russia created a financial messaging system (FMS) after the 2014 Ukraine crisis — but it includes only 400 users and therefore isn’t that useful. China’s Cross-Border Interbank Payment System (CIPS) has about three times FMS’s users — but SWIFT includes nearly 10 times as many users as CIPS. What’s more, CIPS isn’t an alternative to SWIFT; it depends on SWIFT for international messaging.
Russian banks not facing sanctions may turn to CIPS. But China may be reluctant to welcome sanctioned banks, lest it jeopardize its use of SWIFT.
Two days after Russia launched an attack on Ukraine, the United States, Canada and European allies agreed to disconnect a handful of Russian banks from SWIFT, the Society for Worldwide Interbank Financial Telecommunication. These “de-SWIFTed” Russian banks would no longer be able to use the financial interface to transfer money.
The long-standing, and controversial, threat to disconnect Russia from the SWIFT network has been touted as a centerpiece of the West’s retaliation. How big is it, really? And how will it affect the United States and its use of financial power in the future?
The limits of de-SWIFTing
SWIFT connects more than 10,000 financial institutions in a communications network where orders are sent and received. This messaging service enables participating banks to settle commercial, financial and foreign-exchange payments. Cutting banks off from SWIFT means they can no longer use the network to exchange information.
But keeping banks from accessing SWIFT is not, on its own, the financial nuclear weapon some suggest. Denying access to SWIFT, for example, does not stop banks from communicating or transacting with the 11,000 financial institutions outside the SWIFT network. Disconnected banks that do not face sanctions are free to use alternative messaging networks to settle payments.
In fact, without sanctions on actual money transfers, denying countries access to SWIFT could undermine the messaging service by encouraging users to rely on other financial communication networks.
Today, SWIFT continues to be dominated by major U.S. financial institutions, with 40 percent of recorded transactions occurring in U.S. dollars. Making the U.S.-centered financial order less attractive is precisely the type of collateral damage the United States seeks to avoid.
In a statement, TSMC said it is “fully committed to complying with the new export control rules announced.”
GlobalFoundries, the chip manufacturer based in Malta, N.Y., said it also has begun complying with the rules. The company has a system to review and block any prohibited sales to Russia, said Karmi Leiman, the company’s head of global government affairs and trade, though he added that the size of the company’s sales to Russian buyers is “not material.”
Leiman said the internal review system is similar to the one the company uses for Huawei, the Chinese tech giant that has been a target of U.S. sanctions for several years.
Intel, based in Santa Clara, Calif., said it “complies with all applicable export regulations and sanctions,” including the new Russia-focused export controls.
Russia is vulnerable to the export ban because it doesn’t produce consumer electronics or chips in large quantities, analysts say. In particular, it doesn’t make the highest-end semiconductors needed for advanced computing, an area dominated by Taiwan, South Korea, the United States, Europe and Japan.
TSMC’s participation in the sanctions is particularly damaging because the company is the world’s largest manufacturer of chips, including the most advanced.
Among the chips TSMC is no longer manufacturing and shipping are Elbrus-branded semiconductors that are designed in Russia, according to the person familiar with TSMC’s business.
Russia’s military and security services use Elbrus chips in some computing applications, according to Kostas Tigkos, an electronics expert at Janes, a U.K.-based provider of defense intelligence, who described the loss of TSMC’s help with the chips as “devastating” for Russia.
The Russian government has also been encouraging large domestic companies and banks to use Elbrus chips in their computers because the components are designed in Russia.
Russian drones shot down over Ukraine were full of Western parts
The Semiconductor Industry Association, a trade group representing big chipmakers, said its members are “fully committed to complying” with the new rules “in response to the deeply disturbing events unfolding in Ukraine.”
“While the impact of the new rules to Russia could be significant, Russia is not a significant direct consumer of semiconductors, accounting for less than 0.1% of global chip purchases, according to the World Semiconductor Trade Statistics (WSTS) organization,” the group’s president, John Neuffer, said in a statement.
The United States and other Western nations have long regulated sales to Russia of chips and other electronic components specifically designed for military use. Any such sales already required a government license to proceed, industry experts said.
The new rules largely block the sale of dual-use chips, which have both military and commercial applications, to nonmilitary users in Russia, including those in high-tech industries.
In a novel move that the United States has used only once before — against China’s Huawei — it is also requiring companies worldwide to abide by the rules and block such sales to Russia if they use U.S. manufacturing equipment or software to produce chips. Most chip factories around the world use software or equipment designed in the United States, analysts say.
Silicon Valley’s increasingly aggressive stance against Russia could fuel the growth of rivals there and in China, Iran, too
Withholding technology can be a soft-power weapon to potentially turn a population against its leaders. Yet it also can be costly to the U.S. economy, slow to deliver results and scattershot in its effects — much more likely to affect ordinary Russians using their iPhones than generals firing missiles into Ukrainian cities.
There is another cost, as well. The United States’ dominance of global technology, experts warn, was built over generations but could be eroded in just a few years as rival powers — and especially Russia and China — invest billions of dollars to develop alternative technologies at home, in part to decrease U.S. leverage at moments such as these.
Even as Russians furiously buy iPads, Android devices and Windows-based computers, President Vladimir Putin is pushing hard to wean the country from Western technologies. And if Russia and other U.S. rivals succeed, there also could be long-term damage to the ability of American intelligence agencies — particularly skilled in exploiting U.S.-made tech — to track developments in the next conflict, experts say.
The upshot is that although technology sanctions can be unquestionably powerful, it’s a power that, when deployed, can spark backlashes that undermine its long-term utility. Depriving rivals of American-made technology also threatens the future global prospects of an industry that has driven U.S. economic growth for most of this century. The rise of a Russian Google — or a Chinese Facebook or an Iranian YouTube — are not theoretical developments. They are happening already.
“When you cut them off from American tech, they will find alternatives,” said Peter Micek, general counsel for Access Now, a human rights group that lobbies to keep Internet services available to people worldwide.
U.S. officials and technology executives are attempting to navigate this chessboard of risk and reward as they assemble a potent set of punitive moves against Russia.
The result has been growing restrictions on hardware, with Apple joining others in blocking sales to Russia, and moves by major social media platforms to curb the spread of Russian propaganda through its state-funded RT information service — often in response to the demands of Western governments. Digital purchasing tools, such as Apple Pay, also have stopped working as Western sanctions cut off Russian banks for ordinary operations.
But calls by Ukrainian officials to deprive Russians in general of access to social media and even the Internet itself have sparked significant resistance from both the companies and digital rights groups, which argue that the likes of Twitter, WhatsApp and Telegram are key to delivering information in Russia. They often are the only sources of news on the horrors Putin is inflicting on Ukrainians at a time when his control over national news media is nearly total.
The Russian government, meanwhile, has been squeezing these same companies, throttling Facebook and Twitter, and threatening action against Google in retaliation for its YouTube subsidiary limiting access to RT in response to demands by Western governments.
But as this conflict plays out, the idea of depriving Russia of software updates or online support from U.S. companies has not gained traction, even though such moves could gradually erode the functioning of technological tools used every day by the Russian government and its citizens.
By RAGHURAM G. RAJAN
Because Russia's war against Ukraine could not go unpunished, the use of painful, sweeping economic sanctions is clearly justified. In the future, though, these powerful new tools will need to be subject to proper controls; otherwise, they could trigger a reversal of globalization – and of the prosperity that it has made possible.
CHICAGO – War is horrific, no matter how it is waged. Nevertheless, Russia’s unprovoked attack on Ukraine, with its scenes of Ukrainian civilians being murdered or driven from their homes, undoubtedly had to be opposed. In addition to supplying Ukraine with military weapons, governments around the world have deployed economic weapons against Russia. While Russia, an economic midget relative to its military power, may still lash out by expanding the range of military weapons it uses and the territories it targets, it is a risk the world had to take.
Compared to Russia’s indiscriminate bombing, economic weapons will not kill people as quickly, create as much visible destruction, or inspire as much fear. Nonetheless, the unprecedented economic weapons that have been deployed against Russia will be unquestionably painful.
The strictures on Russia’s central bank have already contributed to the ruble’s collapse, and new limitations on cross-border payments and financing have had an immediate impact, weakening confidence in Russian banks. Though trade sanctions (restricting exports of key inputs such as airplane parts to Russia, as well as purchases from Russia) and the exodus of multinational corporations from Russia will have a less immediate effect, they will reduce economic growth and increase unemployment significantly over time. If these measures are not reversed, they will eventually translate into lower living standards, poorer health, and more deaths in Russia.
That we have come to this point reflects a widespread political breakdown. Too many powerful countries are now being led by authoritarian rulers whose reliance on nationalism makes them less willing to compromise internationally and who face few domestic constraints on their behavior. If Russian President Vladimir Putin’s aggression were to go unpunished, more international provocations like his war in Ukraine would become inevitable.
Equally problematic is the breakdown of the international order. The United Nations Security Council cannot legitimately act against any of its permanent veto-wielding members (China, France, Russia, the United Kingdom, and the United States). The organization’s impotence translates into impunity for strongmen who flout international norms. Moreover, even if the UN could approve a military response, the will to confront a determined nuclear power militarily would probably be lacking.
Economic weapons, made possible by global integration, offer a way to bypass a paralyzed global governance system. They allow other powers an effective (that is, painful) but civilized way to respond to aggression and barbarity.
But the risks that these weapons can create must not be underplayed. When fully unleashed, sanctions, too, are weapons of mass destruction. They may not topple buildings or collapse bridges, but they destroy firms, financial institutions, livelihoods, and even lives. Like military WMDs, they inflict pain indiscriminately, striking both the culpable and the innocent. And if they are used too widely, they could reverse the process of globalization that has allowed the modern world to prosper.
Unless the U.S. and its allies mobilize to save it, the second great age of globalization is coming to a catastrophic close.
The supply of basic commodities, from wheat to nickel to titanium to oil, has been disrupted. The West is doing everything it can to “cancel” Russia from the global economic system — sanctioning oligarchs, expelling Russian banks from the global financial plumbing, and preventing Russia’s central bank from accessing its reserves. There’s talk of throwing Russia out of the World Trade Organization.
Even when they haven’t been forced to do so by law, Western companies are boycotting Russia and closing down their Russian operations. Russian consumers can no longer use Visa, MasterCard and American Express. The McDonald’s in Pushkin Square is closed — along with 850 other branches. Photos have appeared on social media of Russians standing in interminable queues for sugar and other basic foods or else fighting over remaining scraps, just as they did in the Soviet days. For its part, the Kremlin has hit back by blocking access to Facebook and threatening to imprison or fine anyone suspected of spreading “fake” news, thereby essentially closing down Western news organizations inside the country.
We Didn’t Mean It
The Western policymakers meeting this week will say they have no intention of closing down the global order. All this economic savagery is to punish Putin’s aggression precisely in order to restore the rules-based system that he is bent on destroying — and with it, the free flow of commerce and finance. In an ideal world, Putin would be toppled — the victim of his own delusions and paranoia — and the Russian people would sweep away the kleptocracy in the Kremlin.
In this optimistic scenario, Putin’s humiliation would do more than bring Russia back to its senses. It would bring the West back as well. The U.S. would abandon its Trumpian isolationism while Europe would start taking its own defense seriously. The culture warriors on both sides of the Atlantic would simmer down, and the woke and unwoke alike would celebrate their collective belief in freedom and democracy. McDonald’s would be open again in Pushkin Square — and Keynes’s various serpents would slither out of the garden.
There’s a chance this could happen. Putin wouldn’t be the first czar to fall because of a misjudged and mishandled war. Many of Russia’s most powerful people are seeing their mansions, yachts and private planes confiscated, all for an invasion they weren’t consulted about. Younger Russians, particularly in the big cities, are more liberal than their parents. Russian shoppers don’t want to return to the Soviet era.
Meanwhile in the West, Ukraine has already prompted a great rethink. As German Chancellor Olaf Scholz has proclaimed, we are at a Zeitenwende — a turning point. Under his leadership, pacifist Germany has already proposed a defense budget that’s larger than Russia’s. Meanwhile, Ukrainian immigrants are being welcomed by nations that only a few months ago were shunning foreigners, and, after a decade of slumber in Brussels, the momentum for integration is increasing.
But this turning point can still lead in several directions. The chances of a regime change in the Kremlin remain slim, given Putin’s popularity and terror machine. Western Europe has heard pious words about integration and immigration before. And look at the West’s leaders! Joe Biden hardly conveys an image of world-changing dynamism; after his initial heroics, Olaf Scholz greeted Volodymyr Zelenskiy’s speech to the German parliament with pudding-like inertia; Emmanuel Macron is bent on winning an election while trying to look like Zelenskiy, in hoodie and stubble; while Boris Johnson has dared to compare the Ukrainian resistance to Brexit.
The company that built India’s digital payments backbone plans to make it cheaper and easier for the nation’s 32 million expatriates to bring their money home.
Indians overseas remitted $87 billion last year, the biggest inflow for any country tracked by the World Bank. The remittances market, where it costs $13 on average to send $200 across borders, is ripe for disruption, according to Ritesh Shukla, chief executive officer of NPCI International Payments Ltd.
“We have displaced cash in India to a large extent and are now looking to repeat the success in cross-border corridors," said Shukla. “Overseas Indians can use our rails to remit money inwards straightway into their bank accounts, and for the markets where Indians travel frequently, we will build acceptance for our instruments."
Successful overseas forays by NCPI would give India a home-grown alternative to SWIFT, the Belgium-based cross-border payment system operator, though Shukla stressed that the objective was not to displace existing platforms. About 330 banks and 25 apps -- including Alphabet Inc.’s Google Pay and Meta Platform Inc.’s WhatsApp -- share NCPI’s unified payment interface, which has helped make instantaneous digital transactions a $3 trillion market in India.
NPCI is in the process of connecting the UPI platform to systems in other countries to replicate its domestic success. It is negotiating collaborations with governments, fintech companies and service providers around the world, aiming to reduce transaction costs and enable more small-ticket transactions, Shukla said.
“This is going to take the payments world by storm," said Mayank Goyal, CEO of moneyHop, a cross-border banking app that lets users make international remittances through the SWIFT network. The company will seek to integrate UPI rails into the app as it makes cross-border payments easier, Goyal said.
UPI’s linkage with overseas nations will further anchor trade, travel and remittance flows between the countries and lower the cost of cross-border remittances, the Reserve Bank of India said in a report.
Russia is seeking payment in United Arab Emirates dirhams for oil exports to some Indian customers, three sources said and a document showed, as Moscow moves away from the U.S. dollar to insulate itself from the effects of Western sanctions.
Russia has been hit by a slew of sanctions from the United States and its allies over its invasion of Ukraine in late February, which it terms a "special military operation".
An invoice seen by Reuters shows the bill for supplying oil to one refiner is calculated in dollars while payment is requested in dirhams.
Russian oil major Rosneft is pushing crude through trading firms including Everest Energy and Coral Energy into India, now its second biggest oil buyer after China.
Western sanctions have prompted many oil importers to shun Moscow, pushing spot prices for Russian crude to record discounts against other grades.
That provided Indian refiners, which rarely bought Russian oil due to high freight costs, an opportunity to snap up exports at hefty discounts to Brent and Middle East staples.
Moscow replaced Saudi Arabia as the second biggest oil supplier to India after Iraq for the second month in a row in June.
At least two Indian refiners have already settled some payments in dirhams, the sources said, adding more would make such payments in coming days.
The invoice showed payments to be made to Gazprombank via Mashreq Bank, its correspondent bank in Dubai.
The United Arab Emirates, seeking to maintain what it says is a neutral position, has not imposed sanctions on Moscow, and the payments could add to the frustration of some in the West, who privately say the UAE's position is untenable and siding with Russia..
The trading firms used by Rosneft have started asking for the dollar equivalent payment in dirhams from this month, the sources said.
Rosneft, Coral Energy and Everest Energy did not respond to Reuters emails seeking comment.
Russia wants to increase its use of non-Western currencies for trade with countries such as India, its foreign minister Sergi Lavrov said in April.
The country's finance minister last month also said Moscow may start buying currencies of "friendly" countries, using such holdings to influence the exchange rate of the dollar and euro as a means of countering sharp gains in the rouble.
The Moscow currency exchange is preparing to launch trading in the Uzbek sum and the dirham.
Dubai, the Gulf's financial and business centre, has emerged as a refuge for Russian wealth.
India, also maintaining a neutral position, recongnises insurance cover by Russian companies and has offered classification to ships managed by a Dubai-based subsidiary of Moscow's top shipping group to enable trade.
India's central bank last week introduced a new mechanism for international trade settlements in rupees, which many experts see as a way to promote trade with countries that are under Western sanctions, such as Russia and Iran.
Countries tend to hold certain currencies as reserve assets mostly for economic, not geopolitical, reasons
ISABELLE MATEOS Y LAGO
"But ultimately, international reserves are held for specific economic reasons, not geopolitical ones: pegging or managing the exchange rate to another currency; paying for imports and international debt service; providing foreign exchange liquidity of last resort to domestic banks. So what will determine the extent of any shift in global reserve allocations is not the portfolio preferences of central bankers or the intrinsic properties of US dollar alternatives. It is whether new currencies come to play an important role in international trade and financial relations. The recent news of China negotiating with Saudi Arabia to pay for oil in renminbi is not, in itself, game-changing. If it finally happens and more of China’s inbound and outbound trade partners follow, it might well be"
Days after Russian troops invaded Ukraine, the G7 and a host of allies in Europe and Asia declared a freeze on the assets of the Central Bank of Russia. The move, unprecedented in its swiftness and scale, instantly incapacitated roughly half of its $630bn in international reserves. Up to this point, central bank reserves had only been frozen multilaterally after abrupt regime change — think of the Bolshevik and Chinese revolutions, or more recently Hugo Chávez’s Venezuela.
Immediately, warnings were uttered about unintended consequences, in particular the stability of the US dollar in the international monetary system. As many have convincingly argued, the Russian reserves freeze alone is unlikely to end the dominant role of the US dollar. But it might, over time, induce major shifts in global monetary relations alongside a broader rewiring of globalisation, making the last 30 years look like a lost golden age.
Prudence and deliberation are in central banks’ DNA. They do not make rash decisions. So while many central bankers privately felt shock or dismay at the reserves freeze, they do not appear to have significantly reallocated assets away from the dollar or euro.
Yet there is consensus among central bank reserve managers that something fundamental has changed: geopolitical considerations now need to be taken into account when assessing the safety and liquidity of a reserve asset. For most, this is an argument in favour of currency diversification, a trend under way already over the past 20 years at the expense of the US dollar and to the benefit of smaller advanced economy currencies such as the Canadian dollar or the Korean won. This might now accelerate, and possibly extend to additional currencies.
Might the renminbi be one of the beneficiaries, as suggested by a recent survey? In fact, when it comes to the attractiveness of Chinese bonds in reserve portfolios after the sanctions on Russia, geopolitics is a clear dividing line. By and large, central bankers I talk to in countries in or close to the sanctioning coalition are reviewing — but not yet retreating from — whatever exposure or planned exposure they had to the renminbi. Others seem more inclined to stick to their holdings and plans to ramp them up further over time.
In the near term there is little practical scope to overhaul trade and financing patterns, even if some countries want to. But other forms of rewiring may develop. Countries that see themselves as politically aligned may try to create a mutual aid system, separate from the sanctioning coalition. China’s recent creation of a renminbi liquidity facility at the Bank for International Settlements can be seen in this light. Discussions could also resurface between large reserve holders from the global south about swap arrangements, like those between the Fed, European Central Bank, Bank of England and a few others in the 2008 financial crisis. Cross-border payment systems to rival Swift will probably continue to grow.
Salman Ahmed joined Fidelity in August 2020 as Global Head of Macro and Strategic Asset Allocation. Previously, he was co-chair of Global Investment Committee and Chief Investment Strategist at Lombard Odier IM (LOIM). Before spending nearly 8 years with LOIM, Salman was head of Global Macro at Edf trading between 2009 and 2012. He also spent nearly 5 years with Goldman Sachs International as a global economist within the global macro team. He began his career in finance with Watson Wyatt (now Towers Willis Watson) in 2001. Salman holds a PhD and MPhil in Economics & Finance from University of Cambridge. He obtained his undergraduate degree from Lahore University of Management Sciences, Pakistan, in 1999.
Russia’s international reserves increased by 0.6% (or $3.6bn) in one week, the central bank reported on August 11. The CBR stopped reporting the monthly reserves figures at the end of January when total GIR stood at $630.2bn. (chart)
"International reserves amounted to $574.8bn as of August 5, up by $3.6bn, or by 0.6%, in one week due to positive revaluation," the regulator said on its website.
Foreign exchange is pouring into the CBR coffers after the current account surplus of Russia's balance of payments hit a new all-time high of $166bn in the first seven months of this year – triple its level in the same period a year earlier that was already a record high. Sanctions intended to reduce Russia’s revenue from energy exports have backfired, and after they sent prices soaring the Kremlin is earning more money than ever. Ironically, the highly effective bans on exports of equipment and technology to Russia have worked against the leaky energy sanctions as they have dramatically reduced imports to Russia that have only bolstered the current account surplus further.
Some $300bn worth of gold and foreign currency CBR reserves were frozen shortly after the invasion of Ukraine in February, but the soaring revenues from oil exports will cover a large share of that money by the end of this year, say economists.
Russians buy record amounts of FX on MOEX
The crisis-scarred population have also been reacting to the sanctions on currency transactions by moving their cash savings out of the traditional dollars and euros into other currencies of the “friendly” countries.
Individual purchases of currency on MOE overtook transactions by bankers for the first time ever in the second half of July, the CBR said in its latest financial market risks review.
Net purchases of currency by individuals increased 1.3-fold from RUB176.1bn ($2.9bn) in June to RUB237.1bn ($3.9bn) in July – a new record, according to the CBR.
Individuals mainly bought foreign currency at banks that could then send the money to accounts overseas.
The outflow of currency has also been visible in the ruble-dollar exchange rate, as the ruble weakened and was trading at RUB60.6 at the time of writing, down from its recent high of almost RUB50 to the dollar. As imports recover, further growth of foreign currency demands can be expected for market players, the central bank said.
The “yuanisation” of the Russian economy continues as a result of the Western sanctions imposed on Russia. The yuan became the third most traded currency in terms of volume of foreign exchange trading on the Moscow Exchange in July and will soon take second place, The Bell reported on August 8, as companies and individuals rush to get out of the dollar and into non-sanctioned currencies.
Banks have been building up large amounts of dollars and euros they can’t spend due to sanctions and have been actively trying to swap them for other currencies.
The government has been doing the same thing, signing trade deals with its partners in local currency and using other non-traditional currencies for international trade. Russia oil exports to India are now being settled in Chinese yuan, Hong Kong dollars and UAE dinars, according to reports.
Ordinary Russians have been moving their savings out of dollars. Balances at retail bank accounts in foreign currency declined in July by $3bn, the CBR reports. Just before the war there was only one Russian bank that offered deposit accounts in yuan; now there are 20, according to The Bell.
By Perry Mehrling
Charles P. Kindleberger ranks as one of the 20th century’s best known and most influential international economists. A professor of International Economics at the Massachusetts Institute of Technology (MIT) from 1948-1976, he taught cosmopolitanism to a world riven with nationalist instinct. He worked to relieve the fears of his fellow citizens through education, thinking that if people understood how the dollar system worked, they would stop trying to destroy it. His research at the New York Federal Reserve and Bank for International Settlements during the Great Depression, his wartime intelligence work and his role in administering the Marshall Plan gave him deep insight into how the international financial system really operated.
In the new book, “Money and Empire: Charles P. Kindleberger and the Dollar System,” Perry Mehrling traces the evolution of Kindleberger’s thinking in the context of a “key-currency” approach to the rise of the dollar system, which he argues is an indispensable framework for global economic development in the post-World War II era. The overall arc of the book follows the transformation of the dollar system, as seen through the eyes of Kindleberger.
The book charts Kindleberger’s intellectual formation and his evolution as an international economist and historical economist. As a biography of both the dollar and Kindleberger, this book is also the story of the development of ideas about how money works. In telling this story, Mehrling ultimately sheds light on the underlying economic forces and political obstacles shaping a globalized world.
India in the last year displaced Europe as Russia's top customer for seaborne oil, snapping up cheap barrels and increasing imports of Russian crude 16-fold compared to before the war, according to the Paris-based International Energy Agency. Russian crude accounted for about a third of its total imports.
NEW DELHI/LONDON, March 8 (Reuters) - U.S.-led international sanctions on Russia have begun to erode the dollar's decades-old dominance of international oil trade as most deals with India - Russia's top outlet for seaborne crude - have been settled in other currencies.
The dollar's pre-eminence has periodically been called into question and yet it has continued because of the overwhelming advantages of using the most widely-accepted currency for business.
India's oil trade, in response to the turmoil of sanctions and the Ukraine war, provides the strongest evidence so far of a shift into other currencies that could prove lasting.
The country is the world's number three importer of oil and Russia became its leading supplier after Europe shunned Moscow's supplies following its invasion of Ukraine begun in February last year.
Some Dubai-based traders, and Russian energy companies Gazprom and Rosneft are seeking non-dollar payments for certain niche grades of Russian oil that have in recent weeks been sold above the $60 a barrel price cap, three sources with direct knowledge said.
The sources asked not to be named because of the sensitivity of the issue.
Those sales represent a small share of Russia's total sales to India and do not appear to violate the sanctions, which U.S. officials and analysts predicted could be skirted by non-Western services, such as Russian shipping and insurance.
Three Indian banks backed some of the transactions, as Moscow seeks to de-dollarise its economy and traders to avoid sanctions, the trade sources, as well as former Russian and U.S. economic officials, told Reuters.
But continued payment in dirhams for Russian oil could become harder after the United States and Britain last month added Moscow and Abu Dhabi-based Russian bank MTS to the Russian financial institutions on the sanctions list.
MTS had facilitated some Indian oil non-dollar payments, the trade sources said. Neither MTS nor the U.S. Treasury immediately responded to a Reuters request for comment.
An Indian refining source said most Russian banks have faced sanctions since the war but Indian customers and Russian suppliers are determined to keep trading Russian oil.
"Russian suppliers will find some other banks for receiving payments," the source told Reuters.
"As it is, the government is not asking us to stop buying Russian oil, so we are hopeful that an alternative payment mechanism will be found in case the current system is blocked."
“The only reason that America can run the deficits that it does is because the dollar is the global reserve…As we move to a more multipolar financial system, it will be tougher for the US to run big debts.”
Why Biden is wise to reduce the deficit
Progressives are a bit too sanguine about debt levels
by Raana Foroohar
Anyway, although we all know that tax cuts and trickle-down economics haven’t created more broadly shared prosperity, I’ve long thought that progressives were a bit too sanguine about debt levels. Let’s say, just for argument’s sake, that a mild recession produced a 20 per cent decline in tax receipts over the next year or two, which is not an unusual outcome during a down cycle, according to one of my favourite market analysts, Luke Gromen, who wrote about the topic recently in an issue of his newsletter, The Forest for the Trees. Let’s also assume a 4.5 per cent interest rate on federal debt (which may be a conservative estimate if the Fed keeps hiking), and a 12 per cent increase in entitlement payouts (also conservative given the number of ageing Americans). Taking those figures, Gromen shows that the interest expense of government debt would go back to the Covid crisis peaks that resulted in a “crash” in the UST market, and subsequently pushed the Fed into more quantitative easing.
I’m not saying this is about to happen. But I am saying that it’s a tricky time in the economy, with the end of cheap money, cheap labour and cheap energy, and that makes it a potentially dangerous time for any country or company holding much debt. The failure of Silicon Valley Bank and the subsequent dominoes now falling has reminded us that there is plenty of hidden risk in the system at the moment.
The only reason that America can run the deficits that it does is because the dollar is the global reserve. That won’t change immediately, but I do believe that the balance of global reserves will change significantly over time, in part because energy autocrats have seen dollar reserves weaponised since the war in Ukraine. As we move to a more multipolar financial system, it will be tougher for the US to run big debts. We will eventually have to come back to the kind of guns and butter debates about spending that we stopped having from the late 1970s onwards. For this reason, I think it’s wise for the Biden administration to show it cares about debt. Ed, would you agree, and how will it play politically?
Edward Luce Responds:
Will the resulting deficits endanger the US dollar? I don’t see much sign of that. The US dollar has accounted for around 60 per cent of global central bank reserves for the last couple of decades and that share has barely shifted. Countries without reserve currencies run budget deficits of 5 per cent of GDP without the sky falling on their heads. The key is to ensure that US trend growth is higher than interest rates on federal debt in order to hold it at stable levels. If that proves impossible, then the greenback could lose its throne. Even were Armageddon to strike, however, Art Laffer would still be available for power point presentations on his magical curve.