The West declares economic war on Russia

From: POLITICO's Morning Money - Monday Feb 28,2022 01:01 pm
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POLITICO Morning Money

By Kate Davidson and Aubree Eliza Weaver

Presented by ExxonMobil

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While Russia continued its halting military advance in Ukraine this weekend, united Western allies blew a massive hole in President Vladimir Putin’s financial defenses, the latest salvo in an intensifying global economic war.

Leaders in Europe, the U.S., the U.K. and Canada announced new restrictions on Russia’s central bank in a bid to cut off the Kremlin’s access to most of the roughly $630 billion in emergency reserves that it was going to use to soften the pain of sanctions.

The move stunned the world financial community — targeting a central bank is extremely rare, but freezing the reserves of a G-20 member bank, with backing from the entire Group of Seven nations, is unheard of. It also tightens the squeeze on Russia’s economy, and in turn Putin, much more than financial sanctions alone, experts say.

“It’s a major escalation,” said Adam Posen, president of the Peterson Institute for International Economics.

“As long as the central bank had foreign currency reserves, in the end it would be costly, it would be painful, but stuff could get done by swapping rubles at the central bank for foreign currency to buy whatever they needed,” Posen added. “And now that’s basically not going to be possible.”

As Sergei Aleksashenko, a former deputy Russian finance minister and deputy central bank governor, put it in a video blog: "This is a kind of financial nuclear bomb that is falling on Russia.”

How would it work?

While the implementation details are still unclear, the idea is to undermine Russia’s ability to prop up its currency by selling foreign reserve assets, as it did last week when the ruble began crashing on news of Western sanctions on Russian banks and oligarchs.

The goal? To take down what’s known as “Fortress Russia,” said Josh Lipsky, director of the Atlantic Council’s Geo Economics Center and a former adviser at the International Monetary Fund. Lipsky estimates the move will lock up $400 billion of Russia’s foreign reserves, which it can no longer use to mitigate the effects of sanctions.

“To put that in perspective, it's like losing the entire GDP of Austria from your bank account overnight,” Lipsky said.

In a joint statement, the U.S. and its allies in Europe also said they would ban selected Russian banks from the SWIFT international payment system, and would block the sale of so-called golden passports to people with links to the Russian government, among other measures. (It was an emotional plea from Ukrainian President Volodymyr Zelenskyy — who dialed into an emergency meeting of EU leaders Thursday night — that convinced reluctant countries to get on board, WaPo’s David J. Lynch, Michael Birnbaum, Ellen Nakashima and Paul Sonne reported.)

What happens next? 

The Russian currency is expected to hit new lows today, and inflation will likely spike. “With the currency losing value against foreign currencies, any imported goods and services will become extremely costly,” our colleagues Johanna Treeck and Douglas Busvine report from Brussels. “Russia can print more rubles, but that would spark runaway domestic inflation and an even sharper depreciation of the currency.”

U.S. officials have made clear their aim is to target Putin and his billionaire allies, not ordinary Russians. But the bigger and broader the sanctions, the bigger the impact on regular people.

“The problem is the people who suffer are everyday Russians, who are going to have soaring inflation, who are going to run out of physical cash,” Lipsky said. “And those are the things that are going to generate protests on the street.”

A senior Biden administration official put an even finer point on it this weekend: “This will show that Russia’s supposed sanctions-proofing of its economy is a myth.”

 

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Russia still has (limited) options

Russia could liquidate its roughly $130 billion in gold reserves, but it takes time to find buyers on the international market.

It could also seek to sell about $60 billion of its Chinese yuan, along with some dollars and euros, to Chinese banks or China’s central bank. But it’s not clear that’s an opportunity China or Russia will want to take, Posen said. China may be wary of opening itself up to U.S. or European sanctions if it plays ball with Russia, and Russia may not want to be that beholden to the Chinese.

“If either of them decide not to do this, then they’re really out of options, and you’re looking at a real currency crisis,” Posen said. “Then you get into the really important question of, do we want to weaponize macroeconomic policy to be associated with potential regime change?”

“I don’t think there’s going to be a regime change,” he added, “but that’s what you’re threatening here.”

Remaining questions

We’re still waiting for more details on how the restrictions on Russia’s central bank would actually be implemented.

A source familiar with the matter said Treasury Secretary Janet Yellen and Deputy Treasury Secretary Wally Adeyemo spent the weekend in their offices, making calls to their counterparts overseas as the packages were coming together. (Asked about Treasury’s coordination with the Fed, an agency spokesperson said, “Treasury is keeping all regulators aware of the actions that are under discussion.”)

Also unknown is how the Russian central bank will respond to try to protect the currency and cushion its economy.

In an open letter this weekend, a group of émigré Russian economists — including Aleksashenko — urged Putin to end the war, warning of calamitous effects on the Russian economy.

“The economic cost to Russia will be an order of magnitude greater than the lost opportunities in the previous decade of economic stagnation," they wrote.

IT’S MONDAY — I hope you’ll join me today at 12 noon ET for a Women Rule interview with Cecilia Rouse, chair of the Council of Economic Advisers. We’ll talk about President Joe Biden’s economic agenda as he prepares to deliver his State of the Union address, and about women’s economic recovery from the pandemic. You can register here to watch live.

And as always, if you have tips, story ideas or feedback, email us at kdavidson@politico.com, aweaver@politico.com, or on Twitter @katedavidson or @aubreeeweaver.

 

A message from ExxonMobil:

ExxonMobil is committed to playing a leading role in the energy transition. We’re advancing climate solutions, including carbon capture and storage, hydrogen and advanced biofuels. And, by 2050, we aim to achieve net-zero emissions (Scope 1 and 2) from our operated assets. We’re working with partners to achieve similar results from non-operated assets and advocating for supportive policies to accelerate the deployment of lower-emission technologies needed to support a net-zero future. Learn more at ExxonMobil.com/Solutions

 
DRIVING THE WEEK

Atlanta Fed President Raphael Bostic speaks Monday … Construction spending data released Tuesday … House Oversight Committee hearing on state and local pandemic aid funding Tuesday … House Economic Disparity Committee hearing on stable housing access Tuesday … Atlanta Fed’s Bostic speaks Tuesday …

Fed Chair Jerome Powell testifies on Capitol Hill Wednesday and Thursday … Chicago Fed President Charles Evans and St. Louis Fed President James Bullard speak Wednesday … Fourth-quarter productivity data released Thursday … New York Fed President John Williams speaks Thursday … February jobs report released Friday … Chicago Fed’s Evans speaks Friday.

SCOOP: TREASURY’S NATASHA SARIN TO TAKE ON NEW TAX POLICY ROLE — Natasha Sarin, deputy assistant Treasury secretary for microeconomic policy, is taking on a new role as counselor for tax policy and implementation. Sarin, who has been a key player in Treasury’s efforts to boost IRS funding for tax enforcement, will focus on working with the IRS to tackle lingering challenges related to the pandemic and years of congressional funding cuts.

Sarin’s first priority will be addressing hurdles related to this year’s tax filing season, which Treasury officials have warned will be plagued with problems. Over the long term, she’ll work with the IRS to help them get resources needed to better serve taxpayers. She’ll also continue working on Treasury’s efforts to close the tax gap, in part by increasing the IRS budget over the next decade.

“I am thrilled that Natasha has taken on this new role partnering with the IRS to address the steep challenges it faces related to the pandemic and years of underfunding by Congress,” Deputy Treasury Secretary Wally Adeyemo tells MM. “I am confident that with continued dedicated efforts and resources, the IRS will be able to better serve the American people.”

ONE MORE FOR TREASURY: BIDEN NOMINATES SHAMBAUGH — Biden on Friday announced his intention to nominate Jay Shambaugh to be Treasury under secretary for international affairs, a key position that has remained vacant during the first year of Biden’s presidency. (Your MM host and colleague Daniel Lippman first reported that Shambaugh was under consideration for the job earlier this month.)

WHY BIDEN IS GOING EASY ON RUSSIA’S ENERGY INDUSTRY — Our Ben Lefebvre and Josh Siegel: “The risk of economic and political blowback is stymieing U.S. and European allies hitting Putin with the kinds of restrictions they used on Iran over the past decade. It shows how reliance on oil imports and worries about rising gasoline prices continue to constrain Washington's action in international crises — even after the U.S. has emerged as an energy powerhouse in its own right and has made progress in moving toward greener sources like wind and solar.”

—And here’s more from our Sam Sutton on the crypto-sized hole in U.S. sanctions targetingRussian financial institutions and oligarchs:

“I don’t think that we’re where we need to be in terms of preventing individuals who are subject to sanctions from moving value and operating using the pseudonymity of cryptocurrency,” said Stuart Levey, who was Treasury’s sanctions czar under Presidents George W. Bush and Barack Obama. “I don’t think that we in the U.S. have fully grappled with that risk.”

—Meanwhile, U.S. banks are preparing for retaliatory cyber attacks after Western nations slapped a raft of stringent sanctions on Russia for invading Ukraine, Reuters’ Elizabeth Dilts Marshall reported.

TRUCKER CRYPTO CRACKDOWN IN CANADA FUELS GOP BACKLASH IN U.S. — Sam again: “What started as a protest by Canadian truckers against public health mandates has emerged as a potential catalyst for U.S. cryptocurrency policy.

“Prime Minister Justin Trudeau’s order to freeze bank accounts and crypto assets belonging to leaders of Canada’s anti-vaccine mandate movement choked off support for demonstrations that paralyzed international commerce and clogged Ottawa’s downtown with big rigs. But while the crackdown brought the ‘Freedom Convoy’ to heel, it also unleashed new efforts by Republicans in Washington to keep the government out of people’s digital wallets. At least one House GOP lawmaker has introduced a bill to prevent a similar government clampdown in the U.S.”

FHFA ISSUES FINAL RULE EASING CAPITAL REQUIREMENTS FOR FANNIE, FREDDIE — Our Katy O’Donnell: “The rule replaces the 1.5 percent prescribed leverage buffer with a dynamic leverage buffer , calculated annually, equal to 50 percent of the firms’ stability capital buffer. It also cuts Fannie and Freddie’s capital requirements for credit risk transfers, which allow the companies to sell default risk to investors. For loans against which the companies sell credit risk, the amount of capital they are required to retain is cut in half, from 10 percent to 5 percent of the retained risk weight.”

SEC PROPOSES NEW RULES TO MONITOR SHORT-SELLING — Katy again: “The SEC on Friday proposed new rules that would require greater disclosure around short shelling, the trading strategy of borrowing shares and selling them on a bet that they can be bought back later at a lower price. The rules would require institutional money managers to file monthly reports on short-sale activity. The agency would aggregate and publicly release some of the data, while keeping the identities of the money managers and individual short positions secret.”

 

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Inflation Watch

INFLATION PAIN MEANS BIDEN GETS NO CREDIT FOR ROARING ECONOMY — Bloomberg’s Nancy Cook and Katia Dmitrieva: “[T]he precipitous rise in inflation to the highest rates in four decades — even before the Russia-Ukraine crisis, which risks further boosting energy costs — has taken [Karen Downing] aback. She found herself earlier this month worrying how a family-pack of chicken wings before the Super Bowl became so costly. Inflation has starkly colored not just Downing’s views of the direction of the country, but those of millions of Americans who will be deciding whether to keep Democrats in control of Congress in November, and the White House in 2024. Biden gets a fresh chance to shape opinion when he delivers his State of the Union speech on March 1.

ICYMI: FED’S PREFERRED INFLATION MEASURE REACHES FASTEST PACE SINCE 1983 — WSJ’s Gwynn Guilford: “The Federal Reserve’s preferred measure of inflation hit a new 38-year high in January, as strong consumer demand and pandemic-related supply constraints propelled price gains. The Commerce Department’s personal-consumption-expenditures index measure of core inflation, which excludes volatile food and energy costs, rose 5.2 percent in January from a year ago, up from 4.9 percent in December. That marks the sharpest 12-month increase since April 1983.”

 

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.

 
 
Fly Around

Companies are taking advantage of a moment of hot and seemingly unshakable demand — one in which consumers are spending “with a vengeance,” to borrow the words of one executive — to cover rising costs and to expand their profit margins to prepandemic or even record levels. —NYT’s Jeanna Smialek

Professional investors have been surging into crypto at record rates. Institutional clients traded $1.14 trillion worth of cryptocurrencies on exchange Coinbase Global Inc. in 2021, up from just $120 billion the year before, and more than twice the $535 billion for retail. — WSJ’s Paul Vigna

S&P Global has cut Russia’s credit rating to “junk” status in the latest sign that western sanctions are already dealing a severe blow to the country’s financial markets. —FT’s Adam Samson and Tommy Stubbington

 

A message from ExxonMobil:

ExxonMobil is committed to playing a leading role in the energy transition and advancing climate solutions while continuing to power economies around the world. We’re investing $15 billion in lower-emission technologies, including carbon capture and storage, hydrogen and advanced biofuels, through 2027. By 2050, we aim to achieve net-zero emissions (Scope 1 and 2) from our operated assets, backed by a comprehensive approach with detailed emission-reduction roadmaps. And where we are not the operator, we’re also working with partners to achieve similar results and help them reach their emission reduction goals. We’re advocating for supportive policies, such as a price on carbon, which can help reduce costs and drive new markets to accelerate deployment of key lower-emission technologies needed to support a net-zero future. Learn more about our plans and how our strategy is resilient under the International Energy Agency’s Net Zero Emissions by 2050 Scenario at ExxonMobil.com/Solutions

 
 

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