Moscow’s countermeasures to the end-of-world sanction: towards the exchange of hostages

In the previous article we got acquainted with the end-of-world sanction. We will now see how Moscow is responding. And what could still happen.

6) Moscow countermeasures – Like the West, Moscow is preparing for the worst. Indeed, he saw it all arrive on Monday, February 28th.

The ECB declared the Austrian subsidiary of the largest Russian bank, Sberbank , in trouble, allegedly due to a bank run attributed to "the reputational impact of geopolitical tensions". In Russia itself, there was a rush to ATMs and the stock exchange remained closed. Unsurprisingly, the government has committed to possible bank recapitalisations and that the central bank has offered liquidity support (domestic gold purchase, unlimited repurchase auction with minimum required quality reduction, easing restrictions on open positions in foreign currency).

There was also the need to regulate foreign liquidity: the ruble fell by 30 per cent, despite the fact that the central bank more than doubled the discount rate, from 9.5 to 20 per cent.

Then, the central bank and the government ordered the exporting companies (hampered by the exclusion of some of them from the SWIFT system of interbank communications, but not really hindered) to convert 80 percent of their revenues into foreign currencies on the market. Mind you: not, as would be normal, to sell them to the central bank. For the simple reason that, after the sanctions, the central bank would no longer know where to place them (except in Chinese yuan).

It should be noted here that, in the face of Russian importers who will sell dollars by buying rubles, to buy these dollars by selling rubles can only be non-Russian subjects. Due to the aforementioned collateral sanctions (those which prevent the acceptance of deposits, exceeding certain amounts, of Russian citizens or residents, the holding of accounts of Russian clients by central depositories and the sale of securities denominated in currency to Russian clients; as well as others preparing on e-money ) designed as an exit highway for Western ruble-holding investors. Not surprisingly, such sanctions do not prevent a Russian: neither from paying his own currency debt or interest on it, nor from buying a Russian asset from a Western seller.

Moscow has tried to block this highway in two ways. First, the Russian Central Bank has imposed strict control on capital movements, prohibiting "all Russian residents from transferring hard currency abroad, even for the service of foreign loan contracts ". A measure that sent Davide Serra , Draghi , Bloomberg , the IIF to the mad. Payments abroad will be granted at discretion.

Second, also on Monday, the central bank ordered market participants to reject offers from foreign clients to sell Russian bonds. And, on Tuesday, Prime Minister Mishustin announced "a presidential order to impose temporary restrictions on the exit from Russian assets." This leaves subjects such as BP , Shell , the Norwegian Sovereign Fund , Nordea Asset Management , Amundi , BNP Paribas , Pictet , Equinor , Total , ENI , the shareholders of Nord Stream 2 (again Shell , OMV , Engie , Wintershall Dea , Uniper ) frozen. ), Raiffeisen , Italian and French banks , Sace , CDP and Intesa with Arctic LNG 2 , a number of other oil, financial, banking and industrial funds and companies. Transfers will be authorized at discretion.

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7) International regulations – In what sense at discretion? Well, at mutual discretion . Solution suggested by the specularity of the Western and Russian moves. At the expiry of each installment or repayment, the Western investor will be able to sell or the Russian issuer will be able to pay… if at the same time an equal amount is released from the frozen Russian foreign exchange reserves. This would be a regulation of international matches. That is, let's say, of a progressive regime of exchange of hostages: the reserves will be released to tastejust enough .

Failing that, to the Western investor who agrees to sell, or to the Russian issuer who has to pay, Moscow would deliver a payment instruction from the Russian Central Bank, out of the frozen Russian foreign exchange reserves. If, if the payment instruction were not executed, whose default would it be: the Russian issuer? or the western bank? A juridical pandemonium of biblical dimensions. Which certainly will be preferred the exchange of hostages.

Indeed, we re-read the Joint Statement USA-EU-FR-GE-IT-UK-CN of February 26: "we undertake to impose restrictive measures that prevent the Russian central bank from deploying its international reserves in ways that undermine the impact of our sanctions ". Thus, by definition there are ways for the Russian central bank to use its foreign reserves that do not undermine the impact of sanctions . Consistently, the " Russia-related Sovereign Transactions Directive " of the US Treasury, also of February 28, states: " a general license is issued to authorize certain energy-related transactions with the Central Bank of the Russian Federation and will follow with other authorizations and indications if necessary . Ditto in the EU , only with the characteristic bureaucratic complication. Bingo.

Naturally, we will see a very difficult negotiation. Just think of when the West will also demand war damages from Moscow (how many foreign investments are going up in smoke in Ukraine today?), As well as (after a pro-Russian regime took office) the payment of previous foreign debts of Kiev. It won't be boring.

8) Neutrals – It remains to be established where most conveniently to exchange hostages and there is no shortage of candidate financial centers ( Turkey , Brazil , India and who knows how many others). But there is a dedicated place to settle the large international financial matches: Basel, in Switzerland. Where sits the bank of central banks, known as the Bri-international regulations , which does not need SWIFT and of which the Russian Central Bank is regularly part. Which Bri has declared that "it will not be a way to circumvent the sanctions", but then specified "the applicable sanctions" and, in fact, does not participate in the sanctions , as we have seen Draghi revealed on 1 March. In other words, the regime of progressive exchange of hostages does not even have to be invented: it already exists.

This solution is apparently complicated by the fact that, on 28 February, Switzerland (a neutral country par excellence and which had only partially participated in the sanctions on Crimea) joined the sanctions on Russia decided by the EU on 23 and 25 February. With the intention of avoiding "being used as a platform to circumvent EU sanctions". Apparently , we said, as it did not adhere to the sanctions announced by the EU on February 28 (i.e. those prohibiting transactions with the Russian central bank) … which is all the more remarkable, as Switzerland has also copied another measure decided by the EU on the 28th (the ban on overflight). Of course, "it will continue to examine any further EU package of measures", but so be it. Indeed, it almost seems that Switzerland is offering to be used as a platform to circumvent sanctions . But not all: only those relating to foreign exchange reserves.

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9) The sanctions on energy – This arrangement is not provisional, but destined to last as long as the permanent economic war with Russia : it is the normality of the next decade at least. Of course, a decade is long: the blocked reserves will run out and then, you know, the appetite comes with eating. The bombshell yesterday was that Washington warned it could block Russian oil and gas “ if Moscow intensifies its aggression against Ukraine . It's really on the table, but we have to evaluate what all the impacts will be… we don't want to do it now ”.

What would explain certain strange words of Scaroni: “for gas I understand that the Italian government, as well as the German one, are trying to keep the payment channels open. A mechanism will be put in place ”. Maybe he was referring to Gazprombank 's exclusion from SWIFT sanctions, but maybe not.

Let's read Fubini : yes, it is true, the West has taken 185 billion of Russian foreign exchange reserves, but this seizure " risks being offset by gas and oil revenues in a short time", since "Europe this year it would pay Russia about 260 billion euros ”,“ and yet, these sums in hard currency would become freely usable by the Moscow government while it commits war crimes ”. Indeed, at Fubini the interventionist rhetoric covers a more serious concern: that (as Goldman Sachs writes) the Russian economy will suffer a thud of 7 percent, but then it will start to recover already in 6-9 months … that is, if you do better than the Italian one risks. And, then, he is reduced to delirium of a transfer of fortunes from Russia to Italy, in the form of a seizure of revenues. But it is a delusion, in fact: the seizure of the revenues from the sale of gas and oil would be equivalent, for Russia, to a failure to sell and, then, it would be worth not selling. With all the consequences of the case that the European countries really cannot bear.

Yet, perhaps there is a hint here of what may happen on the day that the gas pipelines via Ukraine and Belarus were to be shut down and the only gas pipeline available was the now legendary Nord Stream 2 . The latter never ceases to amaze: after the lack of German authorization , Washington had given the Swiss company that owns it until Wednesday to ask for bankruptcy, what it seemed it would do but then did not do , limiting itself to firing the staff and close the phones . Indeed, on Wednesday itself, Moscow made it known that "the infrastructure is ready, technically, technologically, logistically and so on, this infrastructure will stay there, it won't go anywhere"; adding that "the inevitable consequence of the abandonment of Nord Stream 2 will be a rapid increase in gas prices on the European market". Maybe, in the future, Washington will grant the opening of the blessed tube, in exchange for the allocation of a part of the revenues to the release of blocked investments in Russia, the reimbursement of war damages or who knows.

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In short, the countermeasures taken by Moscow reveal the nature of the end-of-the-world sanction imposed by the West, as a suitable measure to set up a cross-match settlement regime. In which the Bank for International Settlements may collaborate. And that shouldn't necessarily lead to the termination of all business relations. In the next article we will look at the costs of all this, in terms of reserve currency status, which make dollar and euro central bankers quite nervous.

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This is a machine translation from Italian language of a post published on Atlantico Quotidiano at the URL on Fri, 04 Mar 2022 03:50:00 +0000.