Citi On International Finance As War By Any Other Means

Tyler Durden's picture

With The White House proclaiming Russian stocks a "sell" today (and in the meantime Russian stocks and the Ruble strengthening), it is clear, as Citi's Steven Englander notes, that the Russia/Ukraine crisis may be the first major political conflict that is played out in international financial markets. The difference, Englander points out, between this and standard imposition of sanctions is that both sides have some options that can inflict damage on the other side.

International finance as a continuation of war by other means (via Citi's Steven Englander)

Normally sanctions involve a big group of countries on one side and a vulnerable target on the other so the vulnerability is very asymmetric. Small countries can occasionally expropriate big country assets but in most cases that ostracizes the small country from the international financial community.

The US/EU are hoping that they can make the crisis sufficiently painful to Russia that it backs off from the Ukraine. The Russians may suspect that the willingness in the West to pay a financial/economic price is limited and that public opinion will swing quickly if volatility emerges.

So far we have:

1. Formal sanctions by the US and Europe on a small set of Russian/Crimean officials, plus the threat that the sanctions will be extended


2. Possible release of oil from the Strategic Petroleum Reserve (denied by the White House as an effort to push oil prices down)


3. Pressures on Russian asset markets


4. Probable move of Russian reserves out of Fed to non-US custodians


5. Russia destabilizing Ukrainian gas and debt markets

There are even reports that  there were efforts by Russia in 2008 to exacerbate the US financial crisis, although the reports do not have firsthand documentation. Other countries may be watching this as a template for how events would play out in case Asian political issues over conflicting territorial claims or other issues escalate.

These developments may give a different meaning to the term ‘currency wars’ that became so popular in recent years.

One advantage using finance as a weapon is that it can be scaled up or down as needed, and is much more reversible than military actions. It is also quicker than traditional trade sanctions to have an impact, and arguably is more likely to hit decision-makers and those who have access to them  than trade sanctions, which often hit the poor and almost always create profit-making opportunities for the well-connected in sanctions-running

How far can this go and what are the implications?

So far the steps taken are baby steps – sanctions applied to a handful of Russians and Crimeans by the US and EU, but no real screws being applied (Russian President Putin not named, for example).  Probably there are huge holes through which transactions can continue to occur and the sanctions can be evaded. However, if the crisis intensifies, the US/EU may be tempted to apply broader sanctions on Russian assets on the view that this is the quickest way to apply pressure and that Russians will be unable or unwilling to move their assets into friendly jurisdictions quickly enough.

For the Russians, the temptation may be to try and sell USD assets in order to disrupt US asset markets, but the leverage may be temporary.  Their reserves are almost USD470bn but they have been actively diversifying away from USD for years. Relative to the size of any market they might be tempted to disrupt, the USD holdings are small. Moreover the sense that the price was being driven down by politically-motivated selling would likely attract buyers on the view that the effects would be limited. Were they do convince other countries to join them, the impact would be more longer lasting and more disruptive, but it is a little bit like letting your own home run down because it will lower the property value of a neighbor you dislike. The damage you do to yourself is more than you can expect to do to your neighbor.

The Russian holdings of USD are probably enough to give the USD a big whack, were they to go into the market selling, especially as since there may be selling pressures already from other reserve managers, and given the trend-loving nature of currency investors. Once you get past hurt feelings, it is not clear that  USD weakness would be a US economic or financial market negative.  A strong dollar is hardly a US policy priority, to the extent that USD weakness would crowd in both exports and imported inflation, it would probably be viewed as going in the direction preferred by Fed policymakers. Were it not for the unfriendly motivation, it is unlikely that US policymakers would object. 

Long-term implications

If the use of financial market warfare intensifies, the risks are:

1) More home bias in investing,


2) Official investors gravitating to jurisdictions and custody arrangements that insulate their assets from seizure


3) Premium on gold, physical commodities and other unattachable assets

This would unwind many years of international capital market liberalization. Moreover, it would have the greatest impact in discouraging long-term, illiquid investments, as these would be most vulnerable to seizure. It is much easier to cut positions in short term liquid assets if there is trouble brewing.

External deficit EM economies would probably suffer the most since creditors would see an extra force majeure risk premium added. Apolitical safe havens would probably benefit the most.  Where there is an interaction with the traditional currency war discussion is that the damage to EM borrowers would probably be greater than to G10 borrowers.  When EM countries depreciate, they often get hit by higher bond yields as well.  G10 countries, even when they depreciate sharply, often do not face big pressures on their bond markets.  Moreover, higher food prices from depreciation are not nearly the same social issue in G10 that they are in EM.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
DoChenRollingBearing's picture

Won´t get hurt much if you buy gold, fishez!

Major Major Major's picture

Fishez, watching over my sunken gold.

AlaricBalth's picture

During the Cold War, nuclear deterent theory was based on Mutually Assured Destruction (MAD). The current scenario calls for Mutual Asset Destruction and it doesn't have the same deterent effect when those who espouse this mode of economic war are certifiably psychotic.

DoChenRollingBearing's picture

Nicely said.  Mutual Asset Destruction would be bad too.  There are LOTS of people, everywhere, who would be hurt.  I was reminded of this just today by the mining engineer/editor I spoke with:

EVERY economically-aware person watches the American economy, even in Peru.

SWRichmond's picture

I have speculated that at some point China will assert dominance over export market competitor Japan by selling some of their USD to buy Yen.  Perhaps they could (already are?) sell USD (to Belgium, apparently)  to buy Rubles, Russia to use stronger ruble to bolster gold position, forming a trading bloc.

DoChenRollingBearing's picture

That is an interesting set of ideas you write.

But, it is my opinion that Russia and China are buddies only for a relatively short while, at some point China might want some of Siberia...

rsnoble's picture

Implications for investors?  How about mainstreet lol.

"Russia is manipulating it's markets" Lord Obama.

maskone909's picture

Short em's

Charts dont lie... The USD looks to break support

Some thing big this way comes

Fix-ItSilly's picture

Using the USD and its monetary reserve and transactional system as a weapon over Ukraine was utterly stupid.  Nothing strategic is gained while what may arguably be America's greatest asset, the ability to skim profits from most any international trade whether America is involved or not, is forever damaged.

Would "Ukraine" have ever played out like this if Obamacare's website worked and the American economy was performing in accordance with Govt statistics?  Emphatically not, and this is why ZeroHedge is wrong to print all those oil "pipeline" justifications.


Winston Churchill's picture

The US already fatally wounded the petrodollar by using SWIFT as a weapon against Iran.

$5bn had already been invested in destabilizing the Ukraine long before the woes of

Obozocares flawed launch.

Aghanistan,Syria,Ukraine. Just a co incidence about being/are pipeline routes I'm sure.


asteroids's picture

What if Russia convinces all their friends to sell USD. The Chinese, half of the middle east and Asia and Africa. Rember, Amerika is not  loved by the whole planet.

medium giraffe's picture

Means the Fed saves 20% on printer ink.  I'm looking forward to them dumping US debt though.  That should be a hoot.

Quinvarius's picture

Bankers think they can wage a war with finance vs Russia?  Wow.  That is like some guy who has spent his whole life in a gay bar thinking slap fighting is great way to handle yourself on the streets.

Ignorance is bliss's picture

I don't think investing my retirement savings into a war zone is a good idea. I wonder what the average Joe six thinks about having his savings vehicle of choice attacked by competing nations. At least my 401 k is protected by JPM. I know they've been busted a few dozen times for fraud, but Obama has them on a short leash. All is going to be okay with America. Seriously.

Winston Churchill's picture

Apt avatar.

Just keep watching your 401k grow for Uncle Scam.

q99x2's picture

Citi. That's my bank. Fuck Citibank.

Dollar Bill Hiccup's picture

Sounds like just what Vlad's gunning for. Monkey wrench in globalization and Bankertopia.

The FED has already been waging financial war, this just brings it to a head.

medium giraffe's picture

War being played out via the financial markets?  It's an upgrade from social media I suppose.

dogismycopilot's picture

the number 1 thing Putin can do is to remove the buearacratic red tape that is required in Moscow to set up and properly operate a company for middle class Russians (or basically do the opposite of what Obama & Co are doing in the US to small businesses - increasing administrative burdens, costs and fines)