Mr. Trump Attacks Aluminum, Russia Attacks The Debt

Authored by Tom Luongo,

Looking at the unfolding trade war between Donald Trump and the world the phrase that should come to mind is “One good turn deserves another.”

In the case of the insane sanctions on Oleg Deripaska and Russian Aluminum giant, Rusal, back in April, we finally got some clarity as to how Russia can and will respond to future events.

In yesterday’s Treasury International Capital (TIC) report, we saw clearly that Russia activated its nearly $100 billion in U.S. Treasury debt to buy dollars in April. 

More than $47 billion in U.S. debt was dumped into the market to cover the chaos engendered by Trump’s overnight diktat for the world to stop doing business with Rusal.

Also of note, U.S. ally Japan continues to shed Treasuries at around 8-10 billion per month.  Ireland dumped $17 billion and Luxembourg nearly $8 billion.

While China dropped $5 billion this is noise, ultimately as its holdings of U.S. debt have been stable for over a year now.  What is interesting is Belgium, the home of Euroclear, seeing a $12 billion inflow.  Likely that’s where some of the Russian-held debt was traded to.

The Russians likely sold from their balance on reserve with the Federal Reserve.  Here’s the latest iteration of the chart I keep for just such an occasion.

Rusal’s shares and bonds went bidless but the damage wasn’t contained there as major Russian banks like VTB and Sberbank were hit hard as well.   So, while Rusal didn’t have much in the way of dollar-denominated debt.  It did have major dollar-related obligations as accounts receivable on its balance sheet because of the sheer size of its trade conducted in dollars.

And that’s why there was such an outflow from Russia’s stock of Treasuries.  But, here’s the thing.  It didn’t matter one whit.  Why?  It didn’t undermine Russia’s Foreign Exchange Reserves.

No Dip in Russia’s Foreign Exchange Reserves During Rusal Crisis

Russia just sold Treasuries into the market, raised dollars and swapped out Rusal’s bonds, holding them as collateral for a Repo.

The Bank of Russia Intervened to keep Rusal and Other Banks Solvent by Dumping U.S. Treasuries

This went on for most of the month and into May.  Zerohedge’s reporting on this leads the way. 

This mass dumping of U.S. debt caused the long end of the U.S. yield curve to blow out past significant resistance points, like the 10 year pushing above 3.05% in sympathy with the Fed’s policy to dry up dollar liquidity.  If this first-order analysis by Zerohedge is correct, then we can assume Russia has been holding a lot of long-dated Treasuries versus say China which we know has shortened up the average maturity of their massive bond portfolio.

In times past we may have not seen such a massive dump of U.S. debt by Russia.  They may have simply sold dollars directly or swapped euros or yuan for them.  But, these are different times.  Trump has taken the use of sanctions to a level that hasn’t been seen before.

Putin is the master of parallel aggression.  You take an action against Russia, he will generally hit you back along some other vector.

In this case it was a direct confrontation to Trump’s bringing the full weight of U.S. financial dominance down on its rivals and allies, who are all heavily exposed to Rusal’s market position.

Russia is not out of the water with this situation which is why Oleg Deripaska, the majority owner of Rusal and the one targeted by the Trump administration, is looking still to find ways to satisfy the U.S.’s demands on this issue.

Putin’s Pivot

But, don’t think this isn’t working to Putin’s advantage as Deripaska is not one of his supposed favored oligarchs.  This report from Bloomberg spelled out the situation well back in April.

As for Deripaska, he will get help from the Russian government again. {which he did, see above} Rusal has warned that the sanctions might mean a default on a portion of its debt. That’s most likely to happen to its more than $1 billion in dollar-denominated debt. But, as ever, the company’s biggest creditors are Russian state banks, and the Kremlin will keep Rusal solvent one way or another as it reorients toward Asian markets. It won’t be a huge headache for Putin: He’s seen worse, including with Rusal during the financial crisis.

And that’s the most important part.

Once the current positions are wound down and the aluminum market adjusts to the new reality of U.S. hyper-aggression to restart an industry we really don’t need (smelting aluminum? really?) just to satisfy Trump’s outdated views on trade (which they are MAGA-pedes) Rusal’s business will not be so U.S.-centric.

And therefore the world will become less exposed, over time, to the depredations of U.S. financial attack.   I told you before that China has responded to this by issuing new yuan-denominated futures contracts for industrial metals.

Why do you think they did that?

Will it create pain in the short-term?  Yes.  Europe will experience even more of this as will Asia.

Will a lot of companies fear being sanctioned and fined by the U.S. for doing business with Rusal?  Yes.  It’s happening now.  Will this exacerbate underlying economic conditions in Europe?  Of course.

But, if Deripaska submits, like it looks like he will, then the aluminum market will calm down and Trump’s sanctions will look silly.

Sanctions Bite Both Ways

The net result will be more of the aluminum market will flow through the Yuan rather than the dollar, neatly avoiding sanctions and any future threats.  Because with the insanity caused by the overnight chaos in April, any aluminum supplier/consumer will be wary of another such edict from the naked Emperor in D.C.

And, as such, they will diversify the currencies they buy and sell aluminum in.  It won’t be a sea change overnight.  Those least exposed will jump ship first.  Rusal will be one of the main beneficiaries since Russian banks are already sanctioned.

But it will be a trend, that once started will gain steam.

China can and will tie convertibility of its futures contracts to gold through the Shanghai exchange to allay worries about getting money out of the country.

Abusing your customers is never a winning marketplace strategy and that’s exactly what Trump’s sanctions policy is doing, abusing customers of the dollar.  Trust has been the dollar’s strongest attribute for a long time now and it is the primary reason why it has dominated trade and reserves.

But there is a limit to how much your customers will take. And Trump is pushing well beyond that limit.  And when the benefits of using the dollar are eclipsed by the liabilities, people will naturally shift away from it.

Look at the TIC chart above and note the total.  This is a $6.3 trillion synthetic short position against the dollar.  He’s inviting countries to dump treasuries to defend their currencies as the dollar strengthens while shifting their primary materials buying to the biggest rival’s currency.

This is why Russia continues to run a very tight financial ship while it leads the charge away from the dollar. It’s inviting customers into the ruble with both a strong national balance sheet and relatively higher interest rates.  This has the U.S. fuming.

Putin has and will use future mini-crises like this to further clean up the rot left over from the Yeltsin years, like Deripaska, while building a Russia insulated from future attacks like this.

Remember, even the U.S. has limits.  It cannot sanction people for refusing to trade in dollars.  Even the U.S. doesn’t have that power.  It can try but it will fail.  New systems, new banks, new institutions can always be created.

Comments

cowdiddly J S Bach Sun, 06/17/2018 - 09:10 Permalink

Not to mention the due to the relatively small amount in circulation and trade, the Ruble is the MOST gold backed fiat currency on the planet right now. They don't seem to be slowing down in buying more. But they have it priced at 62:1 ? Being an exporter nation they are probably laughing their livin lovin ass off and loving it.  The US is sitting on the gold and of course platinum price that Russia is the major producer like a mother hen.? LOL, If I didn't know better it looks like some broke ass bitchez are scared and it ain't Ivan w/460B in reserve.

Bout time to trot out the Munchkin again holding a single bar and say yep, don't worry its all there, just "trust us".

In reply to by J S Bach

PrayingMantis cowdiddly Sun, 06/17/2018 - 09:24 Permalink

 

   ... “ ... in the case of the insane sanctions on Oleg Deripaska and Russian Aluminum giant, Rusal, back in April, we finally got some clarity as to how Russia can and will respond to future events ... “ ...

 

    ... most recently, Trump had been focusing on protecting steel and “aluminum” on world trading ... could there be an underlying reason behind these sanctions? ... who is Trump really protecting here? ...

 

   ... let’s follow the money ... these links might let us connect the (((dots))) ...

 

       ... >>> http://graphics.thomsonreuters.com/specials/MetalWarehousing.pdf  (REUTERS/REUTERS STaff
Should the London Metal Exchange allow Goldman Sachs, J.P. Morgan and Glencore to own aluminium warehouses even as they trade the metal?
GOLDMAN’S NEW MONEY MACHINE: WAREHOUSES ) ...

 

   ... >>> http://www.crainsdetroit.com/article/20141120/NEWS01/141129992/senate-report-metro-detroit-warehouses-gave-goldman-sachs-influence 

... (Senate report: Metro Detroit warehouses gave Goldman Sachs influence over aluminum pricing ) ...

 

    ... >>> https://www.theatlantic.com/business/archive/2011/07/goldmans-secret-cash-cow-detroit-warehouses-full-metal/337401/ ... (Goldman's Secret Cash Cow: Detroit Warehouses Full of Metal ) ...

 

   ... >>> http://www.demos.org/blog/11/21/14/following-money-how-goldman-sachs-manipulates-commodity-prices ... (Following the Money: How Goldman Sachs Manipulates Commodity Prices ) ... 

 

       ... why aluminum? ... why not any other commodities? 

 

    ... ever wonder what Trump is up to now to please his talmudic Rothschild banksters overlords?  

             ... you be the judge ....

 

In reply to by cowdiddly

bshirley1968 PrayingMantis Sun, 06/17/2018 - 10:21 Permalink

The struggle for most Americans regarding this issue is the fact that the Ministry of Truth has always told us "Russia Bad!" while "US Good!". The Ole good guy vs bad guy paradigm.

I grew up in the 80's and am very familiar with that paradigm. I am an American through and through but our government has become the most corrupt bunch of whoring thieves on the planet. True Americans have awakened to realize the power of our corrupt government lies in the dollar hegemony. True Americans hate it, and hate the power and control it wields in our own lives. We see it at work around the world. We see DC squeeze our lives to subsidize it's world empire. An empire is seeks to maintain for various reasons that are debated regularly.

The rub comes when we see that the only force capable of standing up to this corrupt empire is a country that we have been told all our lives is evil. Russia wasn't always the communist soviet union.....and is no longer that today. But in the minds of many Americans that is all that it will ever be. Russia has the resources, military, intelligence, and skill to control it's own destiny. It has everything it needs to tell the US empire, "No!" I respect that....admire that.....cheer that....and wish them success in their stand. For those of us looking for a way to bust the evil cabal now running our own country, Russia's rebellion of US dominance is a ray of hope. It's not that we don't love our own country or want to be Russians, but we don't care about supporting a world empire that requires wars, taxes, and a strategy that strip us of our individual sovereignty by contaminating our country with people that don't belong here and will never think like an American.

People need to put aside their "fan-boy" biases, drop the blind loyalty, and start dealing with reality. We are not rooting for Putin and Russia, rather we are rooting for the downfall of thus evil banking cartel that is slowly killing us all and taking more and more of our freedoms. To those of you that say that will cause pain and we STILL have the greatest country on earth, I say, somethings are worth the pain.....and we can be a lot better. We have got to change direction....and the sooner we get off this road of empire destruction, the better.

In reply to by PrayingMantis

Demologos Escrava Isaura Sun, 06/17/2018 - 10:04 Permalink

Trump is worth what, a couple of billion? And those assets are encumbered by a lot of debt held by US banks. That does not an oligarch make. When it comes to US oligarchs, Trump is a piker compared to the massive family trusts that can move markets and voting results.

While Putin is rumored to have some ridiculous amount of stashed cash, much more than Trump's net worth, where could he spend it? If Putin cut and ran he wouldn't last fifteen minutes outside of the Kremlin. Putin's power is not dependent on his net worth. Thus he is not an oligarch either.

So which president is leashed by the real oligarchs in his country? The one who has to beg his banks for capital to keep his business empire solvent? Or the one who can cut his country's oligarchs off at the knees and send them scurrying to London in an attempt to avoid prison?

Note to Escrava, one set of oligarchs is making Brazil their jail bitch for daring to consider deals with the other set of oligarchs. I'm not going to give you the obvious answers to the above questions. You need to go back to school because you just got an "F" on your comment.

In reply to by Escrava Isaura

Jack Oliver SoilMyselfRotten Sun, 06/17/2018 - 11:43 Permalink

Why is Putin dumping $US ??? 

Because he CAN - with IMPUNITY !! 

Zio/US learnt a hard FUCKING lesson in Syria !!!

Russia (by these actions) certainly doesn’t fear the Zio/US ! 

I think we will see a charged up Russia after the World Cup - It’s obvious by the World Cup turnout that people feel very safe in Russia and that will now be reflected globally ! 

Russia #WINNING ! 

In reply to by SoilMyselfRotten

peopledontwanttruth 07564111 Sun, 06/17/2018 - 09:24 Permalink

The USA is drunk on power with their dollar as they see it as invincible.  It will be their own undoing.  

The world is eager and preparing to drop/run/destroy the dollar.   One day they’ll all lick their wounds take their losses and forget the dollar completely. 

 

The USA and Israel aka banksters will start WWIII to prove literally they will destroy the world if need be instead of lose their power over mankind 

In reply to by 07564111

Scipio Africanuz Ambrose Bierce Sun, 06/17/2018 - 10:16 Permalink

The US will have to do one of the hardest things in the history of the nation. She'll have to stop LYING to herself! All those recommending weaponization of the petrodollar, are charlatans. The USA cannot get through restructuring via antagonism, that only tightens the economic noose.

What is needed, is bankruptcy protection, via honest cooperation with the emergent economic powers in the East. This comes with a price, retrenchment of imperium. This in turn, requires sobriety that, the game while not completely lost, as in national decomposition, is nevertheless, unwinnable, as in rebuilding can only follow retrenchment.

Now, US policy wonks must be imbibing some real potent hallucinogens, to be unable to see what's right in front of their noses that, no matter the strategy, if it's not one of cooperation, the game is forfeit! The only strategy that helps the US retain great power status, is one whereby clear eyed, hard nosed assessment of assets and liabilities, are carried out.

The East is helping the USA buy time, the exceptionalists are once again, squandering the opportunity, just like they did in 91. They somehow believe the US military can change the trajectory of events. This is not possible any longer except humanity signs up for civilizational extinction.

To cut a long story short, it's time to declare mea culpa, and request a recalibration of goals, objectives, tactics, and critically, strategy. The strategy going forward? Honest cooperation to resolve issues that are creating global tensions, foremost amongst them, the one where the West gets to live like kings, at the expense of billions. This is the major issue, and it cannot be resolved without humility on the part of the West, and indemnity on the part of victims.

Humanity will only move forward through forgiveness, which cannot be activated without contrition.

Exceptionalism Delenda Est!...

In reply to by Ambrose Bierce

Iskiab BaBaBouy Sun, 06/17/2018 - 08:39 Permalink

The first effect will be a shift in reserve currency, what comes next will hurt the US more.

The US has been able to get other countries to comply with their intellectual property right laws through influence and global trade agreements.  Once the gloves are off and international support for the US erodes there really isn’t a reason for other countries to comply.

In reply to by BaBaBouy

PrivetHedge Hyjinx Sun, 06/17/2018 - 13:10 Permalink

Learn to love those IP laws, because they are exactly what stops YOU starting a business in your garage like Apple, Microsoft etc.

Try that today and you'll be buried with patent and IP lawsuits as soon as you make your first dime. That's the 'freedom' that western IP law takes from you and your children. Enjoy.

In reply to by Hyjinx

Deep Snorkeler Stan522 Sun, 06/17/2018 - 08:28 Permalink

Puffed Up Trumpy

a lifetime of self-imposed knowledge deprivation.

A privileged boy, too good for the Vietnam War,

inheriting $200 million from his daddy,

embarked on a career of constant depravity,

marrying a series of half-minded models,

producing freakish children of a simpleton genre -

he tortures Ben Franklin's pure American soul.

 

 

In reply to by Stan522

The Ram Deep Snorkeler Sun, 06/17/2018 - 09:26 Permalink

Nothing wrong with not wanting to serve in Vietnam.  It was a very stupid and wasteful war.  The kids who avoided the war in whatever fashion they did were certainly vindicated on 30 April, 1975 when the last Marine helicopter departed the roof in what was then Saigon.  Leaving behind millions of dead for no real reason.  Unfortunately, many young American men were bamboozled into the war through draft or volunteering.  The smart men knew it was bullshit and said no.  

In reply to by Deep Snorkeler