0:00

The best things

0:02

in life are free, but

0:04

you can give them to the birds and bees.

0:07

I want

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money.

0:09

Welcome to Geopolitics Decanted. This

0:12

is your host Dmitry Alperovitch, Chairman of Silverado

0:14

Policy Accelerator, a geopolitics

0:16

think tank in Washington, D.C. Today

0:18

we're going to talk about economics, the dollar,

0:21

and what is happening with the effort to make Russia

0:23

pay reparations for the destruction

0:25

they have inflicted on Ukraine by seizing

0:27

their currently frozen central bank reserves. There

0:30

is no one better to discuss this topic than my guest,

0:33

Douglas Redeker, currently at the Brookings Institution

0:36

focusing on geoeconomics and the

0:38

managing partner at International Capital

0:40

Strategies, a Washington, D.C.-based

0:42

political advisory firm.

0:44

Doug has also represented the United States on

0:46

the executive board of the International Monetary

0:48

Fund, the IMF. Welcome to the show,

0:50

Doug.

0:51

Thanks, Dmitry. Well, Doug,

0:54

let's begin with the dollar. Certainly,

0:56

we've seen a lot of ink being spilled over

0:59

the last year or so that this

1:01

is the end of the dollar with all of the weaponization

1:04

of the dollar that we've been seeing in terms

1:06

of sanctions on Russia and other countries before

1:08

that, as well as the moves we're seeing

1:11

from countries like Brazil trying to trade

1:13

directly with China and Renminbi, the Chinese

1:15

currency.

1:16

Why is it not the end

1:19

of the dollar in your view? Well,

1:21

first of all, we've been hearing the end of the dollar

1:24

not just for the past year or two or

1:26

three or five. This has been going

1:28

on for a long time. And

1:31

I would say that when you see the

1:33

fabulous charts that journalists

1:36

and analysts always point to about

1:38

the decline in dollar

1:40

reserve holdings, so that's the holdings

1:43

of U.S. dollars by global central banks.

1:46

That's a major component of the strength of

1:48

the dollar. There's also the dollar's

1:50

use in trade. We'll get to that in a moment. But

1:52

let's start with reserves as that proxy

1:55

for the strength of the dollar.

1:56

They always go back and they start at around 1990, 1991.

2:00

They say, oh my God, look

2:03

at how far the dollar has fallen. That's

2:05

misleading. Just as a starting point,

2:08

the euro was introduced in that period.

2:11

At the time of the introduction of the euro, everybody

2:14

around the world moved away from Deutschlärz

2:16

and French Franks and Italian Lira and

2:18

moved into the dollar for that interim

2:21

period when the euro was being introduced.

2:23

There was this artificial increase in

2:26

the level of dollar reserves as

2:28

the individual European currencies

2:30

were being abandoned and the euro was being introduced.

2:33

So if you start from an artificially high

2:35

starting point,

2:36

then yeah, it looks like the steep, steady

2:39

decline of the US dollar. If

2:41

you start a couple of years later, then

2:44

it looks pretty damn constant.

2:46

And in fact, if you look a decade earlier,

2:49

it also looks pretty damn constant.

2:51

So I'm not suggesting that there has not been a slight

2:54

decrease in global dollar reserves,

2:56

but in general, the dollar has been

2:58

around 60% of global reserves for

3:01

decades. It's now at around 58, 58 and

3:03

a half. I'd argue

3:06

that's pretty damn close to 60. So

3:08

we're not seeing this dramatic falloff

3:11

in dollar reserves.

3:12

Having said all of that, clearly

3:15

the weaponization of the US

3:18

dollar is something that irritates a

3:20

lot of other countries. And for good reason, the

3:23

US uses and so would say upuses

3:25

its position as the world's

3:27

dominant global reserve currency.

3:30

That means we can impose sanctions that

3:32

no other country can, because we can

3:35

say in the

3:35

extreme, if you don't

3:38

abide by what we're telling you to do or

3:40

not do, we can cut your

3:42

financial system off from the US

3:44

dollar system. And that is a

3:46

very serious sanction that nobody else

3:48

has.

3:49

So as a starting point, countries

3:51

don't like that. The US is

3:54

clearly using it in the context

3:56

of the 2014 invasion of Crimea. We

3:58

escalated sanctions.

3:59

obviously on the back of the most recent invasion

4:02

of Ukraine in the ongoing war.

4:04

Countries don't like to be told that

4:06

they can't or can do something

4:09

that the US either wants them to do or doesn't want

4:11

them to do because the US simply insists

4:13

on it. But that doesn't mean they've got

4:15

a lot of alternatives. So

4:17

is this the case, you know, we've

4:20

been hearing the stock market during the zero interest

4:22

rate period in the last decade, TINA.

4:25

There is no alternative to investing in stocks

4:27

because the bonds are returning nearly nothing. Is

4:30

that the case in the currency system

4:32

that there is no alternative to the dollar? Renimbi

4:35

is really not a convertible currency and

4:37

how much you really trust the Chinese to keep

4:39

large reserves of their currency. Euro

4:42

has a lot of issues as well. The Eurozone

4:44

is not doing great. Is that the situation?

4:47

The countries would love to move off the US dollar,

4:49

but they just can't.

4:51

Well, I think that's in short, the answer

4:53

to your question is yes.

4:55

That doesn't mean that the Chinese currency

4:57

is not

4:58

increasing in its share of

5:00

both trade and as a reserve

5:03

currency.

5:03

But in 2022, which is the last

5:05

year that we have complete data,

5:07

the renminbi overtook the Japanese yen

5:10

as the fourth most active payment currency

5:12

in the world up to 3.2 percent.

5:17

The renminbi last year as a reserve currency

5:21

reached their all-time high of 2.88 percent.

5:25

Now that's interesting as a metric because

5:27

the IMF

5:28

has an SDR. The SDR

5:30

is the IMF's,

5:32

it's not a currency, but it's a proxy

5:34

for the IMF's Reserve Currency

5:37

Basket. It has several currencies

5:39

in it. That basket forms the

5:41

components of the SDR.

5:43

The Chinese renminbi was introduced into

5:46

that Reserve Currency Basket, the SDR,

5:48

about 10 years ago.

5:50

They are at 12.28 percent of the SDR basket.

5:56

But as a reserve currency itself,

5:58

it is being held by

6:00

2.88%. So let's

6:02

just repeat that 12.28%

6:04

if

6:06

you were just being neutral on the

6:08

IMF's assessment of its reserve currency

6:10

status, but the actual users

6:13

of reserves currencies holders

6:15

have it at one fifth of that

6:18

figure that the IMF describes to

6:20

it.

6:21

And what do you make of the trade

6:23

moves?

6:24

But particularly Brazil, I think is the most prominent

6:26

that said that bilateral trade with China

6:29

will be done in their local currencies.

6:32

Is that just a smart move by them? Because

6:34

you're no longer paying currency conversion fees to

6:37

the dollar,

6:38

the imports and exports are more or less equal.

6:41

So you effectively have kind of a barter situation

6:43

where no one's going to hold large volumes

6:46

of each other's currency

6:47

for long anyway. Well, so

6:50

on a bilateral basis, it's clear the dollar

6:52

is losing some of its stature.

6:54

If you've got country A trading with country

6:56

B, rather than going through the US

6:59

dollar, some of them are now engaging in bilateral

7:01

trade and their respective currencies. That's

7:04

fine.

7:05

That's fine. But it also means that

7:07

the country that is getting more of the other

7:09

country's currency in exchange. So

7:12

let's use for example, Russia and

7:14

India.

7:15

Russia has been trading in rupees

7:17

and rubles much more than they used

7:19

to with India, which means now

7:21

Russia is the holder of billions

7:24

of Indian rupees. Well,

7:26

the rupee is not a global

7:29

reserve currency and is not a widely

7:31

accepted currency in non-Indian

7:33

specific trade. So what exactly

7:35

are the Russians supposed to do with those rupees?

7:38

If you look at Brazil, as you mentioned

7:40

before, again,

7:42

Brazil can say we want to move away from

7:44

the US dollar and at a bilateral

7:46

basis, that's fine. They can trade all

7:48

they want with other countries using

7:51

their bilateral currencies. But at a certain

7:53

point in time in the broader universe

7:55

of global trade and financial interactions,

7:58

they've got to have something that they can do.

7:59

do with those currencies

8:02

that they hold. If they hold dollars, or

8:05

to some extent euros or sterling

8:07

or yen,

8:08

they can actually use them in third party

8:10

transactions with other countries.

8:13

If they're holding Argentine

8:16

pesos, not so much. Well,

8:19

with regard

8:20

to your point about Indian rupees, the

8:23

Russians actually have said that we're going to stop

8:25

trading local currencies because we

8:27

have

8:28

too many rupees and we don't have any use

8:30

for them. We don't buy enough things from

8:33

India. Very different decision

8:35

from the one they're making with China, of course, where

8:38

they're trading a lot in renminbi, but

8:40

that's also because they have massive volume of imports

8:42

now coming from China because everyone

8:45

else is cutting them off, right?

8:47

That's right. And China's the

8:50

big elephant in the room on this, right? So

8:52

we're not really looking at Brazil and

8:54

saying that we think the Brazilian currency

8:56

is going to be a challenge to the US dollar. But

8:59

clearly China being the global

9:02

economic and political power that

9:04

it is, and it's increasing in

9:06

its global ambitions

9:09

in many ways,

9:10

one could argue that the Chinese

9:13

are the threat to watch for. The

9:15

question really then becomes, does

9:17

China really want to follow

9:19

through on

9:20

what it takes to become

9:22

a threat to the US dollar globally?

9:25

Now, you can argue politically that sounds very

9:27

enticing

9:28

and actually financially and economically it sounds enticing

9:30

as well.

9:31

But think about what that means because

9:34

if you are going to be trading or

9:36

if you're going to be a central bank holding a reserve currency,

9:39

you want to make sure that that currency that you're

9:41

holding is liquid.

9:43

For the Chinese to mount a challenge

9:45

to the US Treasury as that globally

9:48

liquid asset

9:49

that people have and know that they can liquidate

9:52

fairly easily on a moment's notice,

9:54

the Chinese would have to issue huge

9:57

amounts, trillions of dollars of

9:59

Chinese or Minbi denominated debt

10:02

allow that to trade globally.

10:05

Now, again, China and its leadership does

10:07

not like markets that are uncontrollable.

10:10

But by definition, if you're going to issue trillions

10:12

and trillions of debt around

10:14

the world, it's going to be trading outside

10:17

of your ability to manipulate that trade.

10:19

So for them to do that, they would have to become

10:21

a wildly deficit-oriented

10:24

country, which they seem

10:26

in no interest of doing. And

10:28

they would have to let the market dictate

10:31

the prices and the values, not only

10:33

of the currency, but of these individual securities.

10:36

I'm not sure that that's something that Xi

10:38

Jinping or his collective economic

10:40

or political brain trust really want

10:43

to do. It sounds great to

10:45

say we're going to have bilateral trade, and

10:47

they'd like nothing better than to diminish

10:50

the influence and the power

10:52

that the US has via

10:54

the US dollar.

10:56

But I'm still not convinced that there's any legitimate

10:58

challenge to the US dollar

11:00

that's in the foreseeable future. And

11:03

how much does it matter in terms of our influence

11:05

if the reserves, countries

11:07

reserves of dollars stay at that level near 60%,

11:11

but more bilateral trade between countries moves

11:13

off of the dollar? Is that a problem for us?

11:16

Well, I think within the margins,

11:20

it's not much of a problem.

11:22

Now problem being in quotes, the

11:24

question really becomes,

11:26

if you're weaponized, you're looking at this with the prism

11:28

of what we can do to influence

11:31

foreign policy decisions

11:33

by other countries via sanctions

11:35

and other similar tools,

11:38

then the question is,

11:39

do we ultimately have the ability to

11:42

enforce what we're imposing

11:44

via sanctions or secondary sanctions?

11:47

Secondary sanctions means it's not that we're

11:50

going to be telling you that you can't do X,

11:52

we're showing you that you can't deal

11:55

with anybody else who is doing X.

11:57

So if you're the PBOC or if

12:00

you're any other major Chinese institution

12:03

or other non-Chinese institution.

12:05

That's the big threat. The big threat

12:07

is

12:07

if the US government were to impose secondary

12:10

sanctions on a bank in your

12:12

country,

12:13

does that impair that bank

12:15

or that country's ability to operate

12:18

in a business as usual environment? What

12:20

we saw decades ago

12:22

in the Iran situation was the US

12:24

imposed sanctions on Iran.

12:27

Europe did not and the US sanctions

12:29

were fairly toothless

12:31

until we coordinated with the Europeans

12:34

to impose financial sanctions jointly

12:37

with the threat of secondary sanctions

12:39

and suddenly Iran sanctions really

12:41

took a hit

12:42

and that's what really the US continues

12:45

to maintain. So as long as we

12:47

dangle out there the

12:49

ability to impose secondary

12:51

sanctions on any country's financial system,

12:54

the dollar

12:55

as a weapon remains a pretty powerful

12:58

tool.

12:59

Presumably even if more bilateral

13:02

trade moves off of the dollar,

13:04

as long as countries like China and others continue

13:06

to trade a lot with us, that secondary

13:09

sanction mechanism is still going to be a very very

13:11

powerful weapon, right?

13:12

Well it's not only with us, it's with everybody else

13:14

that trades in US dollars as well. So

13:17

yes, clearly China US

13:19

trade in dollars is a big deal but

13:22

China trade with other countries in US

13:24

dollars or again on a secondary

13:26

sanctions basis trading with anyone

13:28

else who trades with anyone who

13:30

trades in US dollars. I mean you have secondary

13:33

sanctions are enormously powerful because

13:35

effectively it just shuts down

13:37

any entity from doing anything

13:39

around the world because the dollar even

13:41

if it's diminished in terms of trade, in

13:44

terms of reserves, it's still a very

13:46

powerful and widely accepted

13:48

currency. So if you're shut off from the dollar

13:51

you're pretty much shut off from the world.

13:53

All right, one more question about the reserve currency

13:55

because here's what I'm wondering, right? If you're

13:58

let's say South Africa, you're

13:59

unhappy about US weaponizations

14:02

of the dollar, you're trying to reduce your reserves of the

14:04

dollar, you're looking around, you're not seeing

14:06

alternatives, you don't want renminbi, you

14:09

don't want euros or as much

14:11

of them.

14:12

Why not just go with gold? So

14:15

gold is

14:17

clearly a legitimate alternative.

14:21

But let's just think about what gold really is. Gold

14:25

is big heavy bars

14:28

that are sitting somewhere in a vault.

14:31

So first of all, there's protecting them.

14:33

They don't yield anything. US Treasures yield 4%

14:35

or 5%, so you're actually getting a return.

14:38

Gold just sits there. It

14:40

can go up and go down, you can decide whether

14:42

there's an intrinsic value or not.

14:43

But it's similar. Then you've got to pay to actually

14:46

protect it. We all grew up with

14:48

cartoons watching people trying to tunnel into

14:50

Fort Knox. That's

14:52

ha ha, it's a cartoon. Yes, legitimately

14:55

you've got to protect it from somebody stealing it. But

14:57

then if you want to use it, well,

14:59

if you pick up the phone and you

15:01

say, I've got a billion dollars worth

15:04

of US Treasuries, you can

15:06

probably get rid of it pretty

15:08

quickly.

15:09

If you pick up the phone and say, I've got a billion

15:11

dollars worth

15:12

of gold bars, that's not

15:14

exactly a liquid

15:16

quasi currency reserve.

15:19

So it's hard.

15:21

It's hard to liquidate it. It's

15:23

hard to keep it. It doesn't give

15:26

you any particular value play in

15:28

terms of interest or any other income

15:30

on it. So yes, the Russians, to use

15:32

an example, the Russians have reoriented

15:35

their reserves so that they now have $140

15:37

billion of gold as their reserves.

15:41

That's up from around $40

15:43

billion before the invasion of Crimea.

15:46

So that's a pretty big chunk of Russian

15:49

reserve. How exactly are

15:51

the Russians going to actually liquidate that?

15:53

The other problem is, let's go back to what

15:55

I was talking about with secondary sanctions.

15:57

If they want to actually liquidate.

16:00

those gold bars. They've got to do

16:02

it through banks. Somebody's got

16:04

to give them something that they can trade

16:07

for whatever it is they want to use it for. And

16:09

that gets back to if the US has imposed

16:12

sanctions on banks

16:14

denying access to Russian transactions,

16:18

then the Russians effectively not only have to put those

16:20

bars on a truck somewhere,

16:22

get them out of the country and get paid for it, they have

16:24

to do that illicitly.

16:25

That makes it even harder

16:27

and more costly to do it.

16:30

So you can't do anything with it anyway. Well,

16:32

you mentioned Russia, which is the second

16:34

topic I wanted to discuss with you because since

16:37

the invasion of Ukraine, the re-invasion

16:39

really in 2022, you've had

16:41

this unprecedented step that had been taken by

16:45

G7 countries to freeze $300

16:47

billion of Russian central

16:50

bank reserves.

16:52

And now there's debates about what

16:54

should be done with that. Should we appropriate

16:56

those funds and give them to Ukraine or use

16:59

them in reconstruction for Ukraine? And

17:01

of course, this would be an unprecedented

17:04

move. It's never been done before. You've

17:06

just spoken about how there is really no alternative

17:08

to the dollar. So maybe there are less concerns about

17:11

weaponization of our financial system.

17:14

But is there a concern that countries

17:16

would no longer

17:18

store their reserves with us because

17:21

of this potential of seizures

17:23

of those assets? Where do you fall

17:26

on that particular question?

17:28

So again, there's a real question

17:30

about

17:31

if the US were to unilaterally

17:34

change the law, and I'll get to why

17:36

we need to change the law in a moment, change

17:39

the law so that we could actually seize

17:42

Russian central bank reserve assets in

17:44

this country. And there's a real

17:46

fear that other central banks,

17:49

the Chinese in particular, but others,

17:51

would say, wow, this is

17:53

no longer a safe place for

17:56

us to put our reserves. So

17:58

we're going to move into somewhere else.

17:59

Presumably, most of those would move

18:02

to the European Central Bank or other Eurodenominating

18:05

central banks

18:06

or Switzerland or other

18:08

G7 central banks. The

18:11

problem with that scenario is

18:16

if the US did that on its own, that's

18:18

a real risk. But the US has said, we're

18:21

not going to do that on our own. At least

18:23

the Senate has a bill that would suggest that we would

18:25

do it, but the administration secretary

18:28

Yellen has come out and said this only works

18:30

if you do it in close coordination with other major

18:32

central banks. Precisely because,

18:35

first of all, the US in the context of Russia,

18:38

Russia before the war

18:39

wasn't completely stupid about this. They

18:42

moved the vast majority of their reserves

18:44

out of the US. So although I don't

18:47

know if the figures have been precisely

18:49

disclosed, but the word is

18:51

that Russia has around $5, $6, $7 billion

18:54

of

18:55

central bank assets in the US out

18:57

of its reserve holdings that were estimated

19:00

to be around $600 billion at

19:02

the time the war started. So that's say,

19:04

what is that, less than 10%? Let's

19:07

call it 10%.

19:08

I'm sorry, 1%. That's

19:11

not a big deal. Most

19:14

of those assets, let's call it $600 billion, $300

19:17

billion or so are estimated to be within

19:20

Russia or a friendly partner

19:22

country. Nobody knows

19:25

exactly because they don't disclose, but $140

19:27

we assume is in gold.

19:30

So that leaves another $150 or so. We

19:33

don't know how much they've sold down, but

19:35

China certainly and others that we don't

19:37

know. But there's roughly $300

19:41

billion that are estimated to be

19:43

in G7 style

19:46

central banks of which the US

19:48

is a small portion. The vast majority

19:51

of those are held

19:52

in Belgium

19:53

because that's where Euroclear is located.

19:57

While- Explain Euroclear for a listen.

20:00

Basically, what we did, we in the G7,

20:03

at the time of the invasion, we imposed

20:05

a block,

20:07

not a seizure, but a block on

20:09

Russian Central Bank reserves. That

20:11

meant we didn't know where they were, but

20:15

we said they can't be transacted with.

20:18

So that's a pretty effective tool

20:20

because finding them is hard.

20:22

Telling everyone else you can't touch them is

20:25

a lot more effective,

20:27

at least in terms of blocking them.

20:29

Euroclear is where when a bond

20:31

matures,

20:32

those proceeds go to be

20:35

passed on to the ultimate holder

20:38

or the ultimate issuer, which would be Russia. So

20:40

if you or I held a Russian bond

20:43

and it matured, we would

20:46

turn the bond over and the

20:48

proceeds would go to Euroclear for

20:51

payment onto Russia.

20:53

And Euroclear was prohibited from passing

20:56

it on. It's an intermediate.

20:58

So all of the bonds, we didn't know where they

21:00

were, but when they matured, they

21:02

all went to Euroclear. So it's estimated to be

21:04

around 200 billion of the 300 billion

21:07

is sitting in Belgium right now.

21:09

And it could be more as more bonds mature, right?

21:12

Yeah, although I'm not sure. Reserves

21:14

are usually not held in long-term

21:17

maturities, but we don't know. But yes, it

21:19

could be even more. But let's say that

21:21

we know now where the majority

21:24

of that 300 billion is and the majority

21:26

are sitting in the EU or

21:29

countries that are G7. So

21:32

we know where they are. The question

21:34

then becomes, can you seize

21:37

them? Right? So they're blocked.

21:39

They can't be used by Russia, but can

21:41

you seize them? And seizing

21:43

them is very hard.

21:45

And it's very hard for legal reasons and

21:47

for central bank reasons. Central

21:50

bank reserves are supposed to be treated

21:52

as sovereign sacrosanct

21:55

assets. You don't want them to

21:57

be treated the same way as, for example,

22:00

Oligarch assets, right? It is estimated

22:02

that there's around $1 trillion dollars

22:05

of oligarch assets

22:06

floating around the world.

22:08

And right now we have

22:10

frozen or seized in

22:12

some cases around $58 billion. So

22:15

a small fraction of the $1 trillion. But

22:18

those are privately held. I'll get to that

22:20

in a minute. But the bigger chunk is

22:23

the $300 that we have access to of the Russian Central

22:25

Bank reserves.

22:26

And if you're going to seize them, then

22:29

you're going to be effectively violating a basic

22:32

premise

22:33

of international law and international financial

22:35

practice, which is the Central Bank reserves

22:38

are treated differently from everything else.

22:40

And that's because- We've never done this

22:42

even with Iran or any other countries, right? So

22:44

in the case of Iraq, we

22:47

did in fact do something

22:49

like this.

22:51

In the case of Iraq, you had a UN Security

22:53

Council resolution

22:55

and you had the

22:57

authorization of use of military force

22:59

by Congress effectively declaring

23:02

war against Iraq.

23:05

That was in 91, not in 2003. That's

23:08

right. That's right. The problem is

23:11

we do not have a state of war between

23:13

the US and Russia right now. So

23:16

either Congress would have to authorize

23:18

the use of military force or declare war against

23:20

Russia, which politically, militarily,

23:24

and every other strategically, nobody

23:27

wants to actually have the US Congress declare war

23:29

on Russia right now. Probably not a good thing.

23:32

Therefore you'd either have to change the law

23:34

so that you have a different catalyst,

23:36

a different threshold that has to be reached before

23:39

you can actually seize those assets. Or

23:42

you'd have to declare war, and

23:45

we don't want to do either of those. If we

23:47

do decide to change

23:49

the threshold,

23:51

then

23:52

this becomes a question of whether we do it on a row.

23:54

And as I said before, if you have 7 billion

23:57

out of 300 billion or a total

23:59

of...

23:59

600 billion. That's really not going

24:02

to be worth the trouble.

24:05

But then that means you have to have Europe go

24:07

along with us.

24:09

And Europe, where the vast majority of

24:11

these assets are based,

24:12

has so far been very reluctant to do that.

24:15

Not for bad reasons. I'm not going to

24:17

chastise the Europeans here. Because

24:19

in fact,

24:20

there's a big Pandora's box that

24:22

you open

24:23

in Europe if you change the threshold

24:26

for where one country's aggression against

24:28

another allows

24:29

that victim of

24:31

the aggression country to seek compensation

24:34

through seizing another country's sovereign assets.

24:37

Because if you were to give an example,

24:40

the Poles, looking back on

24:42

World War Two transgressions by

24:44

the Nazis, you could make a case

24:47

that the Germans would be subjecting themselves

24:49

to claims by the Poles.

24:51

No one wants to reopen that, least of all

24:53

the Germans. But you've also got a lot of the

24:55

imperial history of empires

24:58

emanating out of colonial

25:00

activities of other European powers

25:02

around the world, who are also a little bit sensitive

25:05

to how you change the treatment

25:07

of what they did in the past and what

25:09

that would subject them to in the current day

25:11

and age. So there's a lot

25:14

of history and political resistance

25:16

as well as legal. But it could also make these

25:19

countries parties to other conflicts. If there is

25:21

a conflict in Africa, for

25:23

example, one party may make a claim against

25:26

another and go to the central banks and demand

25:28

payment, right? You're going to be involved in all these

25:30

disputes and trying to figure out which ones you say yes

25:32

to and which ones you don't.

25:34

Absolutely. So the deaf and like everything

25:36

else, when

25:37

you're dealing with issues like this, the

25:40

devil's in the detail. How do you define

25:42

a threshold of aggression

25:44

that reaches the level of

25:47

seizing a central bank asset is

25:50

hard to define. I would argue

25:53

Russian behavior in Ukraine has exceeded

25:56

any definitional line.

25:57

No matter where you set the red line, the

25:59

acts that we are aware of alleged

26:02

but pretty clear that they took place,

26:05

reached the level of repeated war

26:07

crimes that are so egregious

26:10

that I would argue the precedent-setting value

26:12

of this is to say, yes, you

26:15

can go back to World War

26:17

II and before and after, but

26:19

this is a unique set of barbaric

26:23

crimes that would warrant a different

26:25

treatment.

26:26

But defining that in law and

26:28

then getting 27 member states of the

26:31

EU to approve it,

26:32

that's a heavy lift. And by the way, there's Switzerland

26:35

as well, which is not a member of the EU but

26:37

obviously has an important banking system.

26:40

So

26:40

it's very hard to get there. So I

26:42

just want to clarify. So it's not enough to

26:44

just get EU and US as hard as it might

26:47

be. You also have to get Switzerland.

26:49

Well you would want

26:51

to get Switzerland. I think if you had

26:53

the 27 members of the EU, the UK,

26:56

the US, and presumably Japan

26:58

and maybe Canada

26:59

all agreeing and Switzerland

27:01

was the outlier, I think

27:04

Switzerland would be not only under an enormous

27:06

amount of geopolitical pressure

27:08

but financial pressure as well. Switzerland's

27:10

a fairly small country. If you're suddenly going

27:12

to make the Swiss franc the dominant

27:14

global reserve currency because it's

27:16

the only one that's not subject to seizure

27:19

if the Chinese invade Taiwan or other

27:21

countries do things that the global community decides

27:24

is so terrible that we're going to actually

27:26

seize their reserves. That's not good for

27:28

the Swiss economy, the Swiss financial system.

27:31

I mean that sets off a

27:33

lot of things. You might think, Jean, that sounds like

27:36

a terrific thing for the Swiss franc. But

27:38

in fact, the Swiss franc valued as the

27:40

most dominant global reserve currency, something

27:43

that would be counterproductive to the Swiss to

27:45

say the least.

27:46

Let me go back and just point

27:48

out the other issue here, which

27:52

I made reference to earlier,

27:53

is the oligarch

27:56

assets. I just want to draw a distinction.

28:00

oligarch assets are easier

28:02

to actually seize

28:04

because they're not subject to that same level of

28:06

sovereign immunity,

28:08

but they are subject

28:10

to individual property

28:13

rights. So while we may

28:15

say it is an obvious bad

28:18

thing that certain people made

28:21

billions on the back of Putin's

28:23

regime in Russia, and they

28:25

were complicit in the system for

28:27

decades, that's not the threshold.

28:30

The threshold has to be that their

28:33

assets were part of

28:35

a chain of evidence that can go back

28:38

to a

28:39

crime,

28:40

a specific crime, whether it's money laundering

28:43

or sanctions breaches or something

28:45

directly related to the commission of

28:47

the crimes in the war.

28:49

That's very hard to prove.

28:51

And if the US

28:53

government or the EU or other governments were

28:55

to seize those

28:56

without having a pretty ironclad link

29:00

between the acts that are underlying

29:02

the criminal predicate

29:04

and the seizure, then those

29:07

individual rich people whose assets are being

29:09

seized would go to court, they might

29:11

win, and if they win, it's not only

29:13

bad PR, but it probably incurs

29:16

a lot of costs to the government as well. So

29:18

everybody's pretty sensitive about that before

29:21

they actually go down that route.

29:22

And it's not enough to say, well, this person

29:25

came out on television and publicly

29:27

supported the war, right? The rhetorical

29:29

support may not necessarily be enough.

29:32

Absolutely not. I mean, we've got people in this

29:34

country on,

29:36

I mean, you've got people on major

29:38

networks, cable networks, who have come

29:40

out and supported the war and

29:42

have taken Putin's side in this. That

29:44

doesn't mean the US government could go in and

29:46

confiscate their assets. I'm not drawing

29:48

a moral link between the two, though

29:50

they're both distasteful.

29:52

It's not a question of just being morally outraged.

29:54

You've got to actually comply with the legal

29:57

process before you actually seize

29:59

property

29:59

rights.

30:00

So it sounds like this is going to be very

30:02

difficult, but where do you stand on this personally, Doug?

30:05

Do you think this is something that the US should pursue with allies

30:08

and try to figure this out?

30:09

Well, I do. I do. I

30:12

started by being very hesitant because

30:14

I thought that the risks

30:17

to undermining the sovereign

30:19

sacrosanct role

30:20

of central bank reserves were

30:23

pretty dire to the US,

30:25

to the dollar, to the broad-based

30:28

international financial system

30:30

that sort of underpins a lot of

30:33

the way we transact business

30:35

around the world. I've now evolved my

30:37

thinking

30:38

largely because I think that

30:40

the level of egregious behavior

30:42

on the part of the Russian government means

30:45

as setting a precedent,

30:47

it's a pretty high or low

30:49

bar how you want to define it. Maybe if you

30:51

reach the same level of behavior as Russia,

30:54

then yeah, I guess you should realize you're

30:56

probably going to be subjecting your sovereign assets

30:58

to some form of retribution.

31:00

There's also, we talked about there is

31:02

no alternative. There's a lot of there is

31:04

no alternative out there in these days. When

31:07

you look at the amount of damage and destruction

31:09

and the prospective cost

31:11

of reconstruction of Ukraine after

31:13

this conflict ends,

31:15

it's hard to see where the funds are going to come

31:17

from.

31:18

So if you've got this pool of $300 billion

31:21

of Russian central bank assets

31:23

that is sitting there,

31:25

it becomes politically very

31:27

enticing

31:28

for a politician to say, I

31:31

understand all of the technical reasons why

31:33

I shouldn't touch this,

31:34

but for goodness sake, asking me to raise taxes

31:37

on my population

31:38

to help support Ukraine reconstruction

31:41

while remaining, you know, Lily White

31:43

in terms of not touching the Russian central bank

31:45

reserves

31:46

might be a political bridge too far. Now,

31:48

there is a midway point here and it's something

31:50

being discussed by the commission

31:52

right now. And I think the US government

31:54

is tacitly supporting this, which

31:56

is to use the income

31:58

of that $300 billion that has

32:00

been frozen and

32:03

use that to provide support to Ukraine

32:05

without touching the actual principle.

32:07

So if you assume 300 billion yields

32:10

you 5% just to use a round number,

32:12

that's $15 billion or 15 billion

32:15

euros a year that

32:17

could be funneled to Ukraine.

32:19

That's a very appealing prospect.

32:22

It's clever. Unfortunately, the ECB

32:25

came out last week and said they

32:27

don't like it very much.

32:29

Only on the basis of the same level

32:31

of we don't want to set a precedent and undermine

32:34

confidence in the euro as an argument

32:36

that I made before.

32:38

But I think over time countries might

32:40

be more willing to do that

32:42

than they would to actually seize the actual

32:44

assets for themselves. And what's an interesting

32:47

point to note is the entire Ukrainian

32:49

economy

32:51

can't absorb more than,

32:53

let's call it 15 to 20 billion euros

32:56

or dollars a year anyway.

32:58

Why is that?

32:59

Well just because it's an economy that

33:01

was around $160 to $170 billion before the war,

33:06

if you're suddenly going to say we're going to take

33:08

the entire size of Ukraine's economy

33:11

and we're going to throw double

33:12

the amount of GDP it generated

33:15

in a pre-war context

33:16

into the country,

33:18

there's just no ability

33:20

to absorb that kind of inflow

33:22

of capital.

33:23

So there's got to be a time

33:25

over which those

33:27

reconstruction costs are actually spread

33:30

out. So if you were to deal with $15 billion

33:32

a year for X years,

33:35

that might actually make

33:38

a dent in the Ukraine reconstruction.

33:41

We all hear the numbers, $300, $400, $600 billion.

33:45

That's not meant to say that the war ends

33:47

on a Tuesday or a Wednesday.

33:49

There have the ability to spend $600 billion.

33:52

There is a time period over which

33:54

that needs to be deployed

33:56

and for a lot of reasons maybe 15 or 20

33:58

is the right number on an average.

33:59

annual basis, any? All

34:02

right, so you talked about

34:03

essentially three sources of funding that could

34:05

be seized, the central bank

34:07

reserves themselves that have been frozen now,

34:10

the interest on those central

34:12

bank reserves as a really interesting

34:14

solution, and then the oligarch money. What

34:17

about the fourth one, which is the

34:19

Russian sovereign wealth fund, which is about $150

34:21

billion. Not quite

34:24

sure where all of that is invested, presumably

34:26

some of that is in Russia, but to the extent

34:28

that they have investments

34:31

overseas and in G7 countries, could that

34:33

be gone after?

34:37

If they had assets overseas, the

34:39

answer is yes.

34:40

I don't think they have

34:43

very many assets overseas. The

34:45

estimate is

34:46

that the central bank of Russia

34:49

and the Russian national wealth fund

34:51

have a significant exposure in

34:53

Chinese renminbi,

34:55

but I'm not aware of any disclosure

34:57

of any material sovereign wealth fund

35:00

assets

35:01

that are held in any

35:02

US G7 or friendly

35:05

allied countries that could be seized.

35:08

I think you would probably end up

35:10

with that being closer to the oligarch

35:13

assets rather than the

35:15

central bank reserves simply because central

35:18

bank reserves are treated so differently,

35:20

but I think the Russians were probably pretty clear

35:23

that they wanted to get their assets out of other

35:25

countries. And again, I should argue, I should

35:28

make a point. We're talking about

35:30

liquid assets. So the Russian national

35:32

wealth fund, sovereign wealth fund might have illiquid

35:35

assets. They might own

35:37

real estate in the Middle

35:39

East,

35:40

but the ability to actually seize, liquidate,

35:43

and monetize that

35:44

is not something that

35:47

could be readily used for the purposes

35:49

of Ukraine reconstruction.

35:51

All right, last question, Doug, and

35:54

probably the hardest one, which is

35:56

we've seen what has happened to Russia

35:58

in the course of this war.

35:59

China

36:01

undoubtedly is looking at this, trying

36:03

to learn lessons in case she decides

36:05

to go after Taiwan, what kind of economic

36:08

repercussions they would suffer.

36:10

They obviously are

36:13

tightly intertwined with our economic system,

36:15

with our financial system, as are we.

36:18

What do you think that the

36:20

Chinese could be doing

36:22

to try to limit their risk?

36:25

Is it even possible from us

36:27

being able to take similar actions against

36:29

China as we are right

36:31

now contemplating or doing against Russia?

36:34

Well,

36:34

we've seen the Chinese decrease the

36:37

amount of U.S. dollar reserves,

36:39

but it's not the way it was with Russia

36:42

before the war, before this phase of the

36:44

war, where they really moved

36:46

almost everything. As I say, there was five,

36:48

six, seven billion left in the U.S.

36:50

The Chinese still have hundreds of billions of dollars

36:53

in U.S. treasuries, and the renminbi is

36:55

de facto linked to the U.S.

36:57

dollar. It's not

36:59

a direct link, but for

37:01

all of the trade-weighted basket that they

37:03

talk about, how they value the renminbi,

37:06

they really look to the U.S. dollar

37:08

as a link to how they allow

37:10

the renminbi to trade in terms of valuation

37:13

around the world. So the Chinese are clearly

37:15

trying to reduce their exposure to the dollar.

37:18

And where are

37:19

they reducing to if they're

37:21

selling the dollar, what are they buying?

37:23

I think it's widely diversified.

37:26

So again, to some degree,

37:28

because they are seeking to extend

37:31

their own strategic influence around

37:33

the world,

37:34

they are deploying their assets

37:37

globally,

37:38

but not necessarily depositing

37:40

them in various central banks and

37:42

holding them as central bank reserves. There

37:45

was a period in the past where the

37:47

Chinese central bank reserves were

37:49

almost, or they may have even exceeded four trillion

37:52

dollars. You're now down around three-something

37:55

trillion.

37:55

So that's not as a direct result

37:58

of this rule.

37:59

But it is a result of China's

38:02

different role in the world, how it's

38:04

using its sovereign wealth,

38:07

whether it is through strategic

38:09

deployment, the Belt and Road, other

38:11

things. They have a lot of

38:13

far flung exposures. So it's

38:16

not just the way a central banker would think

38:18

about it. I think you've got to think about it as a more multifaceted

38:21

use of Chinese wealth. Well,

38:24

Duck, this was absolutely fascinating.

38:26

I really appreciate you coming in and

38:28

explaining this really complicated

38:31

topic to all of us. Thanks again. My

38:34

pleasure.