Atlantic Council Economic Statecraft Initiative Director Julia Friedlander joins Yahoo Finance Live to discuss the U.S. and Western allies blocking select Russian banks from the SWIFT system, Russia doubling its interest rates, and the outlook for Russia's oil and gas revenue.
Video Transcript
AKIKO FUJITA: Your team over at the Geoeconomics Center put out a pretty interesting graphic here about where the Central Bank's reserves are. And I wonder, when you think about those sanctions that Brian just laid out against the Central Bank of Russia, how significant are those steps when you consider that roughly 20% of their foreign reserves are still held in China, which have not necessarily joined in on these sanctions?
JULIA FRIEDLANDER: Thank you, Akiko. And I think I just want to pick up on something Brian just said, that this is a geopolitical crisis that has become a financial crisis, not necessarily a broad spread one, but certainly in Russia. This is an unprecedented measure for the US and its closest allies to take.
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I was thinking about the history of sanctions on Iran and Venezuela and other so-called maximum pressure campaigns. And this is unprecedented in scope. And so I think what you're seeing with the 20% interest rates over the weekend was an attempt to prop up the ruble. But again, if your foreign exchange reserves are frozen abroad, who's going to engage in-- who's going to engage in those purchases?
So I mean, yes, we put out a graphic this weekend showing that the US only holds about 8.5% of those reserves. The Russians, of course, have been trying to de-dollarize since 2014. But that combined with the impact of freezing those assets in the European Union, in the UK, in Japan, are going to have a massive impact on the, quote unquote, "fortress Russia," which is what it has attempted to use to shield the economy from traditional sanctions, such as blockings on the banks, as we saw last week.
BRIAN CHEUNG: Hey, Julia, it's Brian Cheung here. I mean, this is an interesting point that you bring up, because really, we're at this apex point where it seems like the sanctions are substantial enough that people are talking about a possible collapse of the Russian banking system. I mean, that makes sense, given the fact that it's been pretty hard on the likes of VEB, VTB, Spurs bank in Russia.
Do you see any possibility of a spillover here? This isn't necessarily an unintended consequence. We know that's the point of the sanctions here. But some sort of financial crisis globally that could be birthed out of the Russian economy tanking.
JULIA FRIEDLANDER: Well, thank you. I mean, of course it's dangerous to speculate about stuff like this. But Russia is a G20 economy. It has swapped lines with the Fed. And so this is an unprecedented move to essentially vaporize the foreign reserve holdings of a G20 economy overnight.
I do think that there are going to be potential spillovers in global foreign exchanges, as you mentioned, even potentially if Russia faces a sort of default scenario of bottoming out of the economy in the coming days or weeks ahead, that that is, of course, going to affect global markets. This is an unprecedented measure. I keep saying unprecedented because I can't think of a better term.
We don't really know what the impacts are going to be. We don't know the full dispensation of the foreign exchange reserves. We don't exactly know how Russia is going to react. And so we're gambling against the clock. This is setting up a financial clock against a military clock.
Think about this. We're trying to essentially remove the ability to finance a war before the war can be completed. And I can't think of any time if this sort of-- the financial leverage of sanctions have been playing out in such real time, again, over days.
BRIAN CHEUNG: Yeah, can you talk about the unprecedented nature of all this? Because I think people who are watching this are not necessarily aware of how remarkable it is for the United States to sanction the Central Bank in another country, especially one that's in the G20, and not have them allow themselves to change their reserves to defend their own currency.
I mean, from a geopolitical standpoint, I mean, what does this say about the types of tools that we have in the modern era when we see conflicts like this?
JULIA FRIEDLANDER: Well, it's not the first time that we have used similar tools like this. It's just the first time we've used it on a country like Russia. Think about Venezuela, think about Iran. We have taken measures against the Central Banks. But again, these are on smaller economies, not globally integrated.
And so what we're seeing here is a measure against one of the major global players in the economy. So I don't really-- again, I don't really know how this is going to play out. But it really does show that coordination between the US and its closest allies can really take a hatchet to anything they want to.
I don't know how it's going to affect the actual situation on the ground. And I think what we're seeing here is that we're pulling all of the stops and the gamble to stop a war. And if it doesn't stop the war, it's going to raise long-term questions about, what do sanctions do anyway?
AKIKO FUJITA: Julia, there's one additional lever here in terms of economic sanctions the US and its allies haven't necessarily pulled, and that is going directly after oil and gas exports. And the US has made it pretty clear, at least President Biden has said that he doesn't necessarily want to take action without thinking about the impact on European allies.
If, in fact, it comes to that, how crippling would it be to some of the major economies over in Europe like Germany?
JULIA FRIEDLANDER: I think we are trying to figure that out right now. Like, these are calculations about strategic reserves, about what kind of LNG exports we could mobilize, immediately either from the US or from Qatar or from other global providers. We are reaching the end of the winter in Europe. And most calculus says that the, sort of, long heating period in Europe, there are reserves in Europe to get us through that.
But of course, that's not-- heating personal homes is not the only thing that we need energy for. Major industrial producers need cheap gas, need cheap energy to be able to keep prices down. So again, there is a long-term impact here if we do touch, I think, what is the third rail in this crisis, which is energy.
But it's a third rail not only for the United States because-- and its allies because we need the oil, we need the gas. Again, let's not forget that the US does import a large chunk of crude from Russia after the Venezuela crisis. But also a question of, this is Russia's last chance to reap something to prop up their economy. Again, those oil and gas revenues are going to be crucial to really preventing a bottoming out.
BRIAN CHEUNG: And Julia, when you talk about the oil and gas, I mean, that's interesting as we kind of wait to see the fine print on exactly how this SWIFT ban is going to be done. Because it seems like there could be a carve out to allow the flow of those transactions to still happen, even if Russia's banks are unplugged, essentially, from that messaging network.
How important is that SWIFT unplugging? Because there's been some chatter about whether or not there could be some sort of dedollarization implications there, as maybe Russia, in the absence of being able to turn to US dollar denominated payments, turns to, you know, the digital Yuan or maybe cryptocurrencies. I mean, is that a little bit too much of a stretch? What do you see as the ripple effects of that?
JULIA FRIEDLANDER: I think it might be a stretch in the time frame of this crisis. Of course, these are long-term considerations we have about alternative messaging systems, alternative payment systems, the digital Yuan. But we are still operating in the lifetime of this crisis in an overwhelmingly dollarized economy.
So I think-- we have, I think, overestimated the effect of SWIFT itself. Now, we did see the US and its close partners de-SWIFT select Russian banks. And these are the ones that were already sanctioned. That was largely in response to Ukrainian requests. There was political pressure to do this.
So I think we sort of-- because it's SWIFT as a messaging system, it doesn't actually block any transactions. We are looking at higher operating costs, higher transaction costs, things taking a long time for Russia and for these-- for payments to be completed if there's a SWIFT cutoff. But again, you can always create special channels for these things to be completed.
So we blew SWIFT beyond what it actually means. Now, of course, because we did that, it has a big symbolic effect. And I think that some of our European partners were worried that Russia might see a delay in those payments as a result of a SWIFT cut off as the preempting that we had initially touched that third rail and energy markets.
And as a result of that, they would consider turning off the taps. So little-- was a little bit of a goose chase over something that ultimately, just as a matter of purpose, as a matter of what SWIFT is, doesn't really matter all that much.
AKIKO FUJITA: Julia, it's good to get your perspective today. Julia Friedlander, Atlantic Council Economic Statecraft Initiative Director. And our thanks, as always, to Brian Cheung.