- Senior Putin aide plots out the next phase of Russia’s “de-dollarization” plans
- Why Russia has nothing to lose by defaulting (again)
- Dollar rallies on ECB’s “more QE but not quite yet” message
- Prayers for rising copper prices
- When editors collide… “Suck it up and pull on your big-people panties,” says a boomer…a special notice for Currency Wars Alert subscribers… and more!
The last time Russia defaulted on its debt, the financial system barely escaped full-on meltdown. Next time, we might not be as lucky. And next time is in the works now.
Sorry to grab you by the lapels at the start of today’s episode. Usually, we’re not so in-your-face. But we’re hard-pressed to think of another way to engage your attention. We’re talking about a phenomenon you likely haven’t heard about… and won’t read about in the elite media until it’s too late.
The possibility of a Russian default is the newest development in a phenomenon we’ve been tracking since early last year.
After the United States-engineered regime change in Ukraine, Russia annexed the territory of Crimea — just to make sure the expanding NATO alliance didn’t get any ideas about building a base on the Black Sea in Russia’s backyard. Western leaders began to contemplate sanctions.
On March 4, 2014, Russian leaders responded by suggesting they’d figure out a way to avoid using the dollar for international transactions. We documented it that day in The 5.
“We would find a way not just to reduce our dependency on the United States to zero,” said Kremlin economic aide Sergei Glazyev, “but to emerge from those sanctions with great benefits for ourselves.
“An attempt to announce sanctions would end in a crash for the financial system of the United States, which would cause the end of the domination of the United States in the global financial system.”
Bravado? Sure. But consider what’s happened in the year and a half since. (We’ve documented all of it, but a refresher never hurts.)
Only weeks after Glazyev’s remarks, Russia’s First Deputy Prime Minister Igor Shuvalov convened a meeting of Russian and Chinese officials. The Russian media called it a “de-dollarization” summit.
Russia also stepped up its gold purchases in the following six months — buying more gold than in the previous two years. Russia has since continued adding to its stash — so much that it’s now larger than Switzerland’s.
Now Glazyev has put the next steps toward “de-dollarization” into motion. It is nothing short of a Russian default.
Glazyev recently issued an economic blueprint for Russia’s Security Council. You won’t find much coverage outside the Russian press. The globe-trotting journalist Pepe Escobar has written two recent English-language stories for the website of the Russian state TV outlet RT.
De-dollarization mastermind Sergei Glazyev
[Wikimedia Commons photo by A. Savin]
As long as the Western sanctions continue, Glazyev proposed requiring Russian companies to default on any debt owed to Western lenders. Also part of his proposal…
- a ban on Russian companies using foreign currency
- taxing the conversion of rubles to foreign currency
- banning foreign loans to Russian firms if denominated in dollars or euros.
“The amount of foreign currency assets of the Russian Federation located in the jurisdiction of NATO countries accounts to more than $1.2 trillion,” writes Escobar, “including short-term debt of about $800 billion. Their freeze may be partially offset by retaliation against NATO assets in Russia, which amounts to $1.1 trillion, including over $400 billion long-term. So this threat would be neutralized if Russian monetary authorities organized a timely withdrawal of Russian short-term assets in the U.S. and the EU.
“The fact is Russia has lost access to Western credit and cannot roll over its debt with the creditors. So Russia will have to pay the principal and the interest as it comes due. That is a trillion dollars plus interest. Russia also cannot import anything from the West without paying double for it. So arguably, the country may be now in the very position it will be if Moscow opts for default. Thus, Russia would have nothing to lose by a default — as the damage is already done.”
What would the next Russian default look like? On the theory that history doesn’t repeat but often rhymes, let’s go back to 1998.
Back then, Russia had no choice but to default. It was broke. Russia’s post-Soviet government had been stripped of its assets — sold at fire-sale prices to seedy Russian oligarchs, aided and abetted by Western “advisers” from the likes of the International Monetary Fund and Harvard Business School.
The default took down the hedge fund Long Term Capital Management — where our own Jim Rickards was lead counsel.
“We were losing hundreds of millions of dollars per day,” he recalls. Total losses over the two-month span were almost $4 billion. But that wasn’t the most dangerous part.
“Our losses were trivial compared with to the $1 trillion of derivatives trades we had on our books with the biggest Wall Street banks. If LTCM failed, those trillion dollars of trades would not have paid off and the Wall Street banks would have fallen like dominoes. Global markets would have completely collapsed.”
Jim negotiated a bailout with the Federal Reserve and the 14 biggest U.S. banks: “We got $4 billion of new capital from Wall Street, the Federal Reserve cut interest rates and the situation stabilized.”
No one can predict exactly how the financial dominoes might fall during another Russian default. But the more important question is this: How likely is it the globe’s financial wizards can avert disaster again?
Don’t get us wrong: We’re not saying the Russians are going to default tomorrow.
Fact is Glazyev’s proposal isn’t the only one circulating in the Kremlin. His proposal competes with that of the finance minister, who still favors foreign investment. Hard telling who might prevail: Contrary to the Western media myth of Putin as an all-powerful dictator, he stays on top only by deftly managing competing and conniving factions.
Too, Jim Rickards urged us last year to consider a rather different financial warfare scenario. “Sure, the United States could carry out a cyberattack that shuts down the Moscow stock exchange,” he told me last year. “But that’s a tiny percentage of global capital flows. Attack the New York Stock Exchange or the Nasdaq and the impact would be far more devastating. Advantage Russia.”
So it’s too soon to “do something” about the potential of another Russian default. But it’s important enough that we thought we should bring it to your attention today. We’ll stay abreast of the situation in the weeks and months ahead and let you know of any new developments.
Stocks are rallying hard this morning, with most of the major U.S. indexes up 1.5% as we write.
For once, McDonald’s delivered an earnings “beat” before the open — which is another way of saying MCD finally lowered expectations enough that the numbers could surprise to the upside. That’s helping propel the Dow 280 points at last check, to 17,449.
The stock rally isn’t doing much damage to either bonds or gold: A 10-year Treasury yield is 2.04%, and gold continues to cling to support at $1,166.
Gold’s resilience looks encouraging in light of a monster dollar rally, courtesy of the European Central Bank.
The ECB held one of its periodic policy meetings today. It didn’t make any changes, but ECB chief Mario Draghi said the eurozone’s quantitative-easing program will need to be “re-examined in December.” That is, it might be amped up from present levels. Seems the ECB is having no more luck creating its desired level of inflation than the Federal Reserve.
As we write, the euro has weakened nearly 2% against the dollar, slipping to $1.113.
Can divine intervention lift copper prices from their present $2.37 a pound? The president of Zambia hopes so.
“I personally believe that since we humbled ourselves and cried out to God, the Lord has heard our cry,” President Edgar Lungu said Sunday during a national day of prayer. “I appeal to all of you to do your best and leave the rest to God.”
Talk about pain in the emerging markets: Zambia is Africa’s No. 2 copper producer. Its currency, the kwacha, has crashed 50% against the dollar this year. “Prices of essential commodities have risen because of the depreciation of the kwacha. We need to seek God’s hand,” said a priest during Sunday Mass at Good Shepherd Kabwata parish in the capital, Lusaka.
The president was serious about this national day of prayer: All Sunday soccer matches were postponed.
“Don’t know if anyone else has pointed this out, but two of your gurus are at loggerheads,” a reader writes.
“Zach Scheidt is high on Delta Air Lines while Jim Rickards is expecting Delta’s stock price to take a rather large tumble.
“I find the discussions on both sides interesting and believable, although, obviously, only one of them will be proven correct. The conflict, however, creates confusion and makes following the recommendations of either of them difficult until the future story plays out.”
The 5: Unlike some publishers, we don’t enforce any orthodoxy around here.
Soon as we start doing that, our editors will censor themselves. And that’s the last thing we want. We want them to share their unvarnished opinions, based on their soundest analysis, full-throated.
If that means they come into conflict once in a while, we’re willing to live with that. We have confidence in our readers to pull apart competing opinions from the same respected source and come to their own informed conclusion.
More about this in an episode of The 5 from late last year…
“My husband and I are/were boomers,” a reader writes as our generational wars roll on. “Our three children are millennials. All graduated from college debt free due to us working multiple jobs to be sure they entered the workplace debt free.
“We would have retired with a much healthier retirement except for educating our children. My husband has died, but no one needs to take care of me. I worked hard and did without for many years to not be a burden on anyone. All of my children make more than we ever made together at our highest salaries.
“I don’t fall for the argument that college costs more now for my grandchildren. Suck it up and pull on your big-people panties. The economy has changed. Everyone can complain about the costs of everything in ‘their’ time or complain about Social Security not being there for them. Work hard and save. Don’t count on anyone but yourself for your future and you won’t be disappointed with anyone else.”
The 5: We’re all for self-reliance, but c’mon. The college education that cost $10,000 in 1986 cost $59,200 by 2012 — outpacing inflation by a factor of 2.5. That’s even worse than health care.
Those extra jobs you took on to put your kids through school? The money you earned went straight to those assistant provosts, vice chancellors and associate directors whose jobs didn’t exist 30 years ago. To say nothing of deluxe dorm suite accommodations far removed from the linoleum floors, cinderblock walls and shared shower stalls of days gone by.
“Being a late bloomer and baby boomer, I was rather ticked off at the millennial’s comment that all this debt was boomer gen’s fault.
“This is only partly true seeing how we boomers weren’t even around during FDR’s reign of terror and the start of Socialist Security. And during LBJ’s butthead moves into the Greater Society, many boomers weren’t even old enough to vote. Wherefore maybe the ‘Greatest Generation’ wasn’t so great after all? Millennials are strong on mouth but weak on history!”
The 5: True, it was the GI generation president Reagan who enabled the “deficits don’t matter” culture and gave us the first $1 trillion deficit.
But really… What happened once the boomers were in charge? The national debt under Clinton grew from $4.2 trillion to $5.7 trillion… under Bush the Younger from $5.7 trillion to $10.6 trillion… and under Obama from $10.6 trillion to $18.2 trillion and counting.
“Boomers probably won’t have to worry about being systematically put to death as ever angrier millennials gradually assume the reins of power,” writes a reader reacting to the death-panel tangent yesterday.
“When it finally sinks in how badly we boomers have screwed up the world and raised our children, we will most likely just kill ourselves!”
“Hmmm,” muses our final correspondent, “sounds like with the depletion of resources and possibly destroying everything with a few ill-timed wars to correct our out-of-control spending and debt (war, that always works per our politicians) we could be facing a Logan’s Run situation and be facing the Grim Reaper via a floating episode toward Carousel.
“That’ll keep us boomers off the Social Security/Medicare dole! But it could be worse and we could at some point all be eating Soylent Green. Mmm!”
“Sorry, millennials, you’ll have to ‘Google’ all of this. LOL!!!
“Oh, wait, you millennials already have your bleak look of the future with that arrow flinging Mockingjay…”
The 5: Heh…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Special to Currency Wars Alert subscribers: Please keep an eye on your inbox at 4:00 p.m. EDT today. Jim Rickards will have a special message. The subject line will be, “My #1 Private Deal Recommendation.”
“I’ve never made an investment recommendation like it in any of my newsletters,” Jim says. “And I’m only opening up the chance to learn the specifics of this deal on a first come, first served basis.”
Again, the message should arrive in your inbox at 4:00 p.m. EDT with the subject line, “My #1 Private Deal Recommendation.”
