Aurelia Butler

At the end of January, Russia held foreign currency reserves worth $469bn. This hoard was born of the prudence taught by its 1998 default and, hoped Vladimir Putin, also a guarantee of its financial independence. But, as his “special military operation” in Ukraine began, he learnt that more than half of his reserves were frozen. His enemies’ currencies ceased to be usable money. This action is not only significant for Russia. A targeted demonetisation of the world’s most globalised currencies has big implications.Money is a public good. A global money — one that people rely upon in their cross-border transactions and investment decisions — is a global public good. But the providers of that public good are national governments. Even under the old gold exchange standard, that was the case. In our era of fiat (government-made) currency, since 1971 that has been even more obviously the case. In the third quarter of 2021, 59 per cent of global foreign currency reserves were denominated in dollars, another 20 per cent in euros, 6 per cent in yen and 5 per cent in sterling. China’s renminbi still made up less than 3 per cent of global reserves. Today, global monies are issued by the US and its allies, including small ones. (See charts.)This is not the result of a plot. Useful monies are those of open economies with liquid financial markets, monetary stability and the rule of law. Yet the weaponisation of those currencies and of the financial systems that handle them undermines those properties for any holder who fears being targeted. Sanctions on Russia’s central bank are a shock. Who, governments ask, is next? What does it mean for our sovereignty?One can object to the west’s actions on narrowly economic grounds: the weaponisation of currencies will fragment the world economy and make it less efficient. That, one might respond, is true, but ever more irrelevant in a world of severe international tensions. Yes, it is another force for deglobalisation, but many will ask “so what?”. A more worrying objection for western policymakers is that using these weapons might damage them. Will the rest of the world not rush to find ways of transacting and storing value that circumvent the currencies and financial markets of the US and its allies? Is that not what China is trying to do right now?

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It is. In principle, one could imagine four replacements for today’s globalised national currencies: private currencies (such as bitcoin); commodity money (such as gold); a global fiat currency (such as the IMF’s special drawing rights); or another national currency, most obviously China’s. The first is inconceivable: the market value of all cryptocurrencies is currently $2tn, a mere 16 per cent of world foreign exchange reserves, while transacting in cryptocurrencies directly is impossibly cumbersome. Gold can be a reserve asset, but is hopeless in making transactions. There is also no chance of agreeing on a global currency of sufficient weight even to replace reserves, let alone be a global transactions vehicle.This leaves another national currency. An excellent recent pamphlet by Harvard’s Graham Allison and colleagues on The Great Economic Rivalry concludes that China is already a formidable peer competitor of the US. History suggests that the currency of an economy of its size, sophistication and integration would become a global money.So far, however, this has not happened. That is because China’s financial system is relatively undeveloped, its currency is not fully convertible and the country lacks a true rule of law. China is very far from providing what sterling and the dollar provided in their heyday. While holders of the dollar and other leading western currencies might fear sanctions, they must surely be aware of what the Chinese government might do to them, should they displease it. As important, the Chinese state knows that an internationalised currency requires open financial markets, but that would radically weaken its control over China’s economy and society.This lack of a genuinely credible alternative suggests that the dollar will remain the world’s dominant currency. Yet there is an argument against this complacent view, laid out in Digital Currencies, a stimulating pamphlet from the Hoover Institution. In essence, this is that China’s Cross-Border Interbank Payment System (Cips — an alternative to the Swift system) and digital currency (the e-CNY) might become a dominant payment system and vehicle currency, respectively, for trade between China and its many trading partners. In the long run, the e-CNY might also become a significant reserve currency. Moreover, argues the pamphlet, that would give the Chinese state detailed knowledge of the transactions of every entity within its system. That would be an additional source of power.Today, the overwhelming dominance of the US and its allies in global finance, a product of their aggregate economic size and open financial markets, gives their currencies a dominant position. Today, there is no credible alternative for most global monetary functions. Today, high inflation is likely to be a greater threat to trust in the dollar than its weaponisation against rogue states. In the long run, however, China might be able to create a walled garden for use of its currency by those closest to it. Even so, those who wish to transact with western countries will still need western currencies. What might emerge are two monetary systems — a western and a Chinese one — operating in different ways and overlapping uncomfortably.As in other respects, the future promises not so much a new global order built around China as more disorder. Future historians may view today’s sanctions as another step on that [email protected] Martin Wolf with myFT and on Twitter More

The central bank has raised its two-week repo rate by 425 basis points since June, tightening aggressively to tackle inflation that hit a 24-year high of 11.1% in February. Price pressures are still building, spurred on by rising energy costs following the Ukraine conflict.A Reuters poll showed most analysts expected the central bank to deliver one more big interest rate increase when it meets on Thursday, and only a few predicted borrowing costs would rise again later this year.Nine out of the 12 analysts polled predicted an increase of 50 basis points this week and two expected a rise of 25 basis points. One expected no change.Of the six respondents giving an outlook beyond March, three forecast the main rate would peak at 5.50% this year. In a January poll, only one forecast rates would rise above 5%.The central bank will announce its decision at 2:30 p.m. (1230 GMT) on Thursday, followed by a news conference at 3:45 p.m. where Governor Jiri Rusnok will comment on the vote.Prior to Russia’s Feb. 24 invasion of Ukraine, which Moscow calls a “special military operation”, central bankers thought it unlikely rates would climb above 5%. But opinions have changed.Board member Tomas Holub told Reuters last week that he expected to be in the camp favouring a larger rather than smaller move at Thursday’s meeting, but also said he was open to debate about raising to 5.00% now and further in May.Vice-Governor Marek Mora said that he saw rates going “well above” 5%.The central bank may also debate using its large international reserves, which stood at about 64% of gross domestic product in February, to fight inflation and not just as a tool to stabilise exchange rate fluctuations.The bank announced on March 4 it had intervened in markets after the crown had weakened sharply with other currencies in central Europe amid the fallout from the Ukraine conflict.Holub said this month he would prefer to tighten monetary policy through rates rather than currency interventions. More

The finance ministry offer on Eurobonds maturing on April 4, Russia’s biggest debt payment this year, follows Western moves to tighten sanctions against the country over its invasion of Ukraine and to freeze Moscow out of international finance.Moscow, which calls its actions in Ukraine a “special military operation”, says Western measures amount to “economic war”. In response, it has already demanded foreign firms pay for Russian gas in roubles rather than dollars or euros.It was not immediately clear if bondholders would be forced to accept roubles if they rejected the offer, a move that would break the terms of the bond and would again raise the prospect of Russia’s first external sovereign default in a century.”It’s important to note that this is tender offer and not a final decision that these bonds will be paid in roubles. Perhaps, Russian authorities want to gauge investors’ willingness to accept payment in roubles?” said Seaport Global credit analyst Himanshu Porwal.Tim Ash of BlueBay Asset Management, which is not a bondholder, said the move was part of a fight bank by Russia’s central bank and finance ministry “to fend off default and stabilise markets and the rouble”.Ash said the United States’ Office of Foreign Assets Control (OFAC), which enforces U.S. sanctions, “should make clear it will not extend the general licence when it falls due on May 25″, the current deadline for U.S. individuals or entities to receive payments on Russian sovereign bonds.Russia’s finance ministry said in its statement on Tuesday that bondholders should submit requests to sell their holdings to the National Settlement Depository between 1300 GMT on March 29 and 1400 GMT on March 30.SECURING PAYMENTThe Eurobonds would be bought at a price equivalent to 100% of their nominal value, it said.”I think this is to allow Russian investors to get the payment,” said one fund manager, adding that it would help them given Euroclear has been blocking dollar payments to the Russian clearing system.The finance ministry did not say how much of the $2 billion in outstanding Eurobonds it planned to buy back or what its actions could be should bondholders refuse to accept the offer. The bond has a 30-day grace period and no provisions for payments in alternative currencies, JPMorgan (NYSE:JPM) said.According to Refinitiv database eMAXX, which analyses public filings, major asset managers such as Brandywine, Axa, Morgan Stanley (NYSE:MS) Investment Management, BlackRock (NYSE:BLK) were recently among the holders of the bond coming due on April 4.The finance ministry had said earlier on Tuesday it had fully paid a $102 million coupon on Russia’s Eurobond due in 2035, its third payout since Western sanctions called into question Moscow’s ability to service its foreign currency debt.Russian payments have so far gone through, staving off a default. Sanctions have frozen a chunk of Moscow’s huge foreign reserves and Russian officials have said any problem with payment that led to a formal declaration of default would be an artificial default.The rouble tumbled in value after the West imposed sanctions over the Ukraine crisis, plunging as much as 40% in value against the dollar since the start of 2022. It has since recovered, trading in Moscow at around 83 roubles to the dollar, down about 10%.Russia’s next payment is on March 31 when a $447 million payment falls due. On April 4, it also should pay $84 million in coupon a 2042 sovereign dollar bond. More

UK consumers borrowed a record amount in February, with some economists saying it was a sign of the cost of living crisis hitting wallets even before Russia’s invasion of Ukraine pushed energy prices higher.Individuals borrowed a net £1.5bn on credit cards in February, the highest monthly amount since records began in 1993, according to data published by the Bank of England on Tuesday.The figure was more than three times higher than the average of £400mn borrowed in the previous six months and pushed total consumer credit, which includes personal loans and car dealership finance, to £1.9bn net — the highest level in five years.Consumer borrowing is usually considered a measure of spending growth, but with inflation at a 30-year high and falling consumer confidence, some economists have warned that it was increasingly a sign of consumers running into debt to maintain their standard of living.“Weak sentiment also indicates that the big rise in consumer borrowing in February likely reflects households attempting to maintain their consumption at a time when real disposable income is falling sharply, rather than them going on a spending spree,” said Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics.He added that the data “suggest that the economic recovery is about to shift down a gear”.The latest money and credit figures “suggest that consumers are increasingly borrowing more to protect their lifestyles from the surge in inflation”, echoed Thomas Pugh, UK economist at the accountancy firm RSM UK.However, Paul Dales, chief UK economist at consultancy Capital Economics, said it was more likely that the rise reflected households having “the confidence to borrow and spend a bit more”. As a result, he forecast that “the economy may have a bit more near-term momentum than we thought”.A fortnightly survey by the Office for National Statistics showed last week that 12 per cent of respondents were using credit cards more than usual to cope with increased prices in the first half of March. The proportion rose to 18 per cent for those aged 30 to 49 and to 21 per cent among renters. Another one in 10 people said that they were also borrowing more from family and friends.Debt charity StepChange on Tuesday reported a rise in the proportion of people seeking advice who said that cost of living pressure was a reason for their debt in February.Peter Tutton, StepChange’s head of policy, research and public affairs, said: “More and more, what we are seeing is that people experiencing problem debt have problems meeting not just their credit repayments, but also their priority bills.”He called on UK chancellor Rishi Sunak to “find a way to provide more and more targeted support for those who are simply unable to absorb the cost of living increases into their household budgets”.BoE governor Andrew Bailey said on Monday that the UK was facing “a historic” hit to real incomes this year, as spiralling energy costs following the Russian invasion of Ukraine contributed to eroding households’ spending power.The BoE data showed that consumers also deposited less money in bank accounts than before the pandemic. Households deposited £4bn in banks and building societies, less than the £6.3bn average in the previous six months and down from the monthly average of £4.6bn in 2019. More

NEW DELHI – Russian Foreign Minister Sergei Lavrov is set to fly to India this week, sources said, finding time to visit to one of the biggest buyers of Russian commodities since the international community began isolating Moscow for its invasion of Ukraine.There is little sign that buying will slow down any time soon, as more deals get signed. One source said the two countries could discuss smoothening trade payments disrupted by Western sanctions on Russian banks. Media have said he could hold talks in the Indian capital on Friday.It will only be Lavrov’s third visit overseas since Russia’s Feb. 24 invasion of Ukraine, after a trip to Turkey for talks with his Ukrainian counterpart earlier this month and a scheduled meeting in China on Thursday.Russia is India’s main supplier of defence hardware but overall annual trade is small, averaging about $9 billion in the past few years, mainly fertiliser and some oil. By comparison, India’s bilateral trade with China is more than $100 billion a year.But given sharp discounts on Russian crude oil since the attack on Ukraine, India has bought at least 13 million barrels, compared with nearly 16 million barrels imported from the country for the whole of last year. Many European countries have also continued to buy Russian energy despite publicly criticising Moscow.New Delhi has called for an immediate ceasefire in Ukraine but has refused to explicitly condemn Moscow’s actions. It has abstained from voting on multiple U.N. resolutions on the war.India is now considering doubling its imports of Russian coking coal used in making steel, the Indian steel minister said on Sunday. Reuters reported on Tuesday that India recently contracted to buy 45,000 tonnes of Russian sunflower oil for April delivery after supplies from Ukraine stopped. Last year, India bought about 20,000 tonnes from Russia a month.”India will import more items from Russia, especially if it is at a discount,” one senior Indian government official said.The government has been looking to establish a rupee-rouble trade system and discussions between Indian and Russian financial officials are ongoing, said the source. All the sources declined to be named as the talks were private.The Indian government and the Reserve Bank of India (RBI) did not immediately respond to requests for comment.OTHER MECHANISMSBesides the rupee-rouble trade window, several other options are on the cards, including settling all government and quasi-government payments directly through the central banks of the two countries, said the source.”India has made up its mind to continue trading with Russia, one way or the other,” said Happymon Jacob, a professor of international studies at New Delhi’s Jawaharlal Nehru University.”During the Russian foreign minister’s visit, the bureaucracy could definitely bring up the issue of how to continue looking for alternative mechanisms to smoothen trade relations between the two sides.”Russia’s embassy in New Delhi said it could not confirm the visit. India’s foreign ministry said it had no information to share.In a sign of sustained ties despite the Ukraine crisis, India is considering allowing Russia to use its funds lying with the Reserve Bank of India (RBI) to invest in Indian corporate bonds, said another Indian government source.Russia has retained about 20 billion rupees ($263 million) of Indian payments for Russian defence equipment with the RBI.But another Indian government official said New Delhi would have to diplomatically tackle pressure from the West to be able to maintain its ties with Russia.U.S. President Joe Biden said this month India was “somewhat shaky” in acting against Russia. A U.S. diplomat said last week after meeting Indian officials in New Delhi that the United States had not asked partners like India to suddenly stop energy purchases from Russia. More