Christine Lagarde and the graybeards at the European Central Bank (ECB) now appear to have come out strongly against the allocation to Ukraine of an immobilized $330bn in Central Bank of Russia assets.
They nod their heads as Lagarde asserts that using these assets to fund Ukraine risks damaging the international order. Complicated, they say; dangerous, they mutter. Surrounded by risk.
There are indeed dangers and risks all around us, but not the ones identified by Europe’s fearful financial elite. As in 1939, when European civilization was almost extinguished by the Nazis, it is extraordinary to discover that Western bankers are once again aiding the aggressor through a mix of fear and flawed analysis.
She and others (step forward the central banks of Germany, France, and Italy) hide behind the defense that allocation of Russian assets to Ukraine will see a flight of Chinese, and other authoritarian regime reserve assets from the dollar, euro, and other Western reserve currencies, so risking a systemic global crisis.
There is no evidence to back this assertion. This is why.
Firstly, because it would have happened already and didn’t. There was little, if any, flight from G7 currencies when the democracies moved to immobilize these assets. And given that the West has indicated that Russia will never retrieve the funds, it is hard to see how China and other concerned parties, like Saudi Arabia and Indonesia, will now see any incremental difference in seizing and allocating these assets to Ukraine.
Second, given the sheer scale of foreign reserve reserves held by regimes such as China ($5 trillion-plus belonging to authoritarian regimes is held in the West) the reality is there are few liquid alternatives to investing in G7 markets. China, India, and so on hardly trust each other. They are unlikely to pick’n’mix each other’s currencies as an alternative.
Third, the financial system graybeards warn of the risks to global markets of China and others pulling their assets from the dollar and euro.
This is exactly why China would never risk such action. China sees globalization and a stable global order as its long-term path to global economic hegemony. It would never take action that risks this strategic goal. And even assuming it did, this might well generate a huge wave of global risk-off trades that would inevitably spark a flight to quality. What does that mean in practice? It means a torrent of money racing back to the dollar, euro, US Treasuries and Bunds.
The big loser then would be China suffering huge mark-to-market losses on its securities portfolio. The ultimate winner would be the US and Europe.
It’s not the first time we’ve been here with bankers who judge themselves as the sanctified guardians of financial stability, regardless of the price.
Following the Nazi invasion of rump Czechoslovakia in March 1939, the Germans instructed the Bank for International Settlements and the Bank of England to transfer 50 metric tons of gold to the Reichsbank. Most of that ended up in Nazi hands as a result of Bank of England Governor Montague Norman’s decision.
As the Holocaust writer Adam LeBor said, the bankers existed in a “world of fearful deference to authority, the primacy of procedure over morality, a world where, for the bankers, the most important thing was to keep the channels of international finance open, no matter what the human cost. A world, in other words, not entirely different to today.”
Today’s moneymen and women are asking the wrong question. It’s true there is a risk of systemic volatility from seizing sovereign assets, but this is by no means the first time the issue has arisen. Ukraine has seized more than $300m in Russian assets since the all-out war began.
The contrary question must also be asked — how would a Ukrainian defeat impact that same order?
It costs around $100bn annually to keep Ukraine in the fight (something provided by the EU’s February package of $55bn and April’s US aid of $61bn.) That’s not enough to ensure Ukrainian victory, which might require an additional $50bn or more each year. If Donald Trump wins November’s presidential election, it’s fair to assume US support for Ukraine will drop off a cliff.
Lagarde has not signaled how she would fill this enormous funding gap or indeed provide the huge additional sum for outright victory. Nor indeed deal with the seismic consequences of a Ukrainian defeat — likely multiple millions of Ukrainians fleeing westward, a resultant and near-instantaneous rise in populism across Europe, continent-wide socio-economic instability, increased insecurity and a rising military threat as Russian tanks move further toward NATO’s borders, and the consequent need for hundreds of billions more in Europe’s annual defense budgets.
To the fair-minded, that might seem like an existential threat to the European order and also risk the collapse of Lagarde’s Euro.
Ukraine needs secure and predictable funding streams to fight off the aggressor, a fight that it undertakes on behalf of the West.
Without immobilized Russian assets, it is quite possible that Ukraine will lose the war. The apportioning of responsibility for an epoch-defining disaster will then begin. At which point, the continent’s senior bankers will have a lot of explaining to do, even as they try to save the broader European project from the conflagration.
Timothy Ash is a Senior Emerging Markets Sovereign Strategist at RBC BlueBay Asset Management. He is an Associate Fellow at Chatham House on their Russia and Eurasian program.
The views expressed here are his own.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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