The vote by Crimea to join Russia was rejected by the Obama Administration but cheered by Putin. This is a pawn in a new chess match that is really a global economic war. Putin’s Russia has gone on the offensive and warned Washington to stay out or else.
The United States has promised economic sanctions in response, and Europe is considering the same. Putin doesn’t seem to care. Is it arrogance driving him based on his soaring popularity at home? Or, paranoia, as some have suggested? Most likely, it is a cool calculation that Washington is weak and this is an opportunity to capture.
Putin is operating under the assumption that there is a stalemate building in the use of economic weaponry. While the United States has been quite adept at using our economic strength to sanction, punish, and in some cases destabilize what we consider to be rogue regimes and terror groups. Backed by our military, these strategies have proven very successful as explained in Juan Zarate’s book, Treasury’s War. There are three problems with the assumption that we can use the same techniques successfully against Russia:
First, it is a completely different matter of escalation in using financial warfare against a major nation like Russia. There is the potential for direct blowback to our own economy. Just consider what the possibility of Greek default did to global markets. Now imagine the risks of a collapsed Russia if we were effective.
Second, there is the risk that Russia could respond militarily and even perhaps with nuclear weapons. This was underscored in a recent statement by a well-known Kremlin-backed journalist (reported in the Economic Times):
“Russia is the only country in the world that is realistically capable of turning the United States into radioactive ash,” television presenter Dmitry Kiselyov said on his weekly current affairs show.”
Then, there is the third issue that the Russians could retaliate with economic weapons of their own. This was directly threatened by a senior Putin advisor just a week ago:
Sadly, most of Washington and Wall Street laughed off this threat. From Business Insider:
“Again, all you can do is laugh at the notion that Russia has the ability to induce of a crash of the US financial system…”
The problem is that:
1. The Russians believe they can do it (crash our financial system). In fact, they have been planning for it.
2. Our own DoD-sponsored war games suggest they can do it if supported by China. This was recounted in Jim Rickards’ book, Currency Wars. So far, it appears that China is prepared to back Russia. Interestingly, India has joined Russia’s side as well. This matches with what we shared a couple of years ago regarding the BRICS nations.
3. When you add in the cyber component, even outgoing NSA head, General Keith Alexander admits they can do it. As reported in Forbes:
“On the CBS program 60 Minutes tonight, National Security Agency (NSA) director Gen. Keith Alexander admitted that “a foreign national could impact and destroy a major portion of our financial system” by placing a virus in our computer systems “and literally take down the U.S. economy” if the virus was spread around.
Alexander told CBS in blunt terms that “right now it would be difficult to stop (the virus attack) because our ability to see it is limited.”
Deborah Plunkett, another NSA official, told CBS that NSA was working with computer manufacturers to close down “this vulnerability, but they say there are attacks occurring daily.” In stark terms I was shocked to hear that Plunkett basically made it appear that the nation’s cyber-defense system was very vulnerable, which should send the fear of God into Wall Street, industrial America and our political system.”
So, let’s get over the arrogance that we can dictate terms in an economic war. In fact, as Jim Rickards points out in a current article on this very subject, there is a precarious “balance of terror” that has developed, as shared in a recent Op-Ed (excerpted below):
By The Darien Times on March 14, 2014
“. . . In financial warfare between the United States and Russia, a similar balance of terror exists. It is true that the United States has powerful financial weapons it can use against Russia. The United States can freeze the assets of Russian leaders and oligarchs that can be found both in United States banks and foreign banks that do business in dollars. The United States can deny Russian access to the dollar payments system and work with allies to deny Russian access to the SWIFT system in Belgium that processes payments in all currencies, not just dollars. Many of these tactics have, in fact, been used against Iran and Syria in the financial war that has been going on in the Middle East and Persian Gulf since 2012.
But, Russia is not without financial weapons of its own. Russians could refuse to pay dollar-denominated debts to United States and multilateral lenders. Russia could dump the billions of dollars of United States Treasury notes they own thus driving up United States interest rates and hurting the United States stock and bond markets. Most ominously, Russia could unleash its hackers, among the best in the world, to crash United States stock exchanges. On August 22, 2013 the NASDAQ stock market crashed for half a trading day and no credible explanation has yet been offered for the crash. Hacking by Syrian, Iranian or Russian cyber warriors cannot be ruled out. This may have been a warning to the United States about enemy capabilities . . .”
Now, let’s consider what is already underway. First, there was a huge draw-down in foreign holdings of U.S. Treasuries. This is most notable since, in the past, foreigners have rushed into Treasuries during points of global stress. Not this time. The drawdown of nearly $105 billion worth of foreign holdings in a single week is unprecedented according to Zero Hedge and others. Take a look at the following chart to see the magnitude of the “fire sale.” This also wipes out well over a year of buying by foreign interests.
While we cannot prove that the selling is Russian, that’s clearly the speculation. In fact, the amount sold may have been larger and partly offset by typical crisis buying from other nations. From Bloomberg:
“The record drop in U.S. government securities held in custody at the Federal Reserve is fueling speculation that Russia may have shifted its holdings out of the U.S. as Western nations threaten sanctions.
Treasuries held by foreign central banks dropped by $104 billion to $2.86 trillion in the week ending March 12, according to Fed data released yesterday, as the turmoil in Ukraine intensified. As of December, Russia held $138.6 billion of Treasuries, making it the ninth largest country holder. Russia’s holdings are about 1 percent of the $12.3 trillion in marketable Treasuries outstanding, according to data compiled by Bloomberg.”
These do not appear to be the actions of a Russia expecting a quick resolution or afraid of American sanctions. In fact, Russia may have dumped ALL its holdings based on the data with other nations making up the difference. And that’s not all that’s happened. Russian companies have also been pulling vast amounts of money from the West. According to Financial Times, this could indicate that large Russian companies and billionaires assume that sanctions will be placed and want to protect assets in advance. Combined, alleged Russian government dumping of American bonds with pulling private interests pulling back wealth gives a very strong indication that the global economic war has escalated dramatically. The Russians are getting on a war footing. Yet, Washington remains arrogant and seemingly oblivious to the threat.
We need to be very careful in how we respond. China is watching closely and if they sense weakness could begin a similar play in reference to disputed islands or even Taiwan. That plan was telegraphed long ago by Chinese generals. They may be viewing this as their time of opportunity.
The bottom line is clear. This is a Global Economic War. We must prepare for it. Do you have a Game Plan yet?