Summary: Did the United States conduct a successful financial “raid” on Russia? These rumors might not be true — probably are not true — but then so many stories that start wars are false. Remember the Maine! More seriously, these rumors signal that the possibility of financial warfare is on the minds of key people. Probably for good reason.
Update: The significance of this event lies in the fears, not the underlying reality. It shows that people have become aware that financial warfare is not sci-fi, but a possibility. Each time these episodes happen, it becomes more likely that governments begin to consider this new dimension of warfare. Both in offense and defense.
“Russian Rescue Package Expands to $120 Billion“, Wall Street Journal, 19 September 2008 — Subscription required. Excerpt:
As Russia’s stock market went into free fall this week, conspiracy theories circulated that Washington was egging on American financiers to punish Moscow for its incursion into Georgia last month. The theories gained enough credence that Russia’s finance minister, Alexei Kudrin, spoke with U.S. Treasury Secretary Henry Paulson late Wednesday and sought assurances that the U.S. wasn’t playing politics with Russia in the financial crisis, the Russian Finance Ministry said. Mr. Paulson told Mr. Kudrin that the U.S. wasn’t, according to the Russian side. A U.S. account of the call wasn’t available.
… In recent weeks, Mr. Medvedev has blamed the crisis primarily on the U.S., which has been the target of Kremlin wrath on all fronts since the U.S. sharply criticized Russia’s war in Georgia.
A top State Department official, meanwhile, this week cited the financial problems as the “price” Moscow was paying for the war. On Thursday, Secretary of State Condoleezza Rice said Moscow’s moves in Georgia and elsewhere “are putting Russia on a one-way path to self-imposed isolation and international irrelevance.”
The question broached by Mr. Kudrin in his phone call with Mr. Paulson reflects a view widely held in the opaque world of the Moscow elite. Russian officials have asked U.S. bankers in recent weeks if the banks have been ordered by U.S. officials not to lend to Russian companies, according to people familiar with the conversations. The banks deny any such order.
“There’s a feeling of hostility,” said one person who works closely with the Russian government. “The biggest problem is that they don’t understand that the problem is home-made.”
… With growth running about 8% this year, there is no sign of a recession, economists said, but that growth rate could be halved next year. “Growth will slow down,” said Martin Gilman, a former International Monetary Fund official, now a professor at Moscow’s Higher School of Economics.
For a less sanitized version of opinion in Russia, let’s go to our #1 local source in Moscow.
“Angst“, Eric Kraus, Truth and Beauty, 10 September 2008 — Excerpt:
Objectively, the Russian economy is doing better than 95% of the economies on earth. Profitability is high, macroeconomic stability is excellent, growth is compelling – there has not been a single bank failure since 2004, and virtually no exposure to US subprime. Yes, there is the usual litany of complaints, many of them justified – but none of this is really new, and while we are very familiar with the short-term irrationality of markets, we struggle to explain this debacle on the basis of normal market factors alone.
More controversially late last week at least two of the top local Moscow brokers were warning clients that major US banks were being encouraged/pressured to sell their Russian assets. Although certain bulgebracket US institutions were clearly dumping Russian paper last week, it remains possible that they were doing so largely – or entirely – of their own accord.
We have been unable to get confirmation of the alleged political pressure; a very senior person at JPMorgan denied it flat out, whereas contacts at the sole remaining solvent major US investment bank confirmed that they had indeed gotten the call. Our friends on the sovereign debt desks inform us that only US accounts have been selling Russian Federation bonds, but these have all found a new home a couple of percent below last weeks prices. CDS spreads have widened out, but this was primarily hedging activity as cash volumes have dried up.
Intriguingly, aggressive and apparentlyconcerted statements by assorted US officials (vide supra) suggest that it would have pleased them to no end to inflict some economic damage. Whether they are thumping their chests following a successful covert intervention – or are simply trying to put a useful spin on a market-driven sell off to which they were mere spectators – remains an open question.
The Russian equity market has – in recent weeks – been the worst performing global major market. Trading has been substantially worse than in the run-up to the 1998 crisis (where we saw regular dead cat bounces) or during the Yukos debacle. There is one minor difference – in 1998, the Russian economy was dying, the CBR coffers were empty, GDP was stagnant, oil was dropping below $10, and despite Russian domestic debt paying >100%, the government was surviving on expedients.
Russia is currently seeing 7.9% GDP growth, growing trade and budget surpluses, very limited capital flight (with a net positive capital account YTD), and no signs of substantial economic slow-down. Contrast this with Estonia, Latvia or Turkey…or the UK! While markets are often a bit irrational, we would be surprised to see them begin to defy the laws of gravity without reason.
At present, we simply do not know whether or not this was truly the onset of economic warfare; we tend to distrust conspiracy theories, and would note the existence of several plausible counter-arguments …
T&B is frankly bewildered. While we remain sceptical about the purported attack, we are at a loss to find any rational explanation for what we are seeing.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Other posts about Financial Warfare
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A brief note on the US Dollar. Is this like August 1914?, 8 November 2007
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Two essential texts in the theory and practice of financial warfare, 11 September 2008
Click here to see the FM reference paeg about strategy and military theory.
one obvious none-conspiratorial possibility: US firms were liquidating those assets because they had to raise cash to meet other obligations as credit liquidity freezes up. There was a systemic threat to commercial paper last week which, if not halted, would have led to widespread bank failures. They might simply have been needing the cash.
This little section from Angst sums it up nicely for me.
“Instead, we are seeing market-driven phenomena. A sell off in commodities along with a drastic reduction in risk-tolerance causing a fevered unwind of leveraged positions. A financial market temporarily disconnected from the underlying economy can go – quite literally – anywhere…”
The Russian government seizure of privately owned oil assets have no doubt caused a reappraisal of risks in Russia. BP been the latest to have trouble.
One shouldn’t forget that there most likely are quite a few US financial companies, etc. which must by hurting or having problems raising cash. So low appetite for risk
And if it was true that it was a financial attack how long until the Chinese, Arab oil exporters would move in and place their money in Russian equities rather than US. Nice way for them to spread their risk. What would then have been achieved? Nothing.
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Fabius Maximus replies: The significance of this lies in the fears, not the underlying reality. Folks have become aware that financial warfare is not sci-fi, but a possibility.
That suggests that this will start planning cycles in the Russian — and perhaps — US government to prepare for this new dimension of warfare. Both offense and defense.
Earlier this week I heard a theory that the majority of the shorting of financials on the NYSE has been coming from overseas. Perhaps another example of this?
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Fabius Maximus replies: Probably not. A large fraction of hedge funds are domiciled overseas. We also see this in the TIPS data on foreign buying of treasuries, where the UK and various small islands appear to be among our major creditors.
Along what lines would you plan such a strategy FM? Regulation for defense and a sovereign fund of sorts for offense? Or relying on some sort of ‘old buddy’ system?
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Fabius Maximus replies: In this, as in so many aspects of war, defense is trump. Addressing our macroeconomic vulnerabilities is not only the logical place to start, it is imperative for many other reasons. High levels of debt is top of the list; dependence on foreign loans moves this from foolishness to insanity.
The idea of the US — the world’s major debtor flat on its back –waging economic warfare at this point is pretty funny, isn’t it!
Moon of Alabama today comments on a China News Agency report of a weekend phone call between China’s Premier and Pres. Bush. The subject was the quid pro quo that China will expectts for funding America’s new trillion dollar debt — Taiwan!
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Fabius Maximus replies: I have long believed that allowing China to have a sphere of influence in eastern Asia is an almost certain utcome from the inevitable global rebalancing. Unification with Taiwan will be a part — but only a part — of that.
See Brad Setser’s comment on this topic:
Imagine the furor if sovereign funds — not US hedge funds – had been shorting the US broker-dealers…
“allowing China to have a sphere of influence in eastern Asia”
You don’t agree that Tibet and Burma are already evidence of arrival? Or would you say that the lack of US interest in those countries is more the basis for the ‘hands off’ approach, and that actually selling Taiwan for, say, $700 billion would be better evidence of arrival?
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Fabius Maximus replies: Good point! Let’s say then “an expanded sphere of influence.”
The funds required to get through the next years are far more than $700B. The government’s will borrow at least $1 trillion in just 2008-2009, plus rolling over another $500 billion. That total does not include the effect of the recession which I believe is rapidly descending upon us.
As for the cost of the bailout… US financial sector debt is (from memory) aprox $50 Trillion. $700 billion is just the next chip thrown into the pot; there are many rounds more to go in this game.