04.28.2014 1

Russia to dump U.S. treasuries over Ukraine sanctions?

By Robert Romano

sergei_glazyev

Sergei Glazyev

With increasing sanctions against Russia over its escalating incursion into Ukraine, the Kremlin may be poised to strike back — with a plan to dump its $126 billion of U.S. treasuries holdings to roil Western financial markets, financial blog Zerohedge.com warns.

According to Zerohedge, “Russian presidential adviser Sergei Glazyev proposed plan of 15 measures to protect country’s economy if sanctions applied, Vedomosti newspaper reports… Russia should withdraw all assets, accounts in dollars, euros from NATO countries to neutral ones; Russia should start selling NATO member sovereign bonds before Russia’s foreign-currency accounts are frozen; Central bank should reduce dollar assets, sell sovereign bonds of countries that support sanctions; Russia should limit commercial banks’ FX assets to prevent speculation on ruble, capital outflows; Central bank should increase money supply so that state cos., banks may refinance foreign loans; Russia should use national currencies in trade with customs Union members, other non-dollar, non-euro partners.”

Glazyev originally leveled the threat to dump treasuries in March: “We hold a decent amount of Treasury bonds — more than $200 billion — and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner,” he said in early March. “We will encourage everybody to dump U.S. Treasury bonds, get rid of dollars as an unreliable currency, and leave the U.S. market.”

If that happened — if U.S. treasuries were dumped en masse all over the world — it could be the equivalent of a national default, resulting in a collapse of the financial system.

Although at the time Moscow disavowed the statement as Glazyev’s personal views, right around the same time Russia “withdrew as much as $118 billion in Treasury bonds from custodial accounts at the Federal Reserve during a two-week period in March,” the Washington Times’ Patrice Hill reported.

Now, on one hand, that may have just been to avert U.S. economic sanctions and not have those Russian assets seized.

But, on the other, the move also gave Russia the ability to dump the treasuries at a time and place of its choosing, and in a manner that the U.S. would be less able to counter.

Russia’s holdings are relatively small compared to say, China’s $1.2 trillion. Yet, actively dumping a couple hundred billion dollars worth of treasuries on the market all at once would most certainly be felt.

Because the Federal Reserve cannot legally monetize U.S. debt directly — it can only purchase bonds on the secondary market — it might take a couple of months to make up the difference. In the meantime, interest rates would presumably temporarily spike upward.

If that was the end of it, over the long term the impact might not be so great. The larger threat was Glazyev’s statement that “We will encourage everybody to dump U.S. Treasury bonds…”

So, could Russia set off a run on U.S. treasuries and in turn, the dollar? Glazyev seems to think it is possible.

Certainly, that is one of the dangers of the federal government’s current borrowing position, with $5.8 trillion of its $17.5 trillion debt held overseas, much of it owed to countries that do not necessarily hold U.S. interests at heart.

Because the dollar is held as the world’s reserve currency, a potential run on the dollar is a hammer that can be wielded to blackmail the U.S. from taking effective action to support even close friends and allies, underscoring an inability to operate from a position of strength.

Chalk it up to one more reason to balance the budget and to become financially self-sufficient. Instead, the global financial system rests on a house of paper dollars — and our enemies know it.

Robert Romano is the senior editor of Americans for Limited Government.

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