In this post, I’ll tell you how it can be technically and legally done. It involves money (surprise, surprise) or to be precise, the flow of money.
Do you remember George W. Bush’s talk of Saddam having weapons of mass destruction? Do you remember when the US lost its mind collectively as they in all seriousness (and much to the amusement of the rest of the world) started calling French Bread Freedom Bread and French Fries Freedom Fries? If you answered yes, then you will definitely also remember the words Patriot Act.
Unlike the WMDs that turned out to be a “Waffle of Mass Distraction,” the Patriot Act still remains with us. And therein, my dear readers, is the power of the USA against Russia.
I’ll come back to that in a moment.
But first a bit of background on the US Dollar. You'll like this, so pay attention:
All USD transactions done by a bank outside the US must be done through a US-based correspondent bank.
Read that again and ponder on it a bit … okay? Ready to continue? Of course you are.
What that means in reality is that if you have a USD denominated account containing some US dollars with your bank in London (or wherever outside the USA), those dollars are in effect held in a nostro account in your bank’s name in a US-based correspondent bank.
The above is an important concept to understand, because now we come to the second part: commodities.
If you answered US dollars, then give yourself a cookie.
It’s because of the position of the US dollar as the standard commodity settlement currency that China and Russia continue to work to end its hegemony. They’ve had some success, but they are still far, far from making that happen.
Because of the US dollar's position as the settlement currency of choice for oil, it remains a popular reserve currency. The favourite currency of wealthy Russians, although they have euros, Swiss francs, and sterling in their private banking accounts, remains the US dollar.
Because so many wealthy and middle-class Russians like the US dollar, Russian banks have to deal with Mucho Gringo Greenbacks. Just go and have a quick look at the main Russian retail bank’s web pages, and you’ll find quotes for interest rates for USD denominated accounts.
Okay. So now we are coming to the punch line of how Obama could make Putin his biaatch. But before that let’s recap:
- Russians love the US dollar.
- Russian banks offer USD accounts to Russians who love the US dollar.
- Russian oil firms are forced to deal with the dollar.
- All US dollars held in foreign banks are in fact sitting in an account in a correspondent bank in the US.
And now, drum roll please, we come to the Patriot Act.
Specifically to Section 319 of the Patriot Act: Forfeiture of funds in United States Interbank accounts.
This is a great piece of legislation for the US, as it is the equivalent of a nuclear bomb, or as GWB used to say New-Q-Lear!
It allows the US to seize or arrest funds held in US correspondent accounts of foreign banks, which of course is bad enough, but there is more to it. If the US thinks you’re a bad guy and your bank has a correspondent account with a US bank (and all proper banks do, because a bank cannot work without access to US dollars), then the assets held in the correspondent account are liable for the amount the government wants from you.
Don’t believe me? Here’s the text from U.S. Code § 981 (k):
“… if funds are deposited into an account at a foreign financial institution and that foreign financial institution has an interbank account in the United States with a covered financial institution, the funds shall be deemed to have been deposited into the interbank account in the United States, and any restraining order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the covered financial institution, and funds in the interbank account, up to the value of the funds deposited into the account at the foreign financial institution may be restrained, seized, or arrested.”
Wait, it gets better, even if you never held a single US dollar in your account; the fact that your bank has a correspondent account in the USA makes that money fair game for seizure by the US government.
And that’s not all. There is no legal requirement by the US government to prove that the assets in the correspondent are traceable to you. This means that other people’s money could be frozen while Uncle Sam chases your cheating a$$.
So, if you’re still with me (I know it’s a longer post than normal, but stay with me here), then this brings me to my point.
This whole Ukraine crisis is purely about the US having the stomach for the fight, and, quite frankly, they don’t. Crimea and the Ukraine just aren’t that important to the West. Because if they wanted to, they could simply use the Russian energy companies and the Russian banks and seize their correspondent accounts. You would immediately see a run on Russian banks when the middle class and wealthy would try to access their accounts. Since the Russian banks hold such a large amount of their reserve funds in US dollars, which would be frozen, the banks wouldn’t be able to open their doors. It would cause some serious rioting on the streets of Moscow as wealthy Muscovites would try to drive their Audi Q7s and Range Rovers in through the banks doors.
On top of this, the US could slap a few indictments on Rosneft and Gazprom. Because the US dollar is (pardon the pun) the oil that greases the oil and gas industry, the whole market in Russian oil and gas would come to a screeching halt. Those firms also hold large US deposits, which they wouldn’t be able to access, meaning they wouldn’t be able to meet their daily obligations.
Utter mayhem would ensue in Russia.
How long would this take? Well, let me tell you that the time to answer a request for information alone under the Patriot Act Section 319 is 120 hours, yes, HOURS.
“120-HOUR RULE—Not later than 120 hours after receiving a request by an appropriate Federal banking agency for information related to anti-money laundering compliance by a covered financial institution or a customer of such institution, a covered financial institution shall provide to the appropriate Federal banking agency, or make available at a location specified by the representative of the appropriate Federal banking agency, information and account documentation for any account opened, maintained, administered or managed in the United States by the covered financial institution."
Like any form of sanctions, it would have far-reaching repercussions, and we would see all kinds of nasty things in the world of finance, who knows Goldman Sachs’s chairman Lloyd Blankenfein’s beard might even fall off.
But do you honestly think that the Russian kleptocratic economy, which defaulted as recently as 1998, is more resilient than the economy of the US (even with its myriad of problems)?
So, as you can see, from a purely technical perspective, bringing Russia and Putin to his knees is really not that difficult a task. The legislative framework is there, and it is brutally effective. The question is does the USA have the political will and the stomach to face the inevitable repercussions of such actions, or is it just easier to say a few words of support in favour of the Ukraine, and then let things carry on as before?