The news out of the Crimea places the vote on the referendum at 95.5 percent in favor Russian control. The outcome was predetermined but one would think that the pro-Russian faction would have at least fixed the results to make it appear somewhat legit. Why, it makes me wonder if the Chicago boys had been secretly brought into the Crimea to garner such a ridiculous outcome. Now the EU and the U.S. are going to find sanctions to make the oligarchs and other hoarders of Russian wealth suffer the consequences of Vladimir Putin’s 19th century actions. But this will not be a one-sided affair as Russia will be able to invoke counter measures of its own. There are many things to ponder:
1. Every analyst speaks about the ability to affect the oligarchs by the crushing effect of global money leaving the Russian equity market. The financial media savors the 25 percent drop in equity prices on the MICEX (Moscow Exchange). But if Russia retaliates with further military action and/or the shutting down of energy exports, the hit to western capital markets will be much greater than the losses in Russia. The U.S. total equity markets have a value of $18 TRILLION and the European markets also have values in the trillions of euros. The Russian market has a net value of $850 BILLION so any major selloff due to the increased geo-political tensions will have a greater impact on the West.
It is doubtful that the Western European markets could absorb a steep drop with the fragile state of their economies. Also, many of the German and Austrian banks have large outstanding credits to Russian businesses, as well as to other Eastern European governments and corporations. A 50 percent drop in the Russian stock market would pale in comparison to a 15 percent drop in the Western equity markets. The continued call for sanctions and more sanctions needs to be carefully thought as not all situations are similar to Iran and other targets of sanctions. One size does not fit all.
2. The U.S. and IMF are trying to use the Ukrainian situation to embarrass the U.S. Congress to provide increased funds that had been “promised” to enhance the ability of the IMF to bail out distressed nation-states. I SAY NOT A DIME MORE TO THE IMF UNTIL THE IMF TAKES ACTION TO MONETIZE ITS GOLD HOARD. I have continually pushed for the IMF to issue IMF GOLD-BACKED BONDS in an effort to take a dormant asset and put it to use. In today’s world global investors would love to purchase bonds backed by some gold–maybe a five- or 10-to-one ratio–it would be a very low interest rate bearing note in turn for having gold as collateral. This would not violate the IMF charter as the gold would not be sold but only surrendered on the inability of the IMF to repay the bonds. This is from the IMF fact sheet:
“The IMF held 90.5 million ounces (2,814 metric tons) of gold at designated depositories as of mid-September 2013. The IMF’s total gold holdings are valued on its balance sheet at SDR 3.2 billion (about $4.8 billion) on the basis of historical cost. As of September 17, the IMF’s holdings amounted to $118.7 billion at current market prices.”
A conservative gold-bond derivative backed by 20 percent gold would create almost $600 billion in liquidity to throw at global problems and easily support the needs of the Ukrainian government without the U.S. Congress having to contribute another round of financing. It is interesting that a Keynesian-dominated institution cannot find some way to put the barbarous relic to work. If not GOLD-BACKED BONDS, maybe IMF Director Lagarde can work a swap with the Russians to raise the capital for the Ukraine (Russia will swap euros and dollars for gold).
3. In calling for sanctions, the U.S. is going to undermine the world financial system. The targeting of Russia’s wealthy will become a template for dealing with any “global pariah” and thus result in many global actors not wishing to be paid in dollars or other currency but in a more non-partisan medium of exchange like GOLD or SILVER. The low global interest rates result in surrendering little interest earnings and precious metals can easily be used as collateral in any financial transaction (see number two). Any nation threatened with sanctions would be much more comfortable in a respected store of value rather than being held hostage to the “TYRANNY “ of politically inspired sanctions.
***On Friday, the Financial Times editorial board a piece, “Germany Loses Its Faith in Ostpolitik.” The FT applauds the recent assertive remarks by Chancellor Merkel as a very positive step forward for Europe.
“Germany’s tough new stance towards Russia is to be welcomed. There is now a better chance of EU nations supporting tough sanctions if Mr. Putin’s aggression escalates. After all, if Germany, the European superpower, makes the sacrifices necessary to block trade with Russia, others cannot resist. Ms. Merkel’s stance also indicates that Germany is willing to be a more assertive security player, casting aside its traditional reticence. In recent months a number of German leaders–including the head of state and foreign defence ministers–have said the country cannot sit on the sidelines when security challenges arise. Ms. Merkel’s speech reflects her determination to respond to this lead.”
The FT’s editorial board ought to be more careful in cheering a resurrected German powerhouse from the sidelines. Maybe Mr.Putin is also sensing a revitalized Germany and is seeking to enhance the buffer zones on its western borders. Nothing is as it seems and even Secretary of State Kerry said on Friday that the U.S. acknowledges that Russia has legitimate interests in its immediate vicinity. And, one of the best Russian analysts I know (h/t KM) surmises that the corrupt leadership in the Ukraine may be trying to heighten tensions in the hope of better financial terms and more aid from the West. Nothing is as it seems.