Central Bank of Russia

Thanks to the marvellous balanced reporting of the Western Media you will all now be fully aware of the Decree of the President of the Russian Federation No. 95 dated 5th March 2022: ‘On the temporary procedure for fulfilling obligations to certain foreign creditors’ and its implications.

But let’s recap.

The new decree permits a Russian entity who owes money in a foreign denomination to an entity in an unfriendly state to open a rouble denominated account at a Russian bank in the name of the creditor and deposit the equivalent amount in roubles into that account at the official exchange rate. This method can be used to discharge any debt of the debtor to a foreign entity, where they owe more than ten million roubles per month.

The foreign entity can then apply to the Russian Ministry of Finance or central bank for access to the money in that account, and the Russian central bank will grant them a credit over the equivalent amount of financial reserves the Russian central bank holds at the relevant foreign central bank.

Reserves the foreign creditor will not be able to access due to the ongoing financial sanctions.

There are several interesting effects of this mechanism

  • It ensures that Russian entities can discharge their debt obligations in full, and they can not be held in default in Russia. Creditors cannot claim collateral or otherwise interfere with the Russian entity.
  • Because the exchange rate is the official one, the number of roubles required will be large. This is a heavy tax on Russian entities in debt in a foreign currency, and may persuade them to refinance into roubles.
  • The roubles are locked away in accounts foreigners cannot effectively access. In other words they become financial savings. As Modern Monetary Theory explains, that is an effective deflationary force.
  • The foreign entities have been paid, but cannot use their money due to the actions of their local banking system. That makes the loan/accounts receivable a doubtful debt. And for a bank they have lost access to collateral, so the loan may end being a full write off against regulatory capital.
  • Depending upon the rules of any insurance product the foreign entity has hedged with, this may trigger credit default swaps and cause a cascade effect in the West.
  • The coupons on the remaining foreign currency sovereign debt of Russia is almost certain to be settled by this method in the middle of March 2022.

What we have here is the demonstration of the sovereign power behind a currency that cleverly neutralises the fiscal effects of freezing the foreign currency reserves of the Russian Federation.

Exactly as you would expect from a black belt in Judo.

I think we can call ‘Toketa’ in this attempt to pin the Russian financial system down. If only there was a Dojo where you could learn how these currency things work.

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