A raid on Russian reserves would be good for Bitcoin

Wolfgang Münchau is a columnist for DL News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for the New Statesman. Opinions are his own.

People often characterise the taste of wines in terms of fruits. They say, this particular Sauvignon Blanc tastes like grapefruits or apples. I personally prefer to do it the other way round: describe a grapefruit in terms of wine it reminds me of.

When Bitcoin trades at $45,000, you could also flip this if you want to. The units get a bit awkward — 0.000022 Bitcoin tokens per dollar.

It makes no sense right now, but I think that may change. While Bitcoin and other cryptocurrencies will remain supply-constrained, debasement looms large in the future of all fiat currencies — and especially the dollar and the euro.

When that happens, demand for crypto assets would increase correspondingly

The West’s gambit

The EU recently considered a plan to bring Viktor Orbán, the Hungarian prime minister, into line with a threat to trigger a run on the forint, the Hungarian currency.

What this signals to the outside world is that we are getting heavy-handed in the uses of our financial strength in our foreign policy. In this case, the gambit did not work. The forint fell a little on the day the rumour was reported, and rose again the next.

A few days later, news broke that the Group of Seven were planning a complex financial structure based on Russia’s frozen foreign reserves as collateral. This is a much more heavy-handed use of financial power for geo-strategic purpose.

The device has similarities with the infamous collateralised debt obligation, the product behind the global financial crisis in 2008.

Everybody understands the nature of credit. I owe you. I pay back. Or I don’t.

Credit products turn something simple into something hideously complex — with the sole goal to obfuscate and deceive. In the history of finance, there has never been another reason for such instruments.

Back in 2008, CDOs concealed the subprime loans that people defaulted on en masse.

Today, the Europeans are concealing that they do not have enough money to stem the aid that Ukraine needs in the next stages in the war. The still ongoing blockade of a financial package for Ukraine in the US Congress makes everything a lot worse.

Some European prime ministers wanted to raid the €300 billion of Russian reserves held in the EU and other G7 countries directly. Two thirds of that money is in the EU.

A raid of reserve accounts is legally difficult. Russia’s invasion constituted an illegal act under international law, but that does give us the right to plunder their reserves.

The Russian ransack

So what the G7 is trying to do is find a clever financial structure that hides what would otherwise be an illegal money heist: through a zero-coupon bond sold to private investors, backed by the Russian reserves.

I am not a lawyer, but I would be surprised whether courts draw a distinction between the theft of money or its use as collateral.

When pledged as collateral, money ceases to be money. It becomes an ordinary asset.

There is no way that Ukraine will ever repay any loan, so default is pre-programmed. On the day of reckoning, investors will want their money back, which is the moment the Russian ransack will happen.

The beauty, from the perspective of the G7′s current leaders, is that the money heist will happen under the watch of their successors.

Virtually nobody who takes part in this debate in Europe has a grown-up understanding of the impact this would have on the international role of the euro. The whole point of money lies in its liquidity. What is frozen is not liquid.

A political, not legal, act

A court can freeze money if evidence is supplied that the money has been earned illegally. That was not the case here.

This was money the West paid Russia mostly for oil and gas.

The Russian money heist is a political, not a legal act. Politicians decide it. The money is in our jurisdiction, and we have the key to the vault.

We do it because we can.

This is power politics. My concern is not whether this is fair to Vladimir Putin. It is the future of our money. We are placing a paint bomb into his reserve account — others might take note.

There are also political costs. The Council on Foreign Relations in Washington recently warned that aggressive use of US sanctions would over time impair the international role of the dollar.

Zongyuan Zoe Liu says a loss of the reserve currency would, among other things, reduce the US’ ability to impose its values on the rest of the world.

You might think of this as a promise rather than a threat. But the message is clear: if you want to rule the world, don’t tamper with your money.

A popular argument made by financially illiterate moralists goes like this: the freezing of Russian assets in 2022 did not cause a run on the euro and the dollar, because foreign investors have nowhere else to go.

This comment strikes me as having been lifted straight from the script of “The Big Short.” Back then everybody thought the US housing market was safe, because people had no other place to live.

Debasement

The treacherous thing about debasement is that it happens with a delay. The freezing of Russian assets in 2022 did not cause a global crisis because everybody was shocked at what Putin did.

I know that top Chinese officials discussed a strategy at the time to make the country less dependent on the US for its foreign reserves. It’s difficult.

China cannot just leave the dollar and euro markets because it keeps on running large and persistent trade surpluses with the US and with Europe. So did Russia. But China can, and I think will, diversify its future reserves away from the dollar.

For example, there is no need for the five original Brics countries — Brazil, Russia, India, China and South Africa — to hold income from trade amongst each other in dollars.

The dollar is safe for now because right now, there is no way around it. That’s not the case for the euro.

For starters, Europeans are themselves running trade surpluses against the rest of the world. We, too, have reserves in foreign countries. Also, the euro is already in decline as an international reserve asset.

The introduction of the euro in 1999 came with the promise to challenge the dollar’s predominance as the world’s dominant currency. That did not happen because the EU never followed up with a proper banking and capital markets union.

By leveraging our currency into an active tool of foreign policy coercion, we are sending a loud message to reserve managers everywhere: that the safety of their deposits is subject to our political control.

Dollar replacement?

This behaviour raises questions about the future of fiat currencies in general. I don’t think that any other fiat currency will ever replace the dollar.

The Chinese renminbi is unsuited to this role. So, as it turned out, was the euro. There really is nothing else out there.

But cryptocurrencies could become dominant in a world of currency debasement.

It is perfectly imaginable for a Chinese company to ask a European or US customer to pay in Bitcoins, or some other crypto assets.

That would require a more liquid and diversified market infrastructure than what we have currently. It is a critical mass thing. It is impossible until it becomes inevitable.

As we are approaching the critical mass point, one would expect the dollar or euro value of a Bitcoin, or other crypto-asset, to rise, probably by a lot.

And that’s the moment when some people might want to flip the denominator, when it makes sense to measure a dollar against its corresponding crypto values — or the grapefruits it buys.