Rumors are swirling in Moscow that a Russian bank has been removed from SWIFT
This post first appeared on Russia Insider
What is the foreign policy game plan ranged against Russia? It looks like the first serious baby-steps to an existential sanctioned escalation may have just been quietly taken. It may very well be that the first Russian bank was disconnected from SWIFT. While I have not heard any confirmation, the word on the Moscow financial grapevine persists.
The Russian "Tempbank" (http://www.tempbank.ru/eng/) whose management has been individually sanctioned by the US for ongoing trade with Syria and Iran was disconnected from SWIFT according to apparently “informed sources". It seems after the sanctions were removed from Iran a while ago Tempbank went ahead and legally opened correspondent accounts with the Iranian Central Bank and a number of large banks of that country. It has further been rumored that the Tempbank chairperson, Mr. Mikhail Gagloyev received a letter from the "human rights" organization "Associations against the Nuclear Program of Iran" (UANI). This is an interesting organization in its own right. In the letter, UANI warned the Russian bank against cooperating with Iranian or Syrian companies. Meanwhile, the talk in the financial street was that the management of Tempbank was targeted for personal sanctions because of their cooperation with Iranian and Syrian businesses. If these reports are correct, then it follows that with the right amount of influence from the right sources, any Russian bank can be disconnected from SWIFT without much legal recourse or chitchat. This does not look to be a de-escalation of tensions. Then what other domino’s might follow, and to whose real advantage?
While on the subject of money and banks. Governments are struggling to discover just the right fix to get a balance between controlling public debt, which now exceeds 110 per cent of GDP for the advanced economies, and boosting the rate of economic growth. The first goal requires quite a bit of budgetary tightening, while the second needs just the opposite. What is a government or central bank to do?
One option I overheard recently being discussed by some (very respectable) EU bankers recently imbibing vodka in Moscow is to restructure (i.e.; write off, disappear) part of the government debt that has been bought up by the central banks as a direct result of quantitative easing. Their logic was since both the government and the central bank are the public sector; a consolidated public sector balance sheet would net this debt out entirely. I paused and tried to puzzle this one out over my cappuccino as I stirred in my sweetener, but no bright lights illuminated my thinking. All I could come up with was a deep breath and a vision of hyperinflation spreading like diaper rash across the world’s financial backside.
Now consider what might happen if those bonds held by central banks were simply cancelled, instead of being sold at some point in the future back into the private sector as was initially dreamed up (before NIRP’s and ZIRP’s became household monikers). Should that happen the long-term restraining effect of bond sales would also be cancelled out, so theoretically there should be an immediate stimulatory effect on nominal demand in the economy. Theoretically. In fact, the central banks in both the USA, Japan and EU have purchased so much government and commercial debt since 2008 that the effects of such an action could be rather volatile putting it mildly. It follows also that the volatility of the financial markets would be even greater if instead of just cancelling past debt, the central bank were to agree with the government to further enhance financing increases in the budget deficit by printing even more money. We would then really be in a world of hurt, as the specter of “helicopter money” becomes reality. Say goodbye to pretending there is a firewall between monetary and fiscal policy. I wonder if this way of thinking has taken root at the Fed as well, time will tell no doubt.
Except in times of war, countries have not seriously considered unleashing such extreme actions. The hyperinflationary damage, which results from the elimination of central bank capital, has normally been considered too dangerous to let out of the financial cage.
I looked over at the two bankers who ordered yet another round with gimlet eyes and hugely self-satisfied smiles and thought to myself, hell, with leaders like these anything is possible especially if they have positioned their personal portfolios on the “right” side of punting the market. Better still, if they have not done so already, they should really get a reality check from Russia’s central banker Ms. Nabiullina, it would save us all from a world of monetary pain.
Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia
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