Finance as foreign policy (Russia, 2008)

American commentators have argued that Russia’s current financial difficulties are evidence that Russia’s participation in the global financial system constrains Russian geopolitical adventurism. Russians have paid a (financial) price for the conflict in Georgia.

The Wall Street Journal notes that some in Russia see things rather differently: they believe that the US government put pressure on US banks not to rollover loans to Russian banks, and thus helped precipitate Russia’s current financial crisis. Gregory White reports:

As Russia’s stock market went into free fall this week, conspiracy theories circulated that Washington was egging on American financiers to punish Moscow for its incursion into Georgia last month. The theories gained enough credence that Russia’s finance minister, Alexei Kudrin, spoke with U.S. Treasury Secretary Henry Paulson late Wednesday and sought assurances that the U.S. wasn’t playing politics with Russia in the financial crisis, the Russian Finance Ministry said.

Mr. Paulson told Mr. Kudrin that the U.S. wasn’t, according to the Russian side. A U.S. account of the call wasn’t available. ….

The question broached by Mr. Kudrin in his phone call with Mr. Paulson reflects a view widely held in the opaque world of the Moscow elite. Russian officials have asked U.S. bankers in recent weeks if the banks have been ordered by U.S. officials not to lend to Russian companies, according to people familiar with the conversations. The banks deny any such order.

I believe Paulson. US banks haven’t been willing to lend to anyone, including other US banks, recently.

I suspect former Russian President and current Prime Minister Putin does not – perhaps because Putin and others know that they can influence the actions of Russian banks by whispering a few words into the right ears.

Rather than concluding that Russia’s financial integration limits his options, Putin may end up concluding that Russia should never have allowed its banks and firms to borrow so much abroad.

The potential strategic uses of financial power are a particular interest of mine. Russia isn’t alone in thinking that the US government has, in the past, used finance as a source of pressure on countries’ pursuing foreign policies that the US opposes. The British government, for example, was convinced that the US was pulling its sterling reserves during the Suez crisis. The available data suggests it wasn’t – it didn’t need to. The United States leverage came from the fact that the UK needed a large US or IMF loan in order to be able to defend sterling’s peg to the dollar -- and the US wasn’t willing to support such a loan to a country pursuing policies the US didn’t support.

Who seems to have pulled out of sterling then, draining the Bank of England’s dollar reserves? India. And the international oil companies, who worried about the potential impact of a devaluation of sterling on their operations.

Such concerns are likely to multiply in a world where governments play an ever rising role in the market, and experiment with more aggressive strategies for managing money. Imagine the furor if sovereign funds -- not US hedge funds – had been shorting the US broker-dealers ….

Incidentally, the scale of Russia’s government intervention this week has almost been on the same scale as the United States’ government intervention, which takes a bit of work - Russia on Thursday indicated it would spend $20 billion to buy Russian shares, deposit $60b of the Finance Ministry’s funds in Russian banks (perhaps running down its dollar and euro deposits at the central bank in the process?) and that the central bank of Russia would supply $20b in liquidity to Russian banks.