Although the United States has ruled out open military conflict in response to Russia's annexation of Ukraine's Crimean Peninsula, some see growing risks that the two former superpower rivals could sink into a kind of economic Cold War.
The U.S. and its European allies have taken small steps by sanctioning individuals close to Russian President Vladimir Putin and by freezing or postponing trade talks and other measures intended to strengthen economic ties with Moscow.
Both sides are threatening larger measures if the Ukraine crisis worsens, and Congress and the financial markets are on alert for a number of extreme scenarios.
Russia owns about $200 billion of U.S. Treasury bonds as a result of hoarding and reinvesting U.S. dollars it has earned on the sale of oil exports in the past decade or two. The amount is far smaller than China's $1.5 trillion war chest, but still a massive stockpile that it could deploy to try to hurt the U.S. economy.
Analysts think Russia has moved more than $100 billion of the bonds outside U.S. borders to havens where they could be sold off to the detriment of U.S. financial markets without interference from U.S. authorities.
The U.S., meanwhile, has weapons it could deploy if the economic standoff heats up. Most notable are increasingly plentiful oil and natural gas resources that some analysts say could drive down prices of the oil and gas exports that provide a lifeline for Russia's economy.
Though the White House has stayed mum, rumors have surfaced in crude oil markets in recent days that the U.S. might flood global markets with releases from its 727-million-barrel Strategic Petroleum Reserve to try to drive down prices on Russian oil exports, perhaps the toughest retaliatory move at President Obama's disposal.
"A new economic war is already in full swing," said Herve van Caloen, a managing partner at Belpointe Asset Management.
He added, however, that the West is not as prepared as Russia to take drastic measures to win the confrontation.
"Putin is likely to win the first round" by putting Ukraine in an economic vise, the analyst said. "He is already adjusting the subsidized gas prices sold to Ukraine to market levels."
Since the cash-strapped new government in Kiev can't pay, Mr. van Caloen noted, the West has stepped in with a $38 billion emergency aid package. Thus, "our help to Ukraine will thus go straight into Putin's coffers," he said.
The West has reacted with light-handed sanctions that "punish the kleptocrats [surrounding Mr. Putin], not the Russians," he said.
"This may work, but it is difficult to believe such a response will not escalate into an economic war. Tit for tat is going to continue until someone throws in the towel."
Russian bond weapon
Russia already is moving toward what could be a second, more serious escalation in the war. It withdrew as much as $118 billion in Treasury bonds from custodial accounts at the Federal Reserve during a two-week period in March, Mr. van Caloen said. Even if Russia does not outright sell the bonds en masse in an effort to roil financial markets and drive up U.S. interest rates, "Russians are unlikely to buy our Treasurys for a while," forcing the Treasury and the Fed to scramble for other buyers, he said.
One of Mr. Putin's advisers, Sergei Glazyev, threatened in March to use Russia's U.S. government debt holdings as an economic weapon.
"We hold a decent amount of Treasury bonds — more than $200 billion — and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner," he told Barron's. "We will encourage everybody to dump U.S. Treasury bonds, get rid of dollars as an unreliable currency, and leave the U.S. market."
The Russian government immediately disavowed Mr. Glazyev's threat, but the suggestion continues to reverberate through U.S. financial markets. Some market watchers say the threat is credible in light of Russia's bid to get China to join a massive sell-off of U.S. mortgage bonds during the 2008 financial crisis to try to upend the U.S. financial system, as revealed by former Treasury Secretary Henry M. Paulson in his recent book. Though China refused, economists say, Russia's plan could have had devastating effects on stricken U.S. markets.
"Russia has in the past attempted to topple the U.S. financial markets, so there always is a covert threat," said Robert Wagner, a former economics instructor and mutual fund manager. But, he said, "Russia would likely hurt itself more than the U.S. in a massive U.S. bond dump" because it would do little to raise U.S. interest rates while driving down the value of Russia's investments.
Mr. Wagner noted that Treasury borrowing rates were not affected in March by the massive withdrawal of funds from Fed custodial accounts, which most analysts attribute to Russia, suggesting that interest rates would be little affected by a more overt sell-off unless markets fall into a panic mode.
"Russia's threat is a joke," Mr. Wagner said. Holdings of $200 billion "is a drop in the bucket for a country that has nearly $18 trillion in debt," he said.
Mr. Wagner said the Federal Reserve last year bought about $40 billion of Treasury bonds every month and owns more U.S. bonds than Russia, China, Japan or any other single buyer.
Others note that the Fed would not have to step in to buy U.S. bonds if Russia tries to precipitate a sell-off, because any flare-up in tensions between the U.S. and Russia would only serve to enhance the value of U.S. bonds as safe havens for global investors fleeing riskier investments in a time of geopolitical crisis.
U.S. oil weapon
While Russia has moves it could make against the U.S., the U.S. has its own big weapons that could strike at the heart of Mr. Putin's strategy of exploiting Russia's leverage as an energy superpower.
The White House has not endorsed calls to dip into the Strategic Petroleum Reserve or expedite liquefied natural gas exports to Europe, but it has pointedly refused to rule them out either. Given the silence on the matters, market rumors have run rampant.
Craig Turner, a commodity strategist at Daniel's Trading, said Mr. Putin could force President Obama's hand by going beyond Crimea with a military invasion of eastern Ukraine.
"If something like that happened, the EU and U.S. would have to get serious about sanctions," he said. European nations likely would remain unwilling to take drastic action in light of their extensive trade ties with Russia and dependence on Russian energy, he said, but the U.S. does not purchase oil or gas from Russia and has far fewer trade ties.
"What the U.S. should do is open up the Strategic Petroleum Reserve, sell a substantial amount over time on the market, and lower the price of crude $10 to $15" a barrel, he said. "That will actually help the U.S. economy by lowering energy costs, Europe will not suffer from sanctions with Russia, and for the next year or two that hurts Russia's best source of income."
The U.S. also could use its surplus of cheap natural gas as a weapon, over the longer term, by expediting the approval of liquefied gas facilities that could funnel inexpensive fuel to Europeans, reducing their dependence on Russia and forcing Russia to lower its gas prices to compete, he said.
The idea of using U.S. energy resources as a weapon has taken hold in some quarters of Congress, but not everyone thinks it's a good idea.
"While the rhetorical flourish associated with the linkage is politically intoxicating, the underlying facts bear scrutiny," said Frank A. Verrastro, an analyst at the Center for Strategic and International Studies. U.S. gas exports would not be available quickly enough to help Europe anytime soon, while even a sizable release of oil from U.S. reserves would have only limited effects, he said.
Russia exports 7 million barrels of crude oil a day, yet the most the U.S. could legally release from the reserves would be 4 million barrels a day, Mr. Verrastro said. "That would not be adequate to replace or offset Russian barrels lost as the result of potential sanctions," he said, though he conceded that any extended release from the reserves would drive down prices to Russia's detriment.
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