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SWIFT Ban on Russia Means the Fed May Need to Ready Dollars

The seal of the U.S. Federal Reserve Board of Governors across the street from the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Sunday, Dec. 19, 2021. The Federal Reserve chair has tempered his ambition to restore the labor market to its pre-pandemic strength, as the central bank confronts surging inflation and a workforce still constrained by Covid-19.

The decision to exclude various Russian lenders from the SWIFT messaging system could result in missed payments and giant overdrafts within the international banking system, and spur monetary authorities to reactivate daily operations to supply the market with dollars.

That’s the view of prominent Credit Suisse Group AG strategist Zoltan Pozsar, who published a note Sunday examining the consequences for money markets of the decision to take some lenders off SWIFT. The system facilitates trillions of dollars of international payments between institutions.

Drawing comparisons with the 2008 Lehman Brothers Holdings Inc. failure and the pandemic-related market seizures of March 2020, Pozsar warns that “central banks should stand ready to make markets on Monday again.”

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“Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” Pozsar wrote. “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes.”

In Pozsar’s view, current excess reserves and reverse repurchase agreement facilities won’t be enough, and monetary authorities will need to act. And the upshot from that is that the Federal Reserve, which has been paving the way to start shrinking its balance sheet through so-called quantitative tightening, might actually expand it again first, according to Pozsar.

Stepping up the pressure on Russia’s finacial system, European Union foreign affairs ministers approved banning all transactions with the Russian central bank, according to officials familiar with the decision.

RUSSIA INSIGHT: Central Bank Sanctions May Light Fuse to Crisis

The bank may be rendered “impotent” in defending the ruble if sanctions are successful, according to National Australia Bank Ltd. strategists. The intention of the sanctions is to deny the bank unfettered access to its $643 billion of FX reserves, Ray Attrill, head of FX strategy, wrote in a note. “If CBR can’t access reserves, it can’t defend the RUB from free-fall.”

Greenback Surges

The greenback is rising against every Group-of-10 peer as fallout from the worsening conflict in Ukraine fuels demand for the world’s reserve currency. Investors are seeking shelter as market volatility surges on the crisis that’s adding to existing global inflationary pressures.

A gauge of the dollar climbed as much as 0.6% on Monday, extending last week’s 0.4% gain as Western nations ramped up sanctions on Russia over its invasion of Ukraine. A key question is how the turmoil will affect the Federal Reserve’s plan for a series of interest-rate hikes starting March.

The Russian ruble, which weakened 6.9% to 83 per dollar last week, will be in sharp focus when onshore trading starts Monday. Russian bonds were cut to junk by S&P Global Ratings on Friday.

On the ground, citizens have lined up at cash machines around the country to withdraw foreign currency, fearful of a ruble collapse.

Officials from Kyiv will meet Russian counterparts at the Belarus border, hours after President Vladimir Putin put Russia’s nuclear forces on higher alert and even as fighting continues inside Ukraine. Ukrainian President Volodymyr Zelenskiy voiced skepticism that talks would yield results but said he was willing to try if it meant any chance of peace.


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