A Rouble dawn begins ?

One thing is certain. Standard and Poor ratings grades are not always objective. It is subjective and has always been that way. That unfortunately is the case with all international rating agencies. There is always a greenback bias. Those who stand up against the dollar and Uncle Sam's bullying are delivered a junk status rating.

It is no different in the case of Russia. Forget the fact Russia owns $150 billion of U S treasuries making Uncle Sam a debtor to Russia.

Wiess Ratings's Mike Larson prognosises that Russia will go into a recession as Uncle Sam's economic sanctions bite. He doesn't explain how. But who will go into a recession is a clear question? Russia's economic second strike capability appears forgotten. Russia is the single largest oil and gas supplier to Europe. Besides, Europe is still teetering on the edge of a recession. European Central Bank president and former Goldman Sachs honcho Mario Dragi's European version of quantitative easing (long term repurchase operations) has had little effect. If energy supplies are choked and Russian market access is restricted, it is unlikely to help Europe's recovery from recession. A sanction does not weaken Russia. It makes Europe vulnerable!

That is only one phase. The second phase will be complete Russia's liquidation of its dollar treasury assets against its debts. Russia's dollar denominated assets are presently $280 billion inclusive of the $ treasury holdings. The holdings appear small, but still significant to roil the financial markets. The US treasuries in turn will land back with the U S banks. Russia in one stroke would have shrunk its foreign debt and a major problem for the international banks including the likes of JP Morgan Chase, Citi and Goldman Sachs. And a securitization of the outstanding of gas dues from Ukraine and European would undoubtedly wipe out
Russia's debt.

Obviosly such a sell off could cascade across all the US treasury holders. The cascading impact is partly because investors's moves to to cut losses. Losses, because, the Russian sell-off could actually pull down the prices of U S treasuries and in turn raise the yields. That in turn could raise the cost of America's debt funding plans, maybe another fiscal cliff.

Currency wars to hot wars !

Which lender in his right mind will lend fund to a borrower whose debt stock is far more than his gross domestic product. For those who came in late, U S national debt is $18 Trillion dollars and GDP is $17 trillion or 106 per cent.

As for Russia, government debt is just 8.4 per cent of the gross domestic product of $2.2 trillion! Russia had a current account surplus of $32 billion in 2013 compared to Uncle Sam's $379 billion deficit.  

Obviously it is not these numbers that have gone into the ratings. Instead, the criterion is subjective. It is more linked to Russia's move to invoice its trade including energy exports in roubles or gold and bi-lateral currencies. Invoicing in roubles is technically not a problem. After all, the rouble became fully convertible in July 2006.

But the problem is that Uncle Sam cannot afford to pay in roubles or for that any other currency other than the dollar. Unlike the rest of the world, Uncle Sam has never seen the need to maintain foreign currency reserves. So ask Uncle Sam to pay for oil or gas exports in Euro or in gold, in rouble or in Yuan. The chances are that Yankistan will not have it, 'cos Uncle Sam is used to paying for its imports by printing dollars and exporting inflation.

Therefore the shift away to alternative currencies other than the dollar challenges America full spectrum dominance. It ends American exceptionalism. The challenge is to the key pivot – the financial sector. Iraq was wiped out, since Saddam Hussain dared to shift to the Euro for invoicing the oil exports. Libya's Col Qaddafi had also challenged the supremacy of the dollar. Libya as a result is mired in chaos and anarchy.

The latest is Russia's move to import oil from Iran in bilateral terms, including in roubles. But the shift away from dollars also means American economic sanctions loose the sting. The sanctions will remain on paper. The problem however is that oil imports have been so far paid for in dollars. So if the Oil importers also shift away from the dollar, the ability of the US to recycle dollars into funding US government debt becomes expensive. After all the surplus dollars with the rest of the world is what that has kept America's interest rates low.

It is also precisely this debt that has funded U S military expenditure. So with the increased cost of the debt, America's military leverage also diminishes. For America, it means that the foreign military gallivanting becomes financially unsustainable. It was easy to deal with the likes of Iraq, Iran and Libya. Russia though cannot be confronted with no-fly zones and militarily.

So the option is to remove or neutralise the energy leverage of the Russians. It is easier said than done. Russia presently supplies 30 per cent of Europe's natural gas or about 270 million cubic metres per day at $12 per million british thermal units. So If Europe imposes energy sanctions on Russia, Europe needs to find alternative sources of energy.

The U S has offered to step in through the TTIP (TransAtlantic Trade and Investment Partnership) a programme where U S pays in dollars and Europe may or may not get to invoice Euros. But gas from US is recovered largely by hydraulic fracturing. The makes it considerably more expensive significantly higher than the gas supplied by Russia's Gazprom.

Building the infrastructure for gas supplies to Europe, in the form a liquefaction terminal, shipping and regassification terminal would not happen overnight. And the gas supplied through fracking is unlikely to be cheaper than Russian gas would take the price upwards of $25 per mmbtu. That would be happening at a time when China and India would be negotiating of prices of less than $ 6 per MMBTU.

Therefore, to provoke an energy price war, US would still need subsidies. That means the US would be left with little option of other than borrowing funds. So the next big sovereign borrower is poised to enter the global financial markets and the debts may be in Rouble or Yuan (not clear) . So have the rating agencies factored this scenario in making upgrades or downgrades. They obviously haven't

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Post Script: Chinese whispers indicate, Goldman Sachs is beginning to go long on Roubles .