- US Treasury acts as a universally accepted currency
- Swift economic isolation of Russia highlights the US’s financial control
- Fewer buyers for US treasuries due to concerns over the US’s financial dominance
- Unintended Consequences – Russian sanctions indirectly affect real estate borrowing rates and the global economy
Global Transactions: The Dominance of the Dollar
Do Russian Sanctions impact multifamily borrowing rates? – Yes, actually they are, in an unusual way.
The US Treasury is just like any investment, the more demand there is the lower the return the issuer needs to offer to entice investors.
For many many decades, the US Dollar and its guaranteed treasuries were essential collateral for many of the largest transactions between nations.
Imagine you run the treasury of a third-world country and you need to buy oil from a G7 Nation. Do you think the G7 member nation is going to accept your currency?
Similar to a store that only accepts Visa, not American Express, the third-world country has to purchase US treasuries or US dollars from US Banks licensed to make markets for treasuries. The country now has the universally accepted currency so it can pay for the oil in dollars. The value of that currency is highly stable and redeemable almost anywhere in the world.
US Treasury: The All-in-One Global Credit Card
Imagine the US Treasury is a credit card that combines all Visa, Mastercard, American Express, and Discover in one card.
So how does this tie to Russian Sanctions?
Russian Sanctions: A Game Changer in Currency Dynamics
When Russia illegally invaded Ukraine what ensued was a new breed of sanctions that cut Russia right out of the Dollar system nearly overnight. It wasn’t the veracity of these sanctions that made dozens of countries stand up and notice. It was the fact that within a few months, the U.S. economically isolated Russia.
The Shift in Global Currency Dynamics
If you are China, a country that relies on exports and the US-controlled international monetary system, are you going to continue to support the supremacy of the dollar and treasury? I don’t think so.
In fact, China has been conducting a “ditch the dollar” campaign at the BRICS meeting where dozens of additional countries were invited to join. This new emerging larger BRICS agenda is first to find ways to trade with each other without settling purchases in US Dollars.
Conclusion: Unintended Consequences and the Future
The conclusion is that in addition to the US running a deep deficit requiring trillions of treasury auctions, there are fewer buyers since the US is now seen as a financial bully of sorts.
In my opinion, only BRICS, excluding India, will likely trade with each other on a new Renminbi-based wire system, but that’s where it will stop. Advanced economies with government structures will appreciate the fact that no one person or family controls the USA or its currency.
Imagine you owe China 1B, one guy in that country can simply declare the amount due is now 1B or the currency is worth more and less by decree, not market forces.
It doesn’t work long term, but with Russia, the second largest exporter of energy in isolation, the workaround is at least in part contributing to the weak treasury auctions.