March 06, 2014
Russia Threatens to Drop The Dollar and Crash The U.S. Economy if Sanctions Are Imposed – Obama Signs Sanctions Anyway
On Tuesday Reuters reported that a Kremlin aid Sergei Glazyev had announced that if the U.S. were to impose sanctions on Russia Moscow may drop the dollar as a reserve currency and refuse to pay off any loans to U.S. banks saying that Moscow could recommend that all holders of U.S. treasuries sell them if Washington freezes the U.S. accounts of Russian businesses and individuals.
“We would find a way not just to reduce our dependency on the United States to zero but to emerge from those sanctions with great benefits for ourselves,” said Glazyev.
“An attempt to announce sanctions would end in a crash for the financial system of the United States, which would cause the end of the domination of the United States in the global financial system”
That statement is startling by itself, but the true gravity of this situation is only evident when you consider it in context. China has taken Russia’s side in the Ukraine conflict (they are after all allies) and China holds the lion’s share of U.S. treasuries. If Russia puts out the call to drop the dollar China would have a choice: either hold on to those treasuries while the dollar slides (losing their shirt in the process) or join Russia and dump their holdings as well. It should be pretty obvious which way China would go.
The effects of a coordinated bond sell off by China and Russia would be earth shattering. This would be the financial equivalent of a nuclear bomb being dropped. It is no exaggeration to say that such a move would mark the end of an era.
You would think that this would prompt some serious reflection and that diplomats would be scrambling to resolve this peacefully, but instead today Obama signed a sanction order anyway and revoked the visas of a number of Russian officials.
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