Empty Threats

“You know what the Ukraine is? It’s a sitting duck. A road apple, Newman. The Ukraine is weak. It’s feeble. I think it’s time to put the hurt on the Ukraine.” –Cosmo Kramer, RISK enthusiast. Every time an international crisis pops up, proposed solutions always seem to include leverage, both military and economic—how can one party bend another to their will? A friend of mine, who’s a bit of a “prepper,” recently posted an article which absurdly stated that, “Needless to say, Russia could do far more economic damage to the United States than the United States could do to Russia.” For the uninitiated, a “prepper” is someone who’s convinced the world is ending, and they’ve filled their basements with Twinkies, gold coins, and Tang, just-in-case. Presumably that, by discontinuing the use of the dollar as its reserve currency and by “dumping” its U.S. debt, Russia could strangle the U.S. economy and bring it to its knees. Of the $17.4 trillion in U.S. debt, Russia holds only $150 Billion—hardly a large share. The debt they hold is not callable, meaning they cannot just show up one day and demand payment, and when they do eventually get paid, they’re getting paid in U.S. dollars. Let’s translate this to the household level, so you can get a better feel for just what’s happening. Consider the following: The “we’re going to dump your debt” argument: Let’s say you have a 30-year mortgage, but your banker shows up on your doorstep one day and says, “Hey, I know you’re supposed to pay us back over 30 years, but we’d really like it if you’d pay us now.” You’d probably have some choice words before sending him on his way. If the bank wanted to get paid back now, the only option it would have is to sell your mortgage to another bank, and based on current interest rates, it may have to take a loss to do it. The only thing that changes for you is who you write your check out to each month; do you really care what bank holds your mortgage? So, Russia could certainly sell the $150 billion in bonds it’s now holding, but who cares? The “we’re going to hurt the dollar” argument: This makes as much sense as if the bank threatened to burn your house down. Since your home is the collateral which is securing your mortgage, how much sense would it make for the bank to burn it down? If the bank did burn your house down, would it then be able to sell your mortgage to another bank? So, even if Russia could somehow hurt the dollar, would it? Consider that all interest and principal payments on our debt are being paid in U.S. dollars, hurting the dollar would diminish the value of our debt payments and hurt the marketability of the notes Russia is currently holding. By the way, China holds $1.3 trillion in U.S. debt; do you think it has an interest in hurting the dollar? The only real economic warfare that Russia can engage in is to ransom its energy exports to Europe. Russia has an incredibly homogenous economy, of which over 50 percent is hydrocarbon based. Apparently all the windmills in Holland can’t satisfy the continent’s energy requirements, and Europe has become increasingly dependent on Russian energy, especially natural gas. In fact, Russia is the world’s second-leading producer of natural gas; do you know who produces more? That would be the United States. It turns out that North American production of natural gas outpaces Russia by over 30 percent. If Russia forces an increase in the price of natural gas, at what point does it become overwhelmingly economical for the United States to increase exports to our European friends? In short, Russia has very little economic leverage against the United States, a fact which is certainly not lost on the Russians. I’ll leave you with this one disclaimer: I’m writing this piece on Friday March 7, for publication on the 14th. If, by the time you’re reading this, we’re at war with Russia, my “prepper” friend also has a bunker, and you’ll find me there. Stephen Kyne is a partner at Sterling Manor Financial, in Saratoga Springs and Rhinebeck. Securities and investment advisory services offered solely through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Sterling Manor Financial and Cadaret Grant are separate entities.