Opinion by Sebastian Mallaby: War in Ukraine has created a new financial weapon in the West
, imposing austerity on ordinary Russians to slow the flow of currency out. Fearing that the financial system is on the brink of collapse, citizens are lining up at ATMs. President Vladimir Putin’s claim to stand for economic stability has been shredded.This shredding extends a profound shift in geoeconomics. Until a few years ago, creditors were assumed to have the upper hand over debtors. U.S.
Later, as China grew to be a massive creditor, the same fear returned with a vengeance. As a U.S. military ally, Japan was unlikely to have a big enough beef with Washington to resort to a financial attack, but China was a different story. My former Council on Foreign Relations colleague Brad Setserabout the circumstances under which China might use its creditor status as an offensive weapon.
Setser turned out to be wrong, but not for the reasons his critics had expected. The standard objection was that, by starting to sell its Treasury securities, China would destroy the value of the rest of its holdings — damaging its own interests. Russia’s invasion of Ukraine is the latest illustration of why this objection was naive. In wartime, nations routinely damage themselves in the hope of inflicting greater damage on their adversaries.The real reason Setser was wrong emerged in 2008.
Quantitative easing was primarily a tool to manage the economic aftershocks from the crisis on Wall Street. But there was a China angle, too. The Chinese state owned oodles of Treasury and mortgage bonds, and it was determined to get its money back. Quantitative easing demonstrated how the Fed could deal with these demands: It could print money and buy the bonds that China wanted to sell. That buried the idea that a future Chinese threat to dump U.S. bonds could work as a weapon.
With its sanctions on Russia, the West is driving creditor impotence to the next level. Russia’s status as a large official creditor not only fails to give it leverage over the West, it also has little defensive value. It turns out that being a creditor is not a source of power after all. What matters is having a financial system that commands global trust, based on an independent central bank and an independent legal system.
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