On 13th June 2024, the G7 countries decided to ‘use’ Russia’s foreign reserves to ‘finance’ a loan.1 On the surface this all seems fine; the Government is taking a loan to pay for things it really needs right now. However, we aren’t talking about households, we are talking about sovereign Governments which can create money any time by crediting bank accounts. Sure, that is not the case for EU countries which have to rely on the ECB, but for the U.S., that isn’t an issue. And even for the larger EU countries (especially the ones with a Current Account Surplus), it isn’t much of an issue either, since they can always borrow from the bond markets at low interest rates.
There is the obvious ethical issue of freezing or taking another country’s reserves as collateral for a loan. Russia gave real goods and services (eg. oil, natural gas etc) to obtain those reserves. However, this doesn’t mean the U.S. and the EU have similar constraints with their own currencies.
The article lists foreign reserves held by various Western countries:
- France ($71bn)
- Japan ($58bn)
- Germany ($55bn)
- US ($38bn)
- UK ($26bn)
- Austria ($17bn)
- Canada ($16bn)
However, it doesn’t show the composition, i.e., what currencies these assets are denominated in, how much gold/commodities there is in their reserves, etc. Since it is foreign reserves, we can safely assume that it is most likely in U.S. Dollars, IMF SDRs, and to a lesser extent, Euros. It doesn’t matter where it’s held, what matters is which currency it is in.
So, these are (mainly) financial assets like banknotes, deposits, and other short-term instruments. That begs the question, if Russian foreign reserves are in Dollar denominated Government issued financial assets, by using it as collateral for a loan from the World Bank (which is a U.S. institution), isn’t the U.S. using its own previously created financial assets (by issuing treasuries, banknotes etc to Russia) to obtain money it already created from the World Bank?
The profit generated by Russian assets, which are in US Dollars and issued by the U.S. Government, is paying for the interest on the loan taken by the U.S. Government from an American institution like the World Bank.
The U.S. can always afford to pay in U.S. Dollars without going through hoops like this. Just like they have done before, they may say it is paid through taxes, bond issuance or in this case, a ‘loan’ taken from the World Bank using Russian foreign reserves (in reality, US Dollar instruments). In the end, all of these are done in a very similar way, by crediting bank accounts.
Let’s look under the money
We should stop focusing solely on the financing of this loan and instead look at who would benefit from it. Of course, if the U.S. Government takes a loan from the World Bank in U.S. Dollars by using U.S. Government debt as collateral, the World Bank gains whatever interest on loan2 is paid back by the U.S. Government bonds (which is what Russian foreign reserves is mainly composed of).
But what is more important is where does the money go? The U.S. says it goes to Ukraine, so Ukraine gets $50bn added to their foreign reserves? Yes*3, but what will those foreign reserves be used for?
Ukrainian ‘budget’ is denominated in Ukrainian Hryvnia, not U.S. Dollars. Why would Ukrainians take U.S. Dollars when their domestic consumption is paid using Hryvnia? So, the ‘budget’ means financing their Current Account Deficit. U.S. gives Dollars to Ukraine which it then uses to purchase goods from the U.S. and anyone who accepts USD internationally.
The military is much more obvious, we all know U.S. is fighting this war to enrich its Military Industrial Complex at the expense of Russian/Ukrainian lives and property. U.S. takes a ‘loan’ from the World Bank paid for by themselves using financial assets that they issued in the past so that they can pay (enrich) their own Military Industrial Complex to give to Ukrainians, who are sent to their deaths for a war they have no chance of winning.4
The Politico article blames lack of U.S. Aid due to political roadblocks (I will touch on that in the next section) for Ukraine losing. I disagree, no amount of weapons can fill the amount of soldiers Ukraine lost. And by giving them more weapons (which, as stated before, is by no means for altruistic reasons), it’s prolonging the inevitable.
So who gets something?
a. Ukraine which gets weapons and their corrupt leadership get richer.
b. American/European Military Industrial Complex who essentially get free money.
So who loses?
a. Russia, Kind of, Russia couldn’t use its foreign reserves even before due to the freeze. Besides, their economy has been strengthened due to increased spending because of the war pushing wages of all sections higher.
b. Russian and Ukrainian people who will have to die so the oligarchs (both Western and Ukrainian) can enrich themselves.
c. The Ukrainian economy once the war is over and if Ukraine remains under U.S. influence, which will be looted and squeezed further by the U.S. and the institutions that gave them the ‘loans’, which in reality is a deal with the devil.
Which devils benefit?
“I believe that the real question of this ‘loan’ shenanigans is which country’s capitalists will benefit. Europeans or American? The neoliberals will have you believe that since capital is now globalized, which nation state benefits is not very relevant. That is true to an extent. However, production has to take place at some place and multi-national companies do have home biases.
For example, if a weapons factory is built in France, it will benefit the French more. Since France isn’t at full employment, any additional spending, even if it’s on goods that normal people can’t use, will increase output in other sectors due to multiplier effects. Of course, the French arms industry owners will benefit the most (and that is what their leaders want) since they are essentially getting free money.
My point is that this isn’t really a debate about who pays for it, but who benefits from the so-called ‘aid’. The Western propaganda outlets will have you believe that this is all done out of care and consideration for the Ukrainian people, helping them fight against the so-called ‘occupiers’.
Besides the fact that its completely hypocritical, see Israel’s occupation of Gaza/West Bank, it is also complete nonsense. Why? Because the party which gains the most from this so called ‘aid’ is not Ukrainian people but Western capitalists because of reasons mentioned previously, in that it is a wealth transfer to the Military Industrial Complex.
This is mentioned clearly in this Politico5 article:
“Europe and America are also fighting about control over the loan and influencing how the money is spent, senior European officials said.”
If Washington — or institutions with major U.S. stakes such as the World Bank — dole out the money, American companies are in pole position to profit, they said.
“The EU can be naïve, but this goes too far,” said an EU diplomat. “This would benefit mostly American companies, so we have to discuss the conditions more in detail.”
“with the officials saying the EU wanted to negotiate the exact conditions to avoid their companies being left out of profitable Ukrainian contracts.”
This Reuters article mentions how the EU aims to shift the European arms industry to ‘war economy mode,’ i.e., allow arms manufacturers to profit even more.
See how €100 billion comes out of nowhere when talking about defense? No talk of ‘how will we pay for it’ arguments which come up when neoliberals talk about increasing welfare spending.
Why do this kind of gymnastics?
I have outlined how this isn’t really a loan and more akin to the ‘assistance’ given to Ukraine by the U.S. previously. The question arises, why do it this way?
I believe that it is done this way because it would be politically difficult to get it through the Congress because of the Republicans (especially with the MTG types).6 By doing it this way, the U.S. can say it is not costing anything to the ‘taxpayer’ because it is using Russian assets (which as I said before is an accounting smokescreen).
And the Reuters article says:
I do not believe it’s because of Donald Trump; the U.S. can create money the typical way for Ukraine right now under Biden, so it is likely the latter reason.
The American Military Industrial Complex loves the taste of blood, doesn’t matter if its Ukraine, Syria or Gaza.
That’s all.
- https://www.aljazeera.com/news/2024/6/14/g7-to-use-russian-assets-for-50bn-ukraine-loan-how-will-it-work ↩︎
- World Bank gains nothing by just giving the loan, they lose one asset, U.S. Dollars and gain another, Loan issued for the U.S. There is no profit until interests start coming in. There is no default risk since this loan is given by a Sovereign state i.e the US Govt in their own currency ↩︎
- U.S. could take the Dollars and directly give it in form of weapons purchased from its private defense industry (Raytheon, Lockheed Martin etc) or give it to Ukraine which adds to their foreign reserves which they will then use to purchase American weapons. Either way its the same. ↩︎
- https://www.politico.eu/article/why-ukraine-losing-russia-war/ ↩︎
- https://www.politico.eu/article/us-eu-war-in-ukraine-loan-russian-assets-negotiations-g7-us-election-western-support-joe-biden-olaf-scholz-emmanuel-macron/ ↩︎
- https://www.ft.com/content/2bf55e1b-173b-4b63-b26b-95d9a23f5a58 ↩︎