Dear Reader,
If you caught my appearance on the Bannon WarRoom podcast this past Wednesday, you heard me give details on how the REPO Act was written to essentially tie Donald Trump’s hands during his second term as president. But there is much more to tell than what I revealed on air. Here’s the rest of the story.
To review, the U.S. and its allies in Europe are moving quickly to steal U.S. Treasury securities lawfully owned by the Russian Federation. The consequences of this theft in the international monetary system would be momentous and highly adverse for the United States. Let’s look at the background to this situation before weighing the future damage.
The Greatest Theft in History
The Russian Federation is like any other country that runs a trade surplus – it must decide how to invest that surplus. Russia’s surplus, which is denominated heavily in U.S. dollars, is earned mostly through energy exports (oil, natural gas, and refined products) and also through weapons sales, nuclear reactor sales, mining output, tourism, and agricultural output.
The Russian surplus has been building for the last ten years, following the crash of oil prices in 2014. Russian reserves fell from about $475 billion to $355 billion during the oil price crash. Since then, the price of oil has rebounded and so have Russian energy sales abroad.
By 2022, just before the outbreak of the War in Ukraine, the Russian reserve position had climbed to about $630 billion. About 21% of that (or $130 billion) was invested in gold bullion in physical form stored in Russia. Of the remaining $500 billion, about $300 billion was invested in U.S. Treasury securities of various maturities.
The U.S. Treasury securities owned by Russia are all in digital book entry form on a ledger controlled by the U.S. Treasury. Title to the securities is recorded on the books of U.S. and European banks and on the books of Euroclear, the largest securities custodian and transfer agent in Europe and one of the largest in the world.
Of the $300 billion in Treasury securities, about $200 billion is held in Euroclear, another $90 billion is held by large European banks such as Deutsche Bank and Barclays, and $10 billion is held by large U.S. banks such as Citi and JPMorgan.
The principal amount of U.S. Treasuries owned by Russia also earns interest. Since the start of the war in Ukraine, these $300 billion of Russian-owned securities have earned approximately $6 billion in interest. Efforts by the United States to steal the Russian assets include the interest as well as the principal.
Other Russian assets in the U.S. such as direct foreign investment in companies or real estate are also being targeted. If the U.S. and its NATO allies work together to steal 100% of the Russian assets located in the West, it will be the greatest theft in the history of the world.
Immediately after the outbreak of the war in Ukraine in late February 2022, the U.S. froze all the Russian-owned U.S. Treasury securities. Freezing assets is not the same as stealing them. When assets are frozen, it means the owner cannot sell or transfer them, pledge them as collateral or collect interest income (or dividends in the case of shares). The title still belongs to the Russian Federation, but the securities are not available for any purpose until the freeze is lifted.
The U.S. has done this many times to political enemies such as Iran, North Korea, Syria, Venezuela, Cuba, and others. Often, the freeze is lifted years after it is imposed as political differences are ironed out and relations thaw. The U.S. has released tens of billions of dollars of frozen assets to Iran during the Obama and Biden administrations.
Although the Russia asset freeze was not as extreme as stealing the assets, it did mark a major escalation in prior practice. Russia is the eleventh-largest economy in the world, the largest nuclear power, the second-largest energy producer, has the ninth-largest population, has the largest land mass by far, and is a member of the G20.
The Russian-owned U.S. Treasuries were mostly controlled by the Central Bank of Russia. The move to freeze assets held by the central bank of such a large and powerful country was the most extreme move of its kind since the U.S. froze Japanese assets in August 1941. A few months later, the Japanese attacked Pearl Harbor.
As extreme as the move to freeze Russian assets was, the current effort to steal the Russian assets is even more extreme and potentially dangerous to U.S. standing in the world of international finance.
The REPO Act is “Trump Proof”
In late April 2024, the U.S. Congress passed, and President Biden signed into law something called the “Rebuilding Economic Prosperity and Opportunity for Ukrainians Act” or the “REPO for Ukrainians Act” for short. The REPO Act authorizes the confiscation of certain Russian assets subject to U.S. jurisdiction including U.S. Treasury securities and the use of those assets to support Ukraine in its war against Russia. While the term “confiscation” is used in the legislation itself, this is outright theft of the assets.
The REPO Act says, “The President may confiscate any Russian sovereign assets subject to the jurisdiction of the United States.” Such assets confiscated are to be deposited in a “Ukraine Support Fund” to be managed by the State Department and the Agency for International Development (AID).
AID is well-known as a front for CIA financial activity overseas. The current head of AID is Samantha Power, who was formerly U.S. Ambassador to the United Nations under Barack Obama. This will give the Obama-Biden team and the CIA in particular effective control of the funds.
The REPO Act also has provisions intended to tie Trump’s hands if he wins the election in November. Section 103 provides that “No Russian asset that is blocked … may be released or mobilized until the President certifies … that hostilities between the Russian Federation and Ukraine have ceased; and full compensation has been made to Ukraine.” Since those conditions are unlikely to be met in any scenario, this means that Trump cannot release the stolen assets since he cannot offer the certification.
Section 104 provides, “The authority to confiscate … Russian sovereign assets … shall terminate on the earlier of the date that is 5 years after the date of the enactment of this Act.” That date is April 2029, which is after the end of Trump’s term if he wins the election. That means Trump cannot end the confiscation authority during his entire term of office. In effect, the Democrats and RINOs have made the REPO Act Trump proof.
The impact of the REPO Act is limited by the fact that only about $10 billion of Russian sovereign assets are actually under U.S. jurisdiction. Yet, the act contemplates this theft will be a down payment on a much larger theft to be conducted by NATO allies in Europe.
The REPO Act says, “The President shall take such action…necessary to seek to establish a common international compensation mechanism, in coordination with foreign partners … that shall include the establishment of an international fund to be known as the “Common Ukraine Fund”.”
This is a clear reference to the $290 billion of Russian sovereign assets held in Europe. The act then says that the assets of the Ukraine Support Fund will be contributed to the Common Ukraine Fund. No doubt, the U.S. will be the most powerful voice in the administration of the $290 billion common fund.
The Euroclear Connection
The U.S. goal is to use the G7 summit in Apulia, Italy on June 13-15, 2024, as a platform for getting the other G7 members to go along with the Common Ukraine Fund and to steal the Russian assets under their jurisdiction. The largest prize is the $200 billion in custody at Euroclear, which is based in Belgium.
Euroclear is owned by 78 major financial institutions, mostly in Europe. While Belgium is not a member of the G7 (U.S., Canada, UK, France, Italy, Germany, Japan and a representative of the EU), there is little doubt that the G7 countries operating through the banks they regulate, and other political and legal channels could force the confiscation of Russian assets held in Euroclear.
There are many variations on this plan of theft that are being considered. One plan would steal the interest only (about $6 billion) and leave the principal frozen but not confiscated. Another plan would organize a loan to Ukraine collateralized by the Russian assets. When Ukraine defaults on the loan, which they will certainly do, the lenders could seize the collateral. Another hare-brained scheme would impose a 100% tax on the assets and then collect the tax by seizing the assets. All of these variations amount to the same theft. They are wolves in sheep’s clothing.
The Consequences Will Be Devastating to the West
The consequences of this theft of Russian assets are far reaching and extremely negative for Western financial interests and the stability of the international monetary system.
One immediate impact would be the decline of trust in the U.S. Treasury market and an aversion to holding U.S. Treasury securities in sovereign reserves. Major holders of U.S. Treasuries such as China, Japan, Taiwan, Saudi Arabia, Brazil and others would gradually reallocate reserves away from Treasuries toward assets that cannot be frozen or seized such as gold bullion. This is happening already and is part of the explanation for the 30% increase in the dollar price of gold in the past few months.
This theft of Russian assets will also give a boost to efforts by the BRICS+ members to create an alternative gold-linked trade currency (and ultimately reserve currency) for use in international transactions. This effort will take several more years to complete, but U.S. abandonment of the rule of law will accelerate that effort.
If Europe joins the U.S. in stealing Russian assets, Russia will retaliate by seizing billions of dollars of direct foreign investment in Russia owned by major European companies such as Siemens, Total, BP, and others. The value of the European assets subject to seizure by Russia is greater than the value of the U.S. Treasuries owned by Russia. It could be the case that Russia makes a net profit from the two-way confiscation.
If Euroclear participates in this theft, Russia could sue Euroclear in a number of jurisdictions around the world. Euroclear is one of the largest custodians and clearing firms in the world with over $40 trillion in assets held, and has operations in Singapore, Hong Kong, and Malaysia as well as representative offices in Dubai, and Beijing. Courts in those jurisdictions are likely to be far more sympathetic to Russian complaints than European or U.S. courts. Russia could obtain judgments and put liens on Euroclear assets that could throw the global financial system into complete chaos.
The impact of the REPO Act is now being felt by U.S. banks as well. Just days afterWashington voted to authorize the REPO Act, a Russian court has ordered the seizure of $440 million from JPMorgan.
The assets had been frozen by authorities in the wake of the western sanctions, and highlights some of the fallout western companies are feeling from the punitive measures against Moscow. We will closely monitor this situation and update you with the latest as this plays out.
In an ironic twist, the mere talk about stealing Russian assets has caused the price of gold to increase by $600 per ounce in a matter of months. Russia has approximately 3,000 metric tonnes of gold in its reserves, which cannot be touched by Western sanctions or the REPO Act. The rally in gold prices has increased Russia’s reserve position by $50 billion without Russia lifting a finger. This is further evidence, as if any were needed, of Russian brilliance and U.S. stupidity in playing the global financial game.
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All the best,
Jim Rickards
Editor, Strategic Intelligence
