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Let’s stop kidding about it. If the West (in this case, the USA) really cared about Crimea and the Ukraine and wanted Russia to pack up its Kalashnikovs and head home, it would be a simple task to take care of. No gunfire or “Shock and Awe” air attacks are necessary.

In this post, I’ll tell you how it can be technically and legally done. It involves money (surprise, surprise) or to be precise, the flow of money.

Do you remember George W. Bush’s talk of Saddam having weapons of mass destruction? Do you remember when the US lost its mind collectively as they in all seriousness (and much to the amusement of the rest of the world) started calling French Bread Freedom Bread and French Fries Freedom Fries? If you answered yes, then you will definitely also remember the words Patriot Act.

Unlike the WMDs that turned out to be a “Waffle of Mass Distraction,” the Patriot Act still remains with us. And therein, my dear readers, is the power of the USA against Russia.

I’ll come back to that in a moment.

But first a bit of background on the US Dollar. You’ll like this, so pay attention:

All USD transactions done by a bank outside the US must be done through a US-based correspondent bank.

Read that again and ponder on it a bit … okay? Ready to continue? Of course you are.

What that means in reality is that if you have a USD denominated account containing some US dollars with your bank in London (or wherever outside the USA), those dollars are in effect held in a nostro account in your bank’s name in a US-based correspondent bank.

The above is an important concept to understand, because now we come to the second part: commodities.

Everyone is harking on about how wealthy Russia is and how much oil and gas it has. All of this is true. But do you know what currency nearly all oil and gas transactions are settled in?

If you answered US dollars, then give yourself a cookie.

It’s because of the position of the US dollar as the standard commodity settlement currency that China and Russia continue to work to end its hegemony. They’ve had some success, but they are still far, far from making that happen.

Because of the US dollar’s position as the settlement currency of choice for oil, it remains a popular reserve currency. The favourite currency of wealthy Russians, although they have euros, Swiss francs, and sterling in their private banking accounts, remains the US dollar.

Because so many wealthy and middle-class Russians like the US dollar, Russian banks have to deal with Mucho Gringo Greenbacks. Just go and have a quick look at the main Russian retail bank’s web pages, and you’ll find quotes for interest rates for USD denominated accounts.

Okay. So now we are coming to the punch line of how Obama could make Putin his biaatch. But before that let’s recap:

Russians love the US dollar.
Russian banks offer USD accounts to Russians who love the US dollar.
Russian oil firms are forced to deal with the dollar.
All US dollars held in foreign banks are in fact sitting in an account in a correspondent bank in the US.

And now, drum roll please, we come to the Patriot Act.

Specifically to Section 319 of the Patriot Act: Forfeiture of funds in United States Interbank accounts.

This is a great piece of legislation for the US, as it is the equivalent of a nuclear bomb, or as GWB used to say New-Q-Lear!

It allows the US to seize or arrest funds held in US correspondent accounts of foreign banks, which of course is bad enough, but there is more to it. If the US thinks you’re a bad guy and your bank has a correspondent account with a US bank (and all proper banks do, because a bank cannot work without access to US dollars), then the assets held in the correspondent account are liable for the amount the government wants from you.

Don’t believe me? Here’s the text from U.S. Code § 981 (k):

“… if funds are deposited into an account at a foreign financial institution and that foreign financial institution has an interbank account in the United States with a covered financial institution, the funds shall be deemed to have been deposited into the interbank account in the United States, and any restraining order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the covered financial institution, and funds in the interbank account, up to the value of the funds deposited into the account at the foreign financial institution may be restrained, seized, or arrested.”

Wait, it gets better, even if you never held a single US dollar in your account; the fact that your bank has a correspondent account in the USA makes that money fair game for seizure by the US government.

And that’s not all. There is no legal requirement by the US government to prove that the assets in the correspondent are traceable to you. This means that other people’s money could be frozen while Uncle Sam chases your cheating a$$.

So, if you’re still with me (I know it’s a longer post than normal, but stay with me here), then this brings me to my point.

This whole Ukraine crisis is purely about the US having the stomach for the fight, and, quite frankly, they don’t. Crimea and the Ukraine just aren’t that important to the West. Because if they wanted to, they could simply use the Russian energy companies and the Russian banks and seize their correspondent accounts. You would immediately see a run on Russian banks when the middle class and wealthy would try to access their accounts. Since the Russian banks hold such a large amount of their reserve funds in US dollars, which would be frozen, the banks wouldn’t be able to open their doors. It would cause some serious rioting on the streets of Moscow as wealthy Muscovites would try to drive their Audi Q7s and Range Rovers in through the banks doors.

On top of this, the US could slap a few indictments on Rosneft and Gazprom. Because the US dollar is (pardon the pun) the oil that greases the oil and gas industry, the whole market in Russian oil and gas would come to a screeching halt. Those firms also hold large US deposits, which they wouldn’t be able to access, meaning they wouldn’t be able to meet their daily obligations.

Utter mayhem would ensue in Russia.

How long would this take? Well, let me tell you that the time to answer a request for information alone under the Patriot Act Section 319 is 120 hours, yes, HOURS.

“120-HOUR RULE—Not later than 120 hours after receiving a request by an appropriate Federal banking agency for information related to anti-money laundering compliance by a covered financial institution or a customer of such institution, a covered financial institution shall provide to the appropriate Federal banking agency, or make available at a location specified by the representative of the appropriate Federal banking agency, information and account documentation for any account opened, maintained, administered or managed in the United States by the covered financial institution.”

Like any form of sanctions, it would have far-reaching repercussions, and we would see all kinds of nasty things in the world of finance, who knows Goldman Sachs’s chairman Lloyd Blankenfein’s beard might even fall off.

But do you honestly think that the Russian kleptocratic economy, which defaulted as recently as 1998, is more resilient than the economy of the US (even with its myriad of problems)?

So, as you can see, from a purely technical perspective, bringing Russia and Putin to his knees is really not that difficult a task. The legislative framework is there, and it is brutally effective. The question is does the USA have the political will and the stomach to face the inevitable repercussions of such actions, or is it just easier to say a few words of support in favour of the Ukraine, and then let things carry on as before?

3/24/2014 05:07:42
Really informative article – thanks very much!

3/24/2014 05:12:47
Thanks Peter, I’m glad you enjoyed it.

I wanted to bring to light some fact based information that I don’t think is handled by the main stream media at the moment.

3/24/2014 05:56:08

Putin has made it clear that he regards the fall of the Soviet Union as the greatest catastrophe of the 20th century. He has stated previously it is his goal to resurrect the Soviet Union.

Obama is doing everything completely wrong and this escalation will only grow far worse. To impose sanctions on Russia is stupid. That puts Putin in a corner that he cannot escape from for if he backs down to the sanctions he will then be seen as weak back home and the hardliners will eat him alive. You cannot humiliate Putin and actually expect progress this is just inviting a new cold war and now any international observers will never get into Crimea.

Russia can easily react to any sanctions it has already said it will now cancel all nuclear treaties. Russia can shut off the energy to Europe and watch it crawl. Russia has some has talented people in the field of computer hacking and cyber warfare. Countless small banks and credit unions are constantly being attacked trying to break in to their systems from Russia.
3/24/2014 06:11:15
Thanks for the comments. It’s not totally clear to me if by “sanctions” you would include the seizure and freezing of assets.

However, I think your point is valid and the real fear here is what would happen to Russia if Putin did lose control. It’s a matter of “better the devil you know”. Hence we the West are going to sit back and hope this is the end of the expansion.

On the “make Europe crawl” I think you give too much power to the Russians, It would be a case of MAM (mutually assured mayhem) You have to remember that gas flowing in one direction requires money flowing in the other and the Russians need money.That kind of game would result in travel restrictions to all Russians and who knows what other fun business. So both sides would be screwed.

Interesting times.
3/24/2014 22:46:32
“I think you give too much power to the Russians” I totally disagree I think you’re underestimating them and giving too much power to the west.

I don’t believe Putin is bothered by any sanctions and there economic implications. There is political pride that is at stake here as in my previous post Putin said in 2005 that the fall of the Soviet Union was “the greatest geopolitical catastrophe” of the 20th century. Putin’s view of this is not economic, but only political. He wants to be Russia‘s restorer of national pride and power. He sees the loss territory & Soviet Union as a shameful event like Russia losing its manhood. Putting Putin box publicly for his own political livelihood is dangerous game to play he must either respond to the sanctions or he will lose power.

Both sides lack serious leadership and statesmanship, the confrontation between EU/USA and Russia is turning into a pissing contest with total disregard for the Ukrainian people. The best outcome would be for Ukraine hand over the East back to Russia and enter into negotiations for a stable relationship.
3/26/2014 06:18:44
The EU imports 32% of it’s oil from Russia. If we froze the Russian fossil fuel industry we would be seriously harming our closest allies and economic partners. We’d be shooting ourselves in the foot over a country (Ukraine) that the US has very little interest in.

3/24/2014 08:29:07
No expert here, but diminishing population and increasing world supplies of energy seem likely to reduce Russia’s relevance in the not to distant future.

3/24/2014 08:35:12

Informative, and entertaining article, e.g., ‘Waffle of mass distraction’ (hadn’t heard that one before)( really funny and apt)

3/24/2014 13:14:28
You suggest using American currency to prevent Russia from selling oil and gas to Europe? Clever. What do you imagine out Europeans allies will think of that as they are freezing in the dark?

3/24/2014 16:34:28
To answer your first question. I’m not suggesting anything I’m telling you how it could technically be done within an existing legal framework.

As for your second question. “Freezing in the dark” is an over simplification of the issue. But if you wish to discuss in oversimplified terms then I’ll answer: Our European allies would like it just as much as the Russians would like the lack of money flowing in to their coffers from Europe.

3/25/2014 00:44:51
Excellent article – I had always thought that the Eurodollar market existed to process dollars held outside the US, but the way you describe it makes sense. Presumably if the US actually did this, it would hasten the demise of the USD as a reserve currency, which would probably be no bad thing for the US and the rest of the world.

(an irrelevant FYI – there is no such thing as an Audi Q8 – either a Q7, or an A8 or S8)

3/25/2014 02:02:59
The Audi Q8 is actually due out in 2016:

3/25/2014 02:47:16
See, even with cars, I’m ahead of the times and a trendsetter.

Well truth be told it was a typo. I did mean the Q7. Must correct that, thanks for spotting it Tom

3/25/2014 00:53:32
in my view, USA won’t do it, because
1) trust in USD as a reserve currency will fall dramatically, which leads to
2) other countries decrease their USD operations, and nominate their commodities in local currencies. Russia will do the same, selling its oil and gas in EUR and Yuan, which leads to
3) USD x-rate to other currencies decrease, and so decreases the purchasing power of Americans, which makes them unhappy, and that’s why Democrats would loose the elections.

Sorry for obviousness and spelling mistakes if any 🙂

3/25/2014 02:52:51
Mike, Generally agree with that assessment. Regarding your second point. In theory yes and that has already been happening for years, but the overall success of such ventures has been tepid at best. The USD still reigns supreme on that front. As for point three, perhaps long term yes, but a freeze on the USD would cause temporary massive demand. Remember, large amounts of USD would be frozen and inaccessible, while contracts made in USD and delivery dates would cause a mad rush to get access to the USD.

I think the real point here is that the repercussions are too scary and too difficult to calculate for the West to consider this kind of exercise.

3/26/2014 08:59:07
On balance I agree, the ‘new-q-lear’ option is a moot point. Putin is on a gay parade power trip but he isn’t going to annexe Ukraine.

That would be a step too far, he knows it & the Yanks know it.

I almost miss dubbya talking about his fellow ‘merkins’!


3/27/2014 08:55:44
I don’t have any quibble with the mechanism described in the post. It does make me wonder (yet again) whether the world needs a more ‘neutral’ reserve currency. Or at least a competitor.

7/19/2014 18:53:12
Some say all the worlds Eurodollars and commodities listed in dollars aren’t backed up by anything – just belief- they’re wrong.

When the US left the gold standard they replaced it with the ‘tank standard’

Every dollar is backed up with the full faith and credit of a bullet, bayonet, or drone… Yet right now It appears the Russians are in the process of adjusting the ‘exchange rate!’

  • Does the US care less about the Ukrainians? – one could question if they ever did.

‘Operation Keelhaul’

7/20/2014 04:11:09
This would be the financial equivalent of invading Iraq. Easy early victory and utter chaos afterwards. For one, China would realize how unreliable the US is, and how financial war could be applied to the disputes in the E Asia Sea. The consequences would basically shatter the post WW2 economic system (IMF, World Bank, UN, free trade) , which is already on the rocks.

As an aside, everyone but the US remembers that the US military has also shot down a passenger jet.

7/20/2014 17:31:50
Thanks Jeff, the article wasn’t an argument for or against. It simply outlined how it could be done.

If you want an opinion on the correct action to take towards Russia, you can read my two follow up posts to this article.

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