Zoltan Pozsar on Russia, Gold, and a Turning Point for the U.S. Dollar

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

So Joe, there is a lot going on at the moment.

Joe Weisenthal (0:22)

It is truly an extraordinary time, I would say kind of unprecedented.

Already, I think just the sort of like, this economic environment was pretty novel, not many people familiar with it. And now, of course, the start of Russia's war, the attack against Ukraine, making things potentially exponentially more complicated and difficult to understand.

Tracy Alloway (0:46)

Absolutely, and there are all sorts of impacts from what's going on in Ukraine with the Russian invasion. People have been talking at length about the commodities impact, what that's going to mean for inflation. But there is also this monetary impact. And we are starting to see shades of that now. So obviously, the ruble, I mean, if you look at a chart of the ruble right now, I think it lost another third just today on the day that we're recording, which is Monday, February 28th.

It was down at an all-time low of I think about 109 rubles per dollar. But that is after the slide that it already encountered last week.

So really extreme movements in FX. And at the same time, of course, we have the Western powers, central banks across the world talking about excluding Russia from basically the global payment settlement system known as SWIFT.

Joe Weisenthal (1:48)

Yeah, so that's exactly right. And basically at this point, there's no indication that other, you know, US European powers are actually going to get involved in combat directly.

So in lieu of that, there's been a lot of attempts to use economic and financial penalties to go after Russia for its aggression. And so that includes both sort of traditional sanctions, but also as we're seeing some very extreme moves to cut off Russia from its own money, from its ability to conduct business, from its ability to engage in payments. That is a part what's caused the ruble to collapse. We've seen lines at ATMs in Russia scramble for hard currency, and sort of this is a very new element of sort of economic and financial warfare of sorts against a relatively sophisticated and rich country.

Tracy Alloway (2:45)

That's exactly right. It's something that we haven't really seen before. And so there are all sorts of questions around what this means for the broader financial system, how exactly it would work, what it means for the US dollar. And we've already seen some signs of a scramble in money markets for people to get their hands on the safety of the world's reserve currency.

There's a lot of uncertainty, a lot of questions around the mechanics. And I gotta say, whenever we wanna go deep into financial market mechanics or plumbing, there is one person that we turn to.

Joe Weisenthal (3:19)

The most requested guest by far on Odd Lots. And somehow we have a tendency to speak with him at the start of almost every major crisis.

Tracy Alloway (3:28)

This is true. All right, well, we're gonna be speaking with Zoltan Pozsar. He is of course the global head of short-term interest rate strategy at Credit Suisse. So Zoltan, welcome to Odd Lots again.

Zoltan Pozsar (3:40)

Thank you for having me. Nice to be back guys.

Tracy Alloway (3:43)

Yeah, your timing is impeccable as always. I suppose just to begin with, could you maybe give us a sense of Russia's place in the global financial system?

So in your research, you've described it as a surplus agent in the financial system. What does that mean exactly?

Zoltan Pozsar (4:04)

A surplus agent means that you are a nation with a central bank, which has a lot of FX reserves. We are not talking about sudden stops. We're not talking about a current account deficit country that needs to tap funding markets to import stuff. We're talking about a country that is exporting vast amounts of commodities and has accumulated a lot of FX reserves on the back of that. And so when you sanction the central bank of a country with a lot of FX reserves, naturally, I think one impact of that is that the central bank, the way it runs its portfolio is going to number one change. I mean, the entity is a sanctioned entity. So if you have been lending those FX reserves in the FX swap market, what's going to happen with all those trades? I mean, all the FX swap trades go through Western financial institutions.

When you lend dollars in the FX swap market, you sell those dollars and then you get euros and place those euros at the Bundas Bank. You place them in various securities, which are all at euro clear. So when all these things get frozen up, I think it's definitely going to have an impact on funding markets. And also, don't forget, the FX reserves are partly used by the central bank to be able to provide dollars to the domestic financial system. And if all these balances are frozen, one channel of dollars to help the local banking system dries up. So I think it's quite a complicated situation.