• Are frozen Russian foreign reserves being dangled as a carrot to lure Ukraine to the negotiating table?
  • Does dollar “weaponisation” threaten the US currency’s global status?
  • Gold protects against such risks as do other alternatives

When it comes to war, Russia has a history of counterattacking in the winter. Stalingrad, the turning point on the Eastern Front in WWII, is a prominent example, as is the long chase of Napoleon’s crumbling Grande Armée following its pyrrhic victory at Borodino, outside of Moscow.

The winter is Russia’s greatest ally in war, so the saying goes.

The same appears to hold true today. Following the failure of Ukraine to make meaningful progress in its much-anticipated counterattack in mid-2023, Russia has patiently waited for her ally to arrive. Some six weeks ago, she did, and Russia has now decisively gone over to the offensive and is making slow but steady progress across most of the line of contact in Eastern Ukraine.

This progress has now brought fresh Russian units to the Dnieper River in southern Ukraine, near the town of Krynky, where Ukrainian forces had previously established a crossing to support the counteroffensive thrust towards the Azov Sea and possibly the Crimean Peninsula.

Reports are that, following some fighting, Russian troops now control this area. This could be used to facilitate Russia’s winter offensive across the Dnieper River, something that would allow advancing Russian forces to cut Ukrainian military supply lines both north and south. Devoid of most other geographical barriers, the river is the primary natural obstacle. Once across, therefore, Russian forces can begin to wreak havoc.

Perhaps, given the criticality of this apparent situation, it should be no surprise that credible rumours have now surfaced that President Zelensky is about to fire and replace his military chief, General Zaluzhnyi. (It is rumoured that Ukraine’s Intelligence Chief Budanov is on the short list.)

Meanwhile, there is a fight underway in the US Congress regarding whether to provide Ukraine with any more war funding. Hence Zelensky recently suggested that Russian assets abroad, including its foreign reserves held at the US central bank, the US Federal Reserve, and elsewhere, be transferred to Ukraine.

The amounts involved are large, potentially enabling Ukraine to restock its dwindling supplies of artillery shells and other absolute war essentials. Or they could be used to help rebuild Ukraine following the conflict.

This past weekend, the seizure and transfer of Russian reserve assets were promoted in the Financial Times by none other than legendary US foreign policy “fixer”, ambassador-at-large, and former President of the World Bank, Robert Zoellick, who wrote:

[C]onsider the diplomatic, economic, and legal gains from transferring frozen Russian reserves to an escrow for Ukraine and possibly other claimants. Russia is waging a war of attrition against Ukraine. Ukraine’s friends need to send a signal that Moscow cannot outlast Kyiv; it is elegant justice to do so with Russia’s own assets. Ukraine would also benefit psychologically from a large, enduring show of financial support during its winter of discontent.

But what follows is interesting in a quite different aspect. It suggests a basis for negotiation: that the threat of seizure of Russia’s foreign reserves could be a bargaining chip in any future peace settlement:

The promise of financial support for survival, recovery and reconstruction may ease Kyiv’s eventual acceptance of a settlement. If Russia agrees to a true peace settlement, however unlikely, the G7 could return some funds.

Well respected-international lawyers — from the UK, Belgium, the Netherlands, Japan, and the United States — have endorsed the use of the countermeasures principle to transfer frozen Russian reserves to an escrow for Ukraine. We should applaud the use of international law to meet modern challenges and support future deterrence, instead of relegating it to an ineffectual statement of protest. [Emphasis added]

“May ease Kyiv’s eventual acceptance of a settlement?” Why would Zoellick suggest that Kyiv “settle” for anything? Shouldn’t they keep fighting and win? Or has the situation changed?

Note that Zoellick is not suggesting that any seized Russian assets be released to Kyiv now for use in purchasing weapons or other war material, but rather placed in an escrow account that could be accessed by Ukraine only following a settlement. That is an important qualification.

As a seasoned US diplomat and negotiator, Zoellick has probably come to the realisation that Russia, now having decisively taken the initiative on the battlefield, is likely to keep pressing its military advantage. Kyiv’s negotiating position is only going to get weaker as it runs out of military options.

Hence the time to negotiate is now. That will almost certainly require ceding some territory to Russia, including Crimea, but if Kyiv receives financial compensation to help rebuild the country, that bitter pill may be easier to swallow.

Some readers may recall that Zoellick has been involved in some high-profile negotiations before. In the early 1990s, he led the US delegation to negotiate the conditions for the reunification of Germany, something initially opposed by Russia. In the mid-2000s he played a leading role in negotiations for peace in the Sudanese Civil War.

He is not currently serving in the US administration, but I think it’s fair to say his proposal is a prominent “trial balloon” for the current US effort to push Ukraine to the negotiating table behind the scenes.

So, should formal negotiations ensue, we should expect Russia’s foreign assets to be on the table. But how would Russia respond? How would other countries respond? Could such a move backfire?

Although Zoellick denies it, a US-led push in this direction could undermine faith in the US as an “honest broker” with respect to any country’s foreign assets. It could also undermine faith in the US dollar itself as a currency for use in international trade. As the BBC recently reported:

Despite some enthusiasm from the US and UK governments, Europe’s central bankers have been far more sceptical about setting a difficult legal precedent that could undermine global financial stability. It could mean that other countries think twice about placing their safe haven assets in the West.

Many countries, ranging from Turkey to South Africa to Saudi Arabia, have reason to be concerned about the “weaponisation” of the dollar through sanctions or other such actions, as they routinely challenge US foreign policy.

Then, of course, there’s China, increasingly at odds with US policy and arguably siding with Russia in the Ukraine war, if only informally.

Such countries thus have an increasing incentive to try and reduce exposure to US dollar-denominated assets. Indeed, this is on the agenda at upcoming meetings of the so-called BRICS countries: Brazil, Russia, India, China and South Africa. Russia also happens to hold this year’s rotating BRICS presidency, giving it the power to set the agenda.

Any discussion of how to reduce the use of the dollar in international trade and as reserves begs the question of what should replace it. There is no obvious alternative in the way the US dollar replaced the pound sterling as the primary global reserve currency following WWI. (As an aside, it should be noted that in WWI, the US and UK did not seize German foreign assets, although they did impose war reparations following its defeat.)

As I have long argued, in my opinion, the most suitable currency to replace the dollar would be one backed by gold. Gold is the ultimate international money. It can’t be printed into existence by any country. Nor can it be summarily devalued or defaulted on.

Whether the BRICS or other countries begin to move things in this direction is unclear, although many have a clear incentive to do so. Zoellick’s proposal would serve to spur them on and accelerate their efforts.

In any case, the international monetary system is now operating on its most fragile foundations since the Bretton Woods system was set up in 1944. Fragile foundations are easily undermined and any further push by the US and her allies to “weaponise” the dollar should be seen in this context as a risk not only to the dollar but to national fiat currencies generally, including sterling.

Gold provides an obvious alternative for those seeking to preserve their wealth against general currency instability or threats of devaluation. My colleague Sam Volkering also believes that bitcoin or other cryptocurrencies might play some role.

While I’m sceptical that crypto is going to replace the dollar in international trade, Sam sees areas in which its acceptance and use are growing. To learn more about recent developments in the crypto sector and how you can get ahead of current trends, I suggest you tune in to his webinar tonight at 7pm. There’s only a few hours until it starts – simply sign up to watch here.

Until next time,


John Butler
Investment Director, Fortune & Freedom