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US freezing of Russian central bank assets over Ukraine war puts China in a quandary
- The international financial system is based on the trust that all participants will play by the rules, and honouring debt obligations is one of the most important
- If all foreign assets can be frozen in a split second by reserve-currency countries, policymakers should not waste their time with hedging measures like diversification
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Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.
In The Economic Weapon: The Rise of Sanctions as a Tool of Modern War, historian Nicholas Mulder reminds us that even when Britain and Russia were savagely battling each other during the 1853-56 Crimean War, they continued to service their debts to each other.
Likewise, when hedge funds launched predatory attacks on Asian currencies during the 1990s Asian financial crisis, they ultimately still played by the rules (even though their unethical behaviour brought some East Asian countries’ economic progress to a halt).
The United States and its allies’ February 28 decision to freeze around half of Russia’s foreign exchange reserves would seem to fall into a different category. Though the US has taken similar actions against Iran, Venezuela and Afghanistan, Chinese economists thought those were exceptional situations and are shocked that the US would implement such measures against Russia.
The international financial system is based on the trust that all participants will play by the rules, and honouring debt obligations is one of the most important rules there is. Whatever the justification, freezing a country’s foreign exchange reserves is a blatant breach of that trust.
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