Russian oil exports, U.S. dollar clearing, and FATCA soon to collide


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Russia’s oil exports and their connection to dollar clearing and the looming FATCA penalties are about to make things very very interesting, especially considering Russia’s actions in Ukraine.

Vladimir Putin’s presidency and geopolitical adventures can’t help but draw comparisons to some of the old-guard Soviet leaders who took center stage during the Cold War of the second half of the 20th century. The East-West conflicts during that time were characterized by military clashes in far-away places and lots of economic chest-pounding and those hugely optimistic 5-year plans in the old Soviet Union.

Technological advances and the emergence of an interdependent global economy have turned that old world upside down, and the new reality is that the world’s superpowers and the economies that sustain them are incredibly intertwined, not only with each other but with myriad other nations.

It’s in that context that Putin’s sustained aggressions and brinksmanship in Ukraine are so fascinating and disturbing. His use of the Russian military to achieve territorial expansion and to foment rebellion in eastern Ukraine may feel good in the moment to a once-mighty nation seeking to re-establish its former position in the world, but there are consequences today that simply didn’t exist in the 20th century.

We have reported in this blog about the decision of the U.S. Treasury’s IRS division to break off talks with Russia over a FATCA agreement. That U.S. decision alone could cost Russian banks, businesses, and investors vast sums of wealth.  And that is separate from the already agreed-upon economic and banking sanctioning of individual Russian oligarchs most closely tied to Putin.

But what has been talked about very little to date is the dollar market for Russian oil, which is the primary driver of Russia’s current economic power. Russia derives a major portion of its income from oil sales on the international market, but what is not commonly known is that all international oil sales are done in U.S. dollars.

The one thing about conducting transactions in dollars is that to maintain their value, dollar transactions must be cleared through a U.S. financial institution located in the U.S. So since no financial institution in Russia will be FATCA compliant when FATCA goes live, not only will Russian individuals be charged 30 percent of every transaction they conduct in U.S. dollars, so will the Russian government’s oil sales  be subject to the 30 percent FATCA withholding. That has got to hurt!

But will it hurt badly enough to motivate a pull-back and an easing of tensions with western Europe and the U.S.? We may be seeing some of that already, at least in the rhetoric. But only time will tell.