When looking at the US foreign policy landscape, Dick Bove, banking analyst from Rafferty Capital Markets, notes the emergence of the BRICs nations. It is here Bove sees an emerging power that could challenge US, British and German economic dominance.
Russian sanctions boosting money flow to Chinese and Swiss banks
Bove thinks it could be the US frozen out of the international banking system, with money flowing primarily to China in the east and Switzerland in the west as a result of recent Russian sanctions.
Bove looks at US sanctions against Russia – with instance on punishing entire bank corporations – and notes they have an unwanted consequence: third parties will move their banking business outside the US. The problem, bankers realize, is that when a transaction such as HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) laundering money for Iran or drug cartels takes place in the US, touches US regulatory jurisdiction. The Russian sanctions will promote legal and regulatory arbitrage, which tends to flow banking business to the lowest common denominator — and a choice of currency.
Countries have traditionally done business in US dollars – it is the “reserve currency of choice.” It is this currency benefit that is under attack on many fronts.
Russian sanctions relate to only a small number of banks and individuals
“The President has opened a new line of sanctions related to the Russian banking system. The sanctions do not appear to be terribly severe and they only relate to a small number of Russian banks and individuals,” Bove writes. “However, they send a message.”
And that message is not positive if you are a US banker.
“The point here is that the U.S is clearly indicating that your money is at risk if you intend to do business with U.S. and possible U.K. and German banks,” he writes.
In other words, the US has created a need to access the financial system through unconventional means, which often involves skirting pesky US regulations.
“Even if the sanctions were lifted everywhere in the world,” Bove speculates on a logical conclusion. “My belief is that foreign money will now flow to safer and more protected venues like China in the eastern world and Switzerland in the western world.”
Bove: foreign banks have an advantage due to sanctions
While some might think it odd to consider Chinese bank as “safer” than the US, Bove says that in regards to guarding against potential peering eyes of US regulators from observing sanctioned behavior, the foreign banks have an advantage.
“The banks in these nations will benefit,” he observes.
Separate analysis notes there was a point when US regulation was viewed as a positive, supportive of the rule of law. As elites are given preferential legal treatment – cited by numerous international financiers – the overwhelming benefit of doing financial business becomes less significant.