Crossing The Rubicon: Confiscating Russia's Assets
The Samson Option
Israel's implicit threat to use nuclear weapons in the event of losing a war against its Arab neighbors was called the "Samson Option", after the biblical Israelite hero who famously brought down a Philistine temple, killing himself along with the Philistines who were tormenting him. David Perlumutter described it this way in a Los Angeles Times op/ed earlier this century:
Israel has been building nuclear weapons for 30 years. The Jews understand what passive and powerless acceptance of doom has meant for them in the past, and they have ensured against it. Masada was not an example to follow--it hurt the Romans not a whit, but Sampson in Gaza? With an H-bomb? What would serve the Jew-hating world better in repayment for thousands of years of massacres but a Nuclear Winter. Or invite all those tut-tutting European statesmen and peace activists to join us in the ovens?
For the first time in history, a people facing extermination while the world either cackles or looks away--unlike the Armenians, Tibetans, World War II European Jews or Rwandans--have the power to destroy the world. The ultimate justice?
Anti-Russia hawks in the West, such as Bill Browder, probably wouldn't characterize their calls to confiscate Russia's dollar and euro assets as a Samson option, as they don't seem to be in the habit of considering second-order consequences, but like Samson, they are pushing at the foundation stones of a great edifice, risking having it fall on all of our heads.
I’d call it the Destroying Faith In The Dollar Act.
— David Pinsen (@dpinsen) February 19, 2024
In an important thread on X, Izabella Kaminska, the former Financial Times editor and founder of The Blind Spot, explained why confiscating Russia's assets would be a Crossing the Rubicon moment for the West. We've posted that thread below. Following that, we'll close with a couple of brief trading updates.
Authored by Izabella Kaminska of The Blind Spot via X [Emphasis ours]
Why Seizing Russia's Assets Is A Crossing The Rubicon Moment For The West.
1) Property Rights
The principle that forfeiture of property before conviction is illegal is one of the longest and most cherished in the Western capitalist tradition. It underpins the basic dimensions of our democratic society. As Wiki notes, the US Constitution's Fifth Amendment guarantees that "no person shall be deprived of life, liberty, or property, without due process of law", a phrase that was derived from Magna Carta.
It was instituted in large part to protect citizens from the overreach of the state.
Due process includes the observation of habeas corpus, the idea that everyone is innocent until proven guilty.
2) State And Central Bank Immunity
Ah, you may think. These are not the assets of individuals. These are mainly state assets of either the Russian central bank, the Russian Finance ministry or the Russian Sovereign Wealth fund (though, actually, there are also Russian bank assets and individuals in the mix). Seizing their assets is entirely different.
Well no. The principles of sovereign and central bank immunity are, arguably, even more entrenched in the system.
Take as an example the case of the Afghanistan Central Bank (DAB). On February 21, 2023, the United States District Court for the Southern District of New York held that DAB is a central bank entitled to jurisdictional immunity under the Foreign Sovereign Immunity Act and that the court is constitutionally constrained from permitting creditors to seize DAB funds.
Why is it such a big deal? Because sovereign continuity is considered fundamental in the rules-based global order, with the only permitted exception for outright confiscation being for sovereigns that are officially at war with each other.
3) Reputational Issues
It's worth noting that while the assets are widely reported to be situated at Euroclear, in reality, this obscures the fact that Euroclear is merely their custodian. The assets are, according to sources familiar with the situation, mostly sovereign bonds that have been pledged as collateral to the Bundesbank. The corresponding euro liquidity remains frozen on account. If that is true, this explains why the ECB is among the staunchest of opponents to the seizing, and why the Germans in particular are so against the move.
The optics of the Bundesbank, of all the central banks in the world, doing the seizing provides Russia with a highly exploitable propaganda narrative. Not just that the West can't be trusted to preserve sovereign immunity and property rights, but that the Germans are up to their old WW2 tricks in terms of unfairly seizing assets.
But more pertinently, the seizing would skewer any hopes the euro has of surpassing the dollar as the world's top international reserve currency.
On the flipside, defying US/UK pressure to seize the assets could be the making of the euro.
4) Bitcoin's Raison D'etre Moment?
ECB Policymakers will also be acutely aware that seizing Russian assets will build the market and sovereign case for holding reserves in alternative assets like gold, but also (following in the footsteps of El Salvador) bitcoin.
It's worth noting, the National Bank of Poland, one of the biggest champions of seizing the Russian assets, has been aggressively moving more and more of its reserves into gold since the war broke out. More broadly, central banks have been among the biggest net buyers of gold the past year.
Could gold and bitcoin highs be benefiting from such repositioning? I wouldn't discount it.
5) The Workarounds
The 'Wheelbarrow' Rather than letting the collateral go to waste while it's in our care, this would involve rehypothecating it to raise liquidity for Ukraine, which would be invested in such a way as to create growth and profit. Then when everything's over, the collateral can be returned and nobody is any wiser. A bit like "borrowing" someone's wheelbarrow to sow your fields, then putting it back but still benefiting from the crops that grow in the meantime.
It's just an advance against reparations This would involve dispensing the assets on behalf of Ukraine at will, on the basis that when the war's over, (and we've won), we can claim it against the reparation bill we will send to Russia. But this is a bit like a landlord spending a tenant's deposit because they are fairly confident the property will undoubtedly get trashed. So high on the hubris meter.
We'll just take the interest An iteration of the Wheelbarrow, but with much less of a punch. Still complicated.
The tax smokescreen Asset confiscation is sometimes disguised in the former of extraordinary taxes levied by governments unexpectedly. But this is easier to enforce on private individuals or corporates, and markets still tend to see through the ruse.
Forget about the perception of legality Drop the perception of legality and suffer the consequences. Or declare war and confiscate according to the Trading with the Enemy Act. (Though that act only applies to Britain).
This Week's Earnings Trades And Top Names
On Monday, we posted eight earnings trades on companies reporting this week, four bullish and four bearish.
Here are our exits on those trades so far:
Options Trades
Puts on ThredUp (TDUP 0.00%↑). Bought at $0.50 on 3/4/2024; sold at $0.70 on 3/5/2024. Profit: 40%.
Put spread on SEMRush (SEMR 1.53%↑). Entered at a net debit of $0.95 on 3/4/2024; sold at $2 on 3/5/2024. Profit: 110%.
Call spread on BJ’s Wholesale (BJ 8.53%↑). Entered at a net debit of $2.10 on 3/4/2024; exited at a net credit of $4.74 on 3/7/2024. Profit: 126%.
Call spread on Honest Co. (HNST -0.75%↓). Entered at a net debit of $0.55 on 3/5/2024; exited at a net credit of $1.80 on 3/7/2024. Profit: 229%.
We may have a couple more trades on companies reporting after the close today. Be sure to subscribe to our trading Substack/occasional email list below if you'd like a heads up on them.
Top Names Update
Our top ten names from August 31st was the 5th straight weekly top names cohort to crush the market.
We're going to post this week's top ten names tonight. If you'd like a heads up when we do, again, feel free to subscribe to our trading Substack/occasional email list below. Or you can subscribe to our website and get our top names there.
If You Want To Stay In Touch
You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on Twitter here, or become a free subscriber to our trading Substack using the link below (we're using that for our occasional emails now).