"Pozsar’s argument: the moment Western nations froze Russian foreign exchange reserves, the assumed risk-free nature of these dollar holdings changed fundamentally. What had been viewed as having negligible credit risk suddenly carried confiscation risk."
This has nothing to do with dollar. Almost all of the confiscated currency was in Europe, and it has to do with invading your bank's ally. No country in the world ever assumed that's risk free, it wasn't being priced back then and isn't now, because nobody except from Russia is stupid enough to do that.
Good point about Europe holding most of the frozen assets (~$300B vs ~$5B in the US). But that actually reinforces rather than contradicts Pozsar's framework; it's not specifically about the dollar versus other currencies, but about Western-controlled financial claims generally (whether USD, EUR, or other G7 assets) versus 'outside money' that can't be frozen by institutional decision.
The key insight imp isn't 'dollars are risky,' it's 'any financial claim on a Western institution now carries confiscation risk if your geopolitical interests diverge.' Whether those claims are denominated in dollars or euros doesn't change the fundamental calculus for reserve holders. That's why we're seeing (and might see more) diversification toward gold and commodities—assets with less/different counterparty risk rather than just EUR-for-USD swaps.
There have been numerous cases of sanctioning and wealth confisactions (Afrghanistan, Venezuela, Iraq, Iran, Libya), and "_now_ carries confiscation risk" is just factually incorrect. It has always carried such risk, this risk has materialized numerous times, and most importantly, no diversification is happening - literally nothing changed: https://data.imf.org/en/news/4225global%20fx%20reserves%20de...
By the way, good luck with trusting China, Russia, or other places to store wealth more than Europe. It's total ignorance to believe there's somewhere safer to store your money than the West.
Importantly, Russia fully expected to have access to those dollars during a war with the west, as that was the entire reason of stockpiling them in the first place, but Russia's central bank was not informed ahead of time that they were invading Ukraine and was completely unable to move the money before the west reacted.
The risk was known and expected. The risk that (hilariously) wasn't planned for was the risk that Putin is that fucking stupid.
IMHO the fundamental problem is that the world wanted dollars so they gave the US gold or stuff for those dollars. If that flow ever reverses then there's problems. Bretton woods solved the gold issue. The plaza accords solved it when Japan was the problem.
Today the solution is that foreign countries but government debt. That will last as long as everyone is willing to roll it over. It's not clear how or why that stops. But if/when it does it's not going to involve the US sending out trillions worth of stuff
No the fundamental problems was the econmists at the time believe in fixed exchange rates and that's why the got suckered into Bretton woods despite it being a crappy deal, specially for Britain. I didn't help that the American at the meeting was a Soviet spy who wanted to destroy Britain.
And Bretton woods solved nothing at all, it was a system that took a very long to implment, much longer then people think and was unstable almost as soon as it was implemented.
The flow has definitely started reversing, and yep you're right there will be problems. Worldwide central bank holdings of gold just recently surpassed holdings of US Treasuries for the first time in 30 years. And I believe that's using only reported amounts of gold, when all experts agree that China has acquired far more gold in recent years than what's reported.
Key quote:
"Pozsar’s argument: the moment Western nations froze Russian foreign exchange reserves, the assumed risk-free nature of these dollar holdings changed fundamentally. What had been viewed as having negligible credit risk suddenly carried confiscation risk. For any country potentially facing future sanctions, the calculus of holding large dollar reserve positions shifted."
My only critique here is that Russia is an outlier, along with China, because they both hold large dollar reserves and have a contentious relationship with the US. You have to go pretty far down the list to find another nation that is likely to face US sanctions - and those nations, like Libya and Iran, are already heavily sanctioned!
Normally that would be a fair point (and maybe it was valid in 2022).
But given the US approach to foreign policy in 2025, one could argue that the list of countries that “have a contentious relationship with the US” (or, maybe more accurately, the other way around) is a lot longer and less clear-cut today than it was a few years ago.
I sort of feel many countries that used to not have a contentious relationship with the US have one now and thus the observation of outlier status doesn't really work anymore.
But the fundamental point of your comment is well taken. There are a lot of nations out there who have clearly begun to see the lack of sustainable safety in being called an "ally" by the US.
Of course, we're only in the first year of the new US foreign policy posture. Who knows where we'll be by year 4? Who's even to say this new environment won't last longer than 4 years?
Just a lot of uncertainty out there. And that uncertainty is why we see people, organizations and nation states move to protect themselves.
It should, if no one panics, lead to a new balance. A new normal.
The US and Brazil have an informal defense treaty that will almost certainly outlast the next 3 years of lame duck Trump. Plus, they have a presidential election next year.
I don't know what to say about India. If nothing else, no sane US President would alienate India too much because they're an irreplaceable strategic partner and bulwark against Chinese expansion.
You're right that Russia was an outlier in 2022; but as others already said, the landscape has shifted considerably since then. The argument isn't that most countries face immediate sanctions risk, but that the uncertainty itself changes the risk calculation. Even traditional US partners are now hedging (or considering their options) gold holdings at central banks recently surpassed US Treasury holdings for the first time in 30 years. It's less about countries thinking 'we'll definitely be sanctioned' and more 'the tail risk is now visible and needs to be managed.' That calculus might drive gradual diversification even among countries with good US relationships.
The point is that any nation could face sanctions if their interests do not align with the US. There are many countries that have been sanctioned or threatened with sanctions. I think the risk of confiscation is not the only risk worth mentioning. The Fed has been printing money with abandon, and there is no sign that the national debt will ever be paid.
Awesome read. I always love Poszar's work, it's a shame that these days he's no longer working at CS - since most of his work is now stuck behind a paywall.
this is a really good article. it makes none of the mistakes of thinking Bretton Woods I was a political choice (it uses the words "collapse") while separating the difference of the financial inevitabilities and political agencies in so called Bretton Woods III (that elected leaders do indeed have a choice to withhold funds from Russia, but on the other hand, there are inevitable financial & economic effects to war, like having to commit more money for credit of shipping oil).
someone on here is saying that Russia is an "economically small country." This is like saying the learning loss during COVID was "not very big." You are not appreciating the consequences of how big of a deal war and pulling kids out of school are, all the same.
Trump’s tirades on tarrifs show that even despite him and his stupidity the American economy is still the buyer everyone wants. Even despite alienating allies and trading partners with tarrifs countries are still playing ball so to speak. This all tells that the dollar is more resilient than we think.
Are you serious? Many examples of countries looking for alternate supply chains. The fact that it takes a while to put those chains in place does not indicate that countries are “playing ball”.
... for now. The future is unknown. So far republicans seem mostly happy with the uncertainty Trump delivers to the world. What will the next administration be like?
Pozsar assigns far too much weight to Russia. It’s an economically small country. He should be focused a lot more on large American companies that carry actual heft.
According to the article, Russia is just a precursor: "What had been viewed as having negligible credit risk suddenly carried confiscation risk. For any country potentially facing future sanctions, the calculus of holding large dollar reserve positions shifted." -- So the question is: what share of the global economy do these countries represent? If China is among them, this share is considerable.
China has no serious alternative to Treasuries (bc the closest competitors have lower yields). Also, other countries don’t place themselves in the same group as Russia, bc they violated international norms in an extreme manner.
Someone should tell the Chinese that, because they've been a net seller of US treasuries for some time now. They are clearly at a minimum diversifying right now. I'm sure if you ask some people they will say "diversifying" isn't a strong enough word for the velocity of the changes we're seeing. "De-linking" is the popular word these days for what's going on. Truth, as always, is likely somewhere in the middle.
Obviously we can't see all that goes on inside China, but we have 100% visibility on what's happening with US treasuries. Regarding the whole picture, just from what is publicly reported, it certainly seems like China is betting on what appears to be, themselves. Maybe that's a good market in the future and they make out like bandits? Maybe it's a bad market and they take significant hits? Not really sure anyone can say with certainty right now?
If I was forced to bet, I'd say it will pay off, but not as big as they think. Probably big enough to not really need the West though. Which is a strategic win I suppose?
Good question on the USDCNY trajectory. I think it’s fair to assume that they manage this through capital controls rather than market forces, so the adjustment might play out differently than typical reserve diversification scenarios. The GDP growth question is the interesting one: are they trading some growth for strategic autonomy, or betting they can maintain growth through domestic consumption + non-Western trade? Probably find out in the next 5-10 years.
Thank you. If it's for strategic autonomy, it's a bad trade. China needs domestic consumption like you mention, to absorb their supply / keep people working. Weakening USD would make Chinese exports more expensive, esp. if they convert it to Yuan. Meanwhile there's a property crisis and they can stimulate demand, including for strategic autonomy. One devious possibility is just giving it to Russia. Repatriating it as Yuan to stimulate doesn't make sense to me.
The property crisis and domestic consumption issues are real constraints, but I think the framework's point is that the calculus has shifted even if the alternatives aren't great. China's treasury holdings peaked around $1.3 trillion in 2013 and are now closer to $750-800 billion.
You're right that repatriating as yuan for stimulus doesn't solve the structural issues. But Pozsar suggests the alternative isn't necessarily converting back to yuan, it's using dollar reserves to lock in commodity supply agreements or funding infrastructure that creates yuan-denominated trade flows. Strategic rather than economically optimal, but reduces exposure to assets that could be frozen.
Your "giving it to Russia" point is interesting because it addresses multiple objectives simultaneously: supporting an ally while converting financial assets into physical resources and geopolitical relationships. Whether that tradeoff makes economic sense long-term idk.
"Pozsar’s argument: the moment Western nations froze Russian foreign exchange reserves, the assumed risk-free nature of these dollar holdings changed fundamentally. What had been viewed as having negligible credit risk suddenly carried confiscation risk."
This has nothing to do with dollar. Almost all of the confiscated currency was in Europe, and it has to do with invading your bank's ally. No country in the world ever assumed that's risk free, it wasn't being priced back then and isn't now, because nobody except from Russia is stupid enough to do that.
Good point about Europe holding most of the frozen assets (~$300B vs ~$5B in the US). But that actually reinforces rather than contradicts Pozsar's framework; it's not specifically about the dollar versus other currencies, but about Western-controlled financial claims generally (whether USD, EUR, or other G7 assets) versus 'outside money' that can't be frozen by institutional decision.
The key insight imp isn't 'dollars are risky,' it's 'any financial claim on a Western institution now carries confiscation risk if your geopolitical interests diverge.' Whether those claims are denominated in dollars or euros doesn't change the fundamental calculus for reserve holders. That's why we're seeing (and might see more) diversification toward gold and commodities—assets with less/different counterparty risk rather than just EUR-for-USD swaps.
There have been numerous cases of sanctioning and wealth confisactions (Afrghanistan, Venezuela, Iraq, Iran, Libya), and "_now_ carries confiscation risk" is just factually incorrect. It has always carried such risk, this risk has materialized numerous times, and most importantly, no diversification is happening - literally nothing changed: https://data.imf.org/en/news/4225global%20fx%20reserves%20de...
By the way, good luck with trusting China, Russia, or other places to store wealth more than Europe. It's total ignorance to believe there's somewhere safer to store your money than the West.
Importantly, Russia fully expected to have access to those dollars during a war with the west, as that was the entire reason of stockpiling them in the first place, but Russia's central bank was not informed ahead of time that they were invading Ukraine and was completely unable to move the money before the west reacted.
The risk was known and expected. The risk that (hilariously) wasn't planned for was the risk that Putin is that fucking stupid.
IMHO the fundamental problem is that the world wanted dollars so they gave the US gold or stuff for those dollars. If that flow ever reverses then there's problems. Bretton woods solved the gold issue. The plaza accords solved it when Japan was the problem.
Today the solution is that foreign countries but government debt. That will last as long as everyone is willing to roll it over. It's not clear how or why that stops. But if/when it does it's not going to involve the US sending out trillions worth of stuff
No the fundamental problems was the econmists at the time believe in fixed exchange rates and that's why the got suckered into Bretton woods despite it being a crappy deal, specially for Britain. I didn't help that the American at the meeting was a Soviet spy who wanted to destroy Britain.
And Bretton woods solved nothing at all, it was a system that took a very long to implment, much longer then people think and was unstable almost as soon as it was implemented.
The flow has definitely started reversing, and yep you're right there will be problems. Worldwide central bank holdings of gold just recently surpassed holdings of US Treasuries for the first time in 30 years. And I believe that's using only reported amounts of gold, when all experts agree that China has acquired far more gold in recent years than what's reported.
It might involve US sending out trillions worth of stuff. The question is what stuff would that be, could be e.g. bombs.
Key quote: "Pozsar’s argument: the moment Western nations froze Russian foreign exchange reserves, the assumed risk-free nature of these dollar holdings changed fundamentally. What had been viewed as having negligible credit risk suddenly carried confiscation risk. For any country potentially facing future sanctions, the calculus of holding large dollar reserve positions shifted."
My only critique here is that Russia is an outlier, along with China, because they both hold large dollar reserves and have a contentious relationship with the US. You have to go pretty far down the list to find another nation that is likely to face US sanctions - and those nations, like Libya and Iran, are already heavily sanctioned!
Normally that would be a fair point (and maybe it was valid in 2022).
But given the US approach to foreign policy in 2025, one could argue that the list of countries that “have a contentious relationship with the US” (or, maybe more accurately, the other way around) is a lot longer and less clear-cut today than it was a few years ago.
Absolutely, but if I mention that the US president is wildly erratic with his foreign policy, then the comment just gets knee-jerk downvoted.
>and have a contentious relationship with the US
I sort of feel many countries that used to not have a contentious relationship with the US have one now and thus the observation of outlier status doesn't really work anymore.
the set of US adversaries is not presently shrinking, to put it mildly
I wouldn't call them "adversaries" yet.
But the fundamental point of your comment is well taken. There are a lot of nations out there who have clearly begun to see the lack of sustainable safety in being called an "ally" by the US.
Of course, we're only in the first year of the new US foreign policy posture. Who knows where we'll be by year 4? Who's even to say this new environment won't last longer than 4 years?
Just a lot of uncertainty out there. And that uncertainty is why we see people, organizations and nation states move to protect themselves.
It should, if no one panics, lead to a new balance. A new normal.
Should.
Brazil and India are actually already being targeted by the current administration
The US and Brazil have an informal defense treaty that will almost certainly outlast the next 3 years of lame duck Trump. Plus, they have a presidential election next year.
I don't know what to say about India. If nothing else, no sane US President would alienate India too much because they're an irreplaceable strategic partner and bulwark against Chinese expansion.
You're right that Russia was an outlier in 2022; but as others already said, the landscape has shifted considerably since then. The argument isn't that most countries face immediate sanctions risk, but that the uncertainty itself changes the risk calculation. Even traditional US partners are now hedging (or considering their options) gold holdings at central banks recently surpassed US Treasury holdings for the first time in 30 years. It's less about countries thinking 'we'll definitely be sanctioned' and more 'the tail risk is now visible and needs to be managed.' That calculus might drive gradual diversification even among countries with good US relationships.
The point is that any nation could face sanctions if their interests do not align with the US. There are many countries that have been sanctioned or threatened with sanctions. I think the risk of confiscation is not the only risk worth mentioning. The Fed has been printing money with abandon, and there is no sign that the national debt will ever be paid.
Awesome read. I always love Poszar's work, it's a shame that these days he's no longer working at CS - since most of his work is now stuck behind a paywall.
this is a really good article. it makes none of the mistakes of thinking Bretton Woods I was a political choice (it uses the words "collapse") while separating the difference of the financial inevitabilities and political agencies in so called Bretton Woods III (that elected leaders do indeed have a choice to withhold funds from Russia, but on the other hand, there are inevitable financial & economic effects to war, like having to commit more money for credit of shipping oil).
someone on here is saying that Russia is an "economically small country." This is like saying the learning loss during COVID was "not very big." You are not appreciating the consequences of how big of a deal war and pulling kids out of school are, all the same.
Trump’s tirades on tarrifs show that even despite him and his stupidity the American economy is still the buyer everyone wants. Even despite alienating allies and trading partners with tarrifs countries are still playing ball so to speak. This all tells that the dollar is more resilient than we think.
Are you serious? Many examples of countries looking for alternate supply chains. The fact that it takes a while to put those chains in place does not indicate that countries are “playing ball”.
> Many examples of countries looking for alternate supply chains
The US is the single largest consumer market in the world. There is no alternative.
... for now. The future is unknown. So far republicans seem mostly happy with the uncertainty Trump delivers to the world. What will the next administration be like?
You’re both right. Short term it’s the biggest market of dumb buyers. But long term who knows.
Pozsar assigns far too much weight to Russia. It’s an economically small country. He should be focused a lot more on large American companies that carry actual heft.
According to the article, Russia is just a precursor: "What had been viewed as having negligible credit risk suddenly carried confiscation risk. For any country potentially facing future sanctions, the calculus of holding large dollar reserve positions shifted." -- So the question is: what share of the global economy do these countries represent? If China is among them, this share is considerable.
China has no serious alternative to Treasuries (bc the closest competitors have lower yields). Also, other countries don’t place themselves in the same group as Russia, bc they violated international norms in an extreme manner.
>China has no serious alternative to Treasuries
Someone should tell the Chinese that, because they've been a net seller of US treasuries for some time now. They are clearly at a minimum diversifying right now. I'm sure if you ask some people they will say "diversifying" isn't a strong enough word for the velocity of the changes we're seeing. "De-linking" is the popular word these days for what's going on. Truth, as always, is likely somewhere in the middle.
Obviously we can't see all that goes on inside China, but we have 100% visibility on what's happening with US treasuries. Regarding the whole picture, just from what is publicly reported, it certainly seems like China is betting on what appears to be, themselves. Maybe that's a good market in the future and they make out like bandits? Maybe it's a bad market and they take significant hits? Not really sure anyone can say with certainty right now?
If I was forced to bet, I'd say it will pay off, but not as big as they think. Probably big enough to not really need the West though. Which is a strategic win I suppose?
Good points, I was wrong. Thank you for your thoughtful reply. Given that, I’d expect USDYUAN to rise and further reduction in China’s GDP growth.
Good question on the USDCNY trajectory. I think it’s fair to assume that they manage this through capital controls rather than market forces, so the adjustment might play out differently than typical reserve diversification scenarios. The GDP growth question is the interesting one: are they trading some growth for strategic autonomy, or betting they can maintain growth through domestic consumption + non-Western trade? Probably find out in the next 5-10 years.
Thank you. If it's for strategic autonomy, it's a bad trade. China needs domestic consumption like you mention, to absorb their supply / keep people working. Weakening USD would make Chinese exports more expensive, esp. if they convert it to Yuan. Meanwhile there's a property crisis and they can stimulate demand, including for strategic autonomy. One devious possibility is just giving it to Russia. Repatriating it as Yuan to stimulate doesn't make sense to me.
The property crisis and domestic consumption issues are real constraints, but I think the framework's point is that the calculus has shifted even if the alternatives aren't great. China's treasury holdings peaked around $1.3 trillion in 2013 and are now closer to $750-800 billion.
You're right that repatriating as yuan for stimulus doesn't solve the structural issues. But Pozsar suggests the alternative isn't necessarily converting back to yuan, it's using dollar reserves to lock in commodity supply agreements or funding infrastructure that creates yuan-denominated trade flows. Strategic rather than economically optimal, but reduces exposure to assets that could be frozen.
Your "giving it to Russia" point is interesting because it addresses multiple objectives simultaneously: supporting an ally while converting financial assets into physical resources and geopolitical relationships. Whether that tradeoff makes economic sense long-term idk.