“When oil prices are low, you don’t hear from Putin. When oil prices are high, that’s how they make their money. That’s all they have. … We’re at $100 a barrel and rising, so Putin has got the money to go into Ukraine.”
At the 2022 Conservative Political Action Conference (CPAC), we sat down with Larry Kudlow, former director of the White House National Economic Council, to discuss the Russian invasion of Ukraine and the financial tools the United States has at its disposal to counter Putin.
On Monday, the U.S. Treasury Department announced sanctions on the Russian Central Bank, but will notably be giving exemptions for some energy-related transactions.
Jan Jekielek: Larry Kudlow, it’s such a pleasure to have you on American Thought Leaders.
Larry Kudlow: Thank you. My pleasure.
Mr. Jekielek: Well, Larry, so let’s first talk about the big topic of the day, which is the Russian invasion of Ukraine and the global financial system right now being used to try to sanction Russia. Apparently from what I’m hearing, basically, Russia’s going to be withdrawn from the SWIFT System, but I also heard it might be select banks.
Mr. Kudlow: Not exactly.
Mr. Jekielek: So what’s the situation here?
Mr. Kudlow: It’s a little complicated. First of all, let me just say the SWIFT System itself is not a payments system. It’s an information system. It’s a messaging system. I don’t think people understand that. Now, they have decided to take some Russian banks out of SWIFT, not the energy related banks, which is too bad in a way, because I think at some point we’re going to have to do that.
And then there’s something, the Russian Central Bank is partly out of the system, but it isn’t clear to me. People who have been around Wall Street for a long time may remember something called the telex, where you would telex people, “I’m going to make a transaction for this reason at that bank at this time.” But it is not payments. So it’s overrated as a sanction, is what I’m saying.
Mr. Jekielek: Wow. Okay.
Mr. Kudlow: The most important thing is to sanction payments. So, for example, the U.S. and Europe have finally gotten around to sanctioning a bunch of Russian banks, which means, if you’re in dollars or euros, you cannot do business with those banks. Now, that hurts. Now, they may try to go elsewhere. There’s some payment systems.
China has a very small payment system, but basically 90 percent of currency transactions are done in dollars. And I might add oil, energy, oil, gas, and commodities, which is all Russia has, that’s almost 100 percent in dollars. So those sanctions will hurt.
And then what’s called secondary sanctions. JP Morgan is sanctioned. So they can’t do business with the VB Bank in Russia. Presumably, JP Morgan’s correspondent banks, both in the U.S. and around the world, will not do business. That does hurt. So that will damage their ability to engage in finance of whatever goods and services. So they’re on the right track. It’s incomplete, because they’re staying away from the energy stuff, which I think they shouldn’t, but that’s what they’re doing.
Mr. Jekielek: Well, but isn’t the energy stuff actually the most important, the stuff that will hurt the most?
Mr. Kudlow: Yes. They’re worried about Russia not being able to sell oil and gas. All right, that’s the bottom line. That would be a problem in the short run. Now, that problem is fixable if Joe Biden had a good energy policy, but he has a terrible energy policy. He’s running a jihad against fossil fuels, as you probably know, and that’s the reason we’re in the fix we’re in right now.
So when I spoke here at the group, one of the points, a little history, when oil prices are low, you don’t hear from Putin. When oil prices are high, that’s how they make their money. That’s all they have. John McCain used to say, “Russia is like an old gas station masquerading as a country.” All they have.
So go back in time. In 2008, oil got to $150 a barrel. What happened? Putin took Georgia. Then oil prices fell back and then the fracking revolution started under Obama. He was against it, but it went on anyway. And we didn’t hear from Putin for years. But then in 2014, for a variety of reasons, oil prices jumped back to 100 bucks a barrel, from 25 to 100. Well, Putin takes Crimea. He has the money from his oil profits to do that.
Then Trump comes in and we have energy independence and full throttle with the drillers and the frackers. You don’t hear from Putin. In the last year, as Biden comes in and he runs this jihad against fossil fuels, he takes out the Keystone, he takes out Alaska Drilling, he takes out a number of pipelines. Right now the Energy Department is sitting on six applications for LNG exports and they won’t pass it. The Interior Department has stopped all leasing on federal lands. They just stopped it. We’re at $100 a barrel and rising so Putin’s got the money to go into Ukraine.
So the moral of the story is we have spare capacity in oil and natural gas and LNG. Use it. Use it [and] stop this crazy radical left wing green assault on fossil fuel and carbon. And by the way, even renewables, if you wanted to make electric cars and batteries and so forth and more wind turbines, the development of those energy vehicles will require carbon. Who are we kidding here? You have to go and mine. You have to go underground to develop the nickel and the zinc for the batteries.
So [in] their case, there is no emergency. Our carbon emissions are among the lowest of the big countries, first of all. And second of all, they’re kidding themselves. There is no world without fossil fuels. But Biden bought into this far left agenda. It was a gift to Putin, so he said, “Go ahead. Reopen the Nord Stream 2.” Trump, my administration, closed it. Biden said, “Go ahead and reopen it.” That was a terrible mistake. Reopen Nord Stream and close XL, how stupid is that?
So we’re in a fix. Putin is exercising this romantic, ahistorical adventurism. His goal is to take the U.S. down. His goal is to take NATO down. His goal is to take the European down. If he is successful in Ukraine and oil prices are still high, that means he’ll have money. He made $85 billion last year on the increase of oil from 50 bucks to 100 bucks. That’s the calculation. He’s going to Lithuania. Make no mistake about that. He has designs. He wants to reassert and re-institute the old Soviet Empire. And, look, he’s got Georgia. He’s got Belarus. I fear he’s got Crimea. He’s going to have the rest of Ukraine. He’s succeeding and we are financing this by our stupid energy policies, which have raised the price of oil unnecessarily.
Mr. Jekielek: So you think, instantaneous. Let’s say we change the energy policy today, how quickly can that even have an impact?
Mr. Kudlow: Well, I can tell you this, it won’t solve it. It won’t have full impact, obviously, but we were running about 13 million plus barrels per day in 2019, early 2020. Then the pandemic came. But even as we recovered from the pandemic, we’ve never gotten back to that. We’re still running I think about 11.8 million barrels a day today.
Because those companies, the fracking and the developing companies and so forth, the drillers, they know that Biden wants to regulate them and tax them out of business, so they’re not making the investments. Now, if you call the dogs off, you’ll get yourself back to 13 and a half or 14 million barrels a day, my opinion, in six months. And the futures market will start to reflect that so that the price will come down; and that takes money out of Putin’s pocket. Do you understand what I’m saying?
Mr. Jekielek: Yes. Yes, absolutely.
Mr. Kudlow: That takes money out of Putin’s pocket. That’s why it’s so darn important. We can get to 15 million barrels a day. And then you have, look, we have to develop our LNG export business. I mean, right now, Jennifer Granholm, who runs the Energy Department, is sitting on six leases, six projects and applications for LNG exports. Four of those are in the Gulf of Mexico that would go to Europe.
So we could say to Europe, “We have the spare capacity to cover you if we sanction Russia and they can’t sell you LNG.” We can take that out of play. Now, that won’t happen immediately. Although, by the way, a lot will happen. I mean, there’s stuff in the pipeline if they’d let it run. But we’ll make new projects. We offered to help them. I was deeply involved in this as Director of the National Economic Council.
You’ve got big terminals in Portugal and Spain, for example, that would take LNG exports from the U.S. We wanted Germany to do it. They started to do it. Merkel was opposed to it. And then the minute Trump lost, they took it off the boards. Now, I think they’re going to go back to it. But you have ports [and] you have terminals in Europe. And, by the way, we need to build new terminals in the United States to up that technology.
So, no, it won’t happen overnight, but it’s a risk worth taking. My point is this, if the policy changed and the expectations change, you’ll see it in the futures markets and that will arbitrage to the stock market. So that will help bring down prices. The key to bringing down prices is to open the spigots full throttle for oil and gas. It’s that simple. Biden has closed the spigots. The price goes up. Now, of course, you see it at gasoline, at the pump and so forth. So it infuriates truckers, it infuriates ordinary consumers, but we could beat that, but we got to have a different energy policy.
Mr. Jekielek: So let’s go back to the sanctions. You’ve got to sanction the payments. That’s what you’re saying?
Mr. Kudlow: Yes.
Mr. Jekielek: Then you also have to have these secondary sanctions, because one of the things I’ve heard from our analysts, for example, is, even if you sanction all the Russia payments, China can still come in the back door without these.
Mr. Kudlow: They’re there, but not much. It’s a very small amount. The yuan transactions, payments in yuan around the globe may be two percent or three percent of the total—that’s all.
Mr. Jekielek: And they just launched this digital currency during the Olympics. Of course, their plan is to try to replace the U.S. as the reserve currency with this.
Mr. Kudlow: Yeah, well, good luck on that. I know that’s what they want. I’m not worried about that. Just a side point on China, if you read the reports in the last 48 hours, China’s banks are actually restricting loans to Russia.
Mr. Jekielek: Mm.
Mr. Kudlow: Now, they have relationships, don’t get me wrong. But many of China’s banks have said, “We are not going to continue to finance Russian transactions while they’re in Ukraine.” China does actually not approve of the Ukraine invasion. Now, I know Putin and Xi met during the Olympics. But if you watch carefully, first of all, China abstained in the UN Security Council. They did not side with Russia. They abstained. And second of all, China made it clear during the Munich Security Group Meetings that they preferred diplomacy to invasion. They said that publicly.
And as I said in the last day or two, the reports have come out of Beijing that China will limit financing to Russia. So I think Putin is very isolated right now and the more we sanction and, again, I’m okay with taking them off the SWIFT System. It makes life harder for them, but I’m into sanctions on actual payments, payment systems, and sanctioning banks, and then the secondary sanctions on their correspondents.
The Russian Central Bank is very vulnerable here. They have about 650 billion of foreign exchange reserves, which they’ve been building that up in recent years. But they’ve tried hard not to rely on dollars, which is to say bonds. They really haven’t because it has been reported that of their 650 some odd billion in Forex reserves, 300 billion is offshore.
And I know from my trading friends on Wall Street that they have done a lot of swap arrangements. So they don’t actually own U.S. Treasuries, but they have swap arrangements with counterparties that do so, in effect, they still own those Treasuries. They’re just trying to make it look like they don’t and they’re trying to hide it. It’s very hard to track this stuff down.
But all I’ll say is the ultimate weapon here is to sanction the Central Bank, because that’ll stop payments. All the payment systems run through, it’s called the Central Bank of the Russian Federation. And we’re afraid to do that because of the oil factor.
But if you ask me, I mean, given the fact that Putin is bogged down in Kyiv in Ukraine, which we love, Putin is the evil man. Zelensky looks like a hero. He may be there. They’ll probably take it, but it’s going to be more costly. The more financial hurt, I mean real hurt, the SWIFT System is just information messaging, I mean, real, in other words, no payments, because all that runs through the Central Bank.
Mr. Jekielek: But that will have the temporary effect of actually even raising the prices further.
Mr. Kudlow: Yes, it will further. And you know what? We should take it. My judgment, it’s a short run issue. And again, here’s the problem. If you take out their transactions abilities so they can’t sell their oil, yes, the price will go up. I don’t know how many, [but] Russia does about 10 million barrels a day.
Mr. Jekielek: Mm-hmm (affirmative).
Mr. Kudlow: As I say, we’re doing 11.8. If Biden would change his policy and understand the relationships here, I mean, the Greenies have them by the, you know what. That’s the trouble. John Kerry, what did he say, that dope? “I hope this invasion of Ukraine doesn’t compromise Putin’s working with us on climate policy.” Huh? Really? Yeah? Are you worried about climate policy or are you worried about freedom and sovereignty?
But all you have to do is turn the spigots on. I’m telling you. You’ll take a hit. Oil might go to 125, 130. It might go to 150. We can survive that. Turn the spigots on, it comes back down. These things would happen fast.
Mr. Jekielek: Let’s talk domestic for a little bit. I saw a few days ago there was a CBS report that basically said that Americans have to brace for inflation as a result of the war.
Mr. Kudlow: Yeah.
Mr. Jekielek: What are your thoughts on this?
Mr. Kudlow: It’s an incredibly stupid thing to say. I mean, it’s fake news, dumb network. The reason we have 7 to 10 percent inflation right now is because of deficit spending on a grand scale and the Federal Reserve is accommodating it with money printing. It’s that simple. The government is overspending and the Federal Reserve is buying the bonds and creating the biggest increase in money supply I’ve ever seen. And I’ve been in this game for 50 years.
I started my career at the New York Fed in open market operations in 1973, so I know a thing or two about this. Stop spending. Stop spending and then the Fed has to stop printing money. That’s where the inflation comes from. There was some pandemic related inflation, but now you are in a deep monetary inflation, a Milton Friedman type inflation, and it’s based on overspending and money creation.
And the way to stop it is, pause the spending and the Fed should be selling bonds—not buying. The Fed has to take money out of the system. And the inflation is not going away anytime soon. Look, the inflation rates through January, 12 months to January, the CPI was 7.5 percent. The wholesale PPI was almost at 10 percent and the import prices were almost 11percent.
Mr. Jekielek: So a little bit predated Ukraine?
Mr. Kudlow: Of course.
Mr. Jekielek: And about the Fed, so I understand there’s a little bit of, well, I call it intrigue. And I am not an expert on this by any means, but the Fed is a bit divided between some people on the Fed want to stick with price stability and maintaining employment and stuff like this, and the other group is interested in getting into these, frankly, World Economic Forum type indicators that would contribute to the decision making that the Fed would make beyond price stability and employment and so forth.
Mr. Kudlow: Well, look, Davos is one thing. I mean, it’s world socialism. But Larry Summers really put it best—Democratic economists and a smart guy. I agree with him sometimes. Not always. But he said months ago about Biden and Biden’s nominees to the Fed, which is really the key, that you’re raising a whole generation of people, central bankers, who are far more interested in climate change and woke social policies than inflation or price stability.
Biden’s nominations to the Fed are just terrible. Lael Brainard is nominated for Vice Chair. Brainard’s been around for a long time. She’s never actually confessed to being a capitalist, but she’s been there. She’s a liberal and she’ll be okay. She’s in the middle of that game.
However, this woman, Sarah Bloom Raskin, who was nominated to be the Vice Chair for Bank Supervision, it’s a big job, she is unqualified for that position. Now, she has an ethics issue that’s an ongoing investigation. My friend, Pat Toomey, Senator Toomey, led the Republicans to walk out of the vote because they couldn’t get enough information about her ethics problem. But longer run, she is an advocate publicly, many speeches of denying credit to fossil fuel companies.
Now, two things on that. Number one, that attitude, that thought, has nothing to do with the Fed’s mandate. The Fed’s mandate is to maintain low inflation at good employment and moderate interest rates. It doesn’t say anything about climate change or fossil fuel. This is an example of left wing woke thinking in a regulatory agency that has no business in that game.
And as she said, for example, during the pandemic crisis in 2020, when we worked with the Fed to set up emergency lending facilities, she said, “Don’t loan to the fossil fuel companies.” So the result of that, by the way, is Vladimir Putin in Kyiv, as we just discussed. I think that should disqualify her.
And ironically, if she had her way and we withheld loans and we destroyed the fossil fuel companies, I ask you, what would happen to the price of oil and natural gas? It would skyrocket because you’ll have no supply or lower supply, which is exactly the problem now. So it would cause higher inflation, which violates the Fed’s mandate. So she is really unqualified.
There’s another one. Lisa Cook, a nominee who’s a far left radical Black activist. She’s credentialed. She has a PhD. She teaches at Michigan State. But as my friend, John Cochrane, from University of Chicago and Hoover has said, “You look at all her papers, her academic work, there is nothing about the Fed or inflation or monetary policy or macroeconomics.” She wants slavery reparations. She believes the United States is racist—systemic racism.
So there’s your problem, bad nominations. They’re also trying to influence Reserve Bank Presidents who sit on the FOMC, and that’s going to be another problem too. So my advice to Jay Powell, you’re already behind the eight ball, pal. And he’s a friend of mine, but if you’re going to tighten policy, you better do it right away before these new nominations go through.
Mr. Jekielek: So this has been on my mind for a long time. Basically, you know that Canadian Prime Minister Justin Trudeau invoked the Emergencies Act.
Mr. Kudlow: I know Justin Trudeau very well.
Mr. Jekielek: And, as a result, there was actually freezing of all sorts of accounts of people that were involved somehow in these trucking protests, including people that even donated to them. Now, this Emergency Act didn’t last very long. One of the theories is that the international banking system panicked and told them, “You can’t do this.” Now, I don’t know, what are your thoughts about all this?
Mr. Kudlow: I mean, I think what Justin Trudeau did was highly inappropriate. The emergency state was highly inappropriate. I mean, this is socialist states central planning to the nth degree, a misuse of his powers. Terrible decisions. I know the guy, worked with him a lot, because I was the Sherpa for G7 and G20. I don’t know, there’s a switch that’s gone wrong with him. I mean, Justin is a liberal. There’s no question about that. But these are dictatorial things that he was doing.
And I’ll tell you what, those truckers, God bless them. My heart is with the truckers. I said this in my talk today, these are people, salt of the earth. 75 percent of the goods that transport in the United States are trucking. These are salt of the earth people and there’s a populous revolt going on and it will cost Justin Trudeau dearly. He’s already a minority government. I think the Conservatives, he’s reviving the Tories in Canada, and we got a convoy thing going in Washington D.C. I don’t know, my heart is with them too. Trudeau made a huge mistake.
Mr. Jekielek: But just in terms of the impact of this banking decision, does that change the game in any way?
Mr. Kudlow: Which banking decision?
Mr. Jekielek: Well, the decision to basically force the bank, almost deputize the banks, that’s what some people had said.
Mr. Kudlow: Oh, look into their finances.
Mr. Jekielek: Yes, to basically block them.
Mr. Kudlow: Well, I mean, it’s unconstitutional. Some of these guys just take that to court. I mean, I’m not an expert on the Canadian Constitution, but the Canadian Constitution’s a whole lot like ours and Britain’s, and those kinds of power emergency don’t exist. You can’t do that. So I don’t think it’s a world banking issue. I think it’s a very bad political decision on his part.
Mr. Jekielek: Well, Larry Kudlow, it’s such a pleasure to have you on the show.
Mr. Kudlow: You’re a trooper. It’s my great pleasure. My wife reads the Epoch Times newspaper every Wednesday.
Mr. Jekielek: We live in an age of weaponized information and censorship. To be first to know about new American Thought Leaders, episodes and related content, you can sign up for our newsletter at theepochtimes.com/newsletter. You can just hit the check mark on American Thought Leaders.
This interview has been edited for clarity and brevity.
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