Russia Saw It Coming…
The U.S. dollar's overuse in recent financial warfare and global trade wars has caused many countries to fear that they could become the next target of U.S. displeasure, driving them away from using dollars in international transactions.
As a result, Russia has been insulating itself from being kicked out of the dollar system by steadily acquiring gold over the past 13 years, from 600 tons in 2009 to close to 3,000 tons in 2022, in preparation for the expected financial warfare from the U.S. and its allies. When sanctions were imposed in 2022, almost 25% of Russia's total reserves were in gold, about $150 billion in actual gold bullion held in safe storage in Russia.
While this was not a complete answer to the sanctions, it was a substantial move in the direction of insulating themselves from the dollar system.
In addition, Russia's growth should be higher than the United States this year, estimated by the IMF to grow slightly less than 3%. Russian oil exports are higher than ever. Russia is also buying high-tech goods from China, including some military hardware and other manufactured goods, while China is buying Russian oil and natural gas, to add to agricultural output and weapons. That’s a big two-way trade, and the dollar isn’t being used. Russia's paying yuan, and China's paying rubles.
Saudi Arabia, the world's largest oil exporter, has traditionally relied on the US dollar to settle its oil trades. However, in recent years, the country has been taking steps to move away from the dollar and diversify its foreign currency reserves. In 2020, Saudi Arabia's central bank announced that it had begun conducting transactions in Chinese yuan and other currencies, signaling a shift away from the dollar.
Iran, another major oil producer, has also been seeking to reduce its dependence on the dollar. The country has been subject to a series of US sanctions, which have severely impacted its economy. In response, Iran has been exploring alternative payment systems and currencies, including the Chinese yuan and the euro.
Now, Iran and Saudi Arabia recently agreed to re-establish relations after years of hostility that had threatened stability and security in the Gulf and helped fuel conflicts in the Middle East from Yemen to Syria. The deal, brokered by China, was announced after four days of previously undisclosed talks in Beijing between top security officials from the two rival Middle East powers.
This agreement, signed by Iran's top security official, Ali Shamkhani, and Saudi Arabian national security adviser Musaed bin Mohammed Al-Aiban, agreed to re-activate a 2001 security cooperation accord, as well as another earlier pact on trade, economy and investment.
The Irony of De-Dollarization…
It is now clear that a possible shift away from the U.S. dollar as the world's primary reserve currency is underway. This idea of "de-dollarization" has been met with alarm by some, who see it as a sign of America's decline. But is it really such a bad thing?
To understand the issue, we need to first look at what a reserve currency is and how it works. Essentially, a reserve currency is a currency that is held in large quantities by other countries as a store of value and a means of exchange. The U.S. dollar has been the primary reserve currency since the end of World War II, thanks in part to the strength and stability of the U.S. economy.
However, being the primary reserve currency also comes with a cost. In order to maintain this status, the U.S. has to run large trade deficits, exporting its currency to other countries so they can use it in global trade. This means that the U.S. has to produce more than it consumes, which can be a burden on the economy.
So, if the U.S. were to lose its status as the primary reserve currency, it could actually be a good thing in the long run. Other countries, such as Brazil, Russia, India, and China (known as the BRIC countries), would have to take on the responsibility of exporting their currency in order to support it as a reserve currency. This would shift the burden from the U.S. to these countries and could ultimately benefit the U.S. economy.
Of course, there are also potential downsides to de-dollarization. For one thing, it could lead to increased volatility in the global economy as countries adjust to a new reserve currency. It could also lead to geopolitical tensions as countries jockey for position in the new currency regime.
Despite these potential drawbacks, many experts believe that de-dollarization could ultimately be a positive development for the U.S. economy. As economist Michael Pettis has pointed out, "if the U.S. dollar loses its reserve currency status, it will no longer be necessary to run such large trade deficits. This will be a great benefit to the U.S. in the long run."
The dollar is currently being propped up by the demand for dollar-denominated collateral, particularly short-term Treasury bills, but this is not a long-term solution. The U.S. Treasury takes confidence in the dollar for granted, making it the greatest threat to the dollar, not from abroad but from within.
The lesson is that supporting a reserve currency is a burden, and lifting that burden from the U.S. will most likely benefit the U.S. in the long run and hurt mercantilist exporting nations. The burden of supporting a reserve currency will then shift to the BRIC participants, who will have to do what the U.S. has done for decades, exporting their new reserve currency in size by running vast, sustained trade deficits.
This leads to the irony: the US dollar will become much more valuable once it is no longer a reserve currency as it will no longer be exported in vast quantities. US dollars will be scarce and will thus increase in value.
Even though the de-dollarization may take a while, be careful what you wish for, as currencies are not just theoretical concepts. They serve practical purposes in facilitating trade, establishing trust, measuring value, and managing risk. It is crucial to realize this before seriously contemplating the demise of the dollar.
Stay alert, stay informed.
Wave Cap
Comments