Russia on Thursday said it would ditch all U.S. dollar assets in its National Wealth Fund (NWF) and increase holdings in euros, Chinese yuan and gold in what analysts said was a political move ahead of a presidential Russia-U.S. summit later this month.
Russia has been gradually reducing its dollar holdings since the imposition of Western sanctions following Moscow’s annexation of Crimea in 2014, and has sought to partially decouple from the Western financial system.
Tim Ash at BlueBay Asset Management said the move was designed to send a signal ahead of a summit between President Vladimir Putin and his U.S. counterpart Joe Biden on June 16.
“Like the central bank, we have decided to reduce investments of the NWF in dollar assets,” Finance Minister Anton Siluanov said at the St Petersburg International Economic Forum.
After the changes, that will be finalised within a month, the fund will hold 40% of its assets in euros, 30% in yuan and 20% in gold. The Japanese yen and British pound will account for 5% each, Siluanov said.
The dollar share will drop from 35%, while the share of pounds will be halved. Gold will be added to the NWF for the first time.
“The rest of the world has also sharply reduced the dollar share of FX reserves over the past two decades but Russia has a special interest in doing so quickly and undermining global confidence in the dollar because it is a petro-state and a strategic rival of the United States,” Matt Gertken, a geopolitical strategist at BCA Research in Montreal, said in an email exchange.
“However, it is unlikely that Russia will totally cleanse its system of all dollars since that would be a foolish financial decision.”
The rouble firmed marginally on the news, although First Deputy Prime Minister Andrei Belousov said he did not expect the change to affect the exchange rate.
Analysts at ING said the move implied selling $40 billion in favour of gold, yuan and euro.
Russia’s NWF, which accumulates Russia’s oil revenue and was initially designed to support the pension system, stood at $185.9 billion as of May 1. It forms part of Russia’s gold and FX reserves that totalled $600.9 billion on May 27.
Russia’s central bank slashed its holdings of U.S. Treasuries in 2018 and cut the dollar share in its gold and forex reserves in 2020 to 21.2% as of Jan. 1, down from 24.5% a year earlier. The central bank reports that data with a six-month lag.
“This process of dedollarisation is taking place not only in our country, but in many countries around the world that have started to have concerns about the reliability of the world’s reserve currency,” said Kremlin spokesman Dmitry Peskov.
($1 = 73.1750 roubles)
China’s yuan eventually could develop into a reputable global reserve currency, but Beijing would have to drastically loosen its grip on the economy, according to a Chinese economy expert, who also sees some upside to a downgrade in the US dollar’s status.
Western sanctions that froze much of Russia’s foreign currency holdings since its invasion of Ukraine have underscored the dollar’s power while also highlighting the risks of relying on it heavily.
“The use of Chinese currency will inevitably expand and play a much bigger role in the world,” Baizhu Chen, professor of clinical finance and business economics at the University of Southern California, told Insider. “Some countries feel their economies could be held hostage to US policies because the dollar is dominant, and countries want to diversify their risk.”
Already, upwards of 70 central banks hold some yuan as a reserve currency, while many African countries and some in the Middle East regularly use it for transactions, he noted.
Meanwhile, other central banks have diversified their holdings over the last 20 years, reducing the dollar’s share of global reserves, the International Monetary Fund said in a report Thursday.
And in recent weeks, more efforts to pull back from the dollar have emerged. Saudi Arabia and China are looking to use yuan in a new oil deal. Russia and India are in talks to revive a ruble-rupee ledger. Moscow has also demanded Europe use rubles to pay for its natural gas and may even turn to bitcoin for payment.
“Were the dollar to lose its status as the world’s reserve currency, it would raise interest rates for our historically large debt relative to the economy,” warned Tomas Philipson, former Acting Chairman for the White House Council of Economic Advisers.
That means American consumers and businesses would face higher borrowing costs. Prices for imports would also likely rise.
For now, greenbacks comprise 60% of global reserves versus the yuan’s 2.5%. And in global payments volume, the dollar accounts for 40% while the yuan has about 3%, even though China is the world’s second biggest economy, trailing closely behind the US, Philipson said.
That could change, but not without massive reforms.
How China can make the yuan more competitive China would have to open up its market and loosen government oversight, Chen explained, noting that historically, no currency that’s been heavily controlled has become dominant in global reserves.
In the bond market, that means China must enact reforms to reach the level of liquidity and efficiency of the US bond market. This requires lifting restrictions on interest rates as well, Chen said.
China also needs to refrain from currency manipulation, like devaluing the yuan to boost exports, he added. Allowing for an independent central bank with transparent decision-making would facilitate this.
In addition, the yuan must become as trustworthy as the dollar. “Countries generally trust that the US isn’t going to screw up. But whether the yuan could be perceived as a store of value — a safe haven during uncertainty or war — that is a much more difficult thing,” Chen said.
A lighter touch overall from Beijing would be a steep climb as it has trended toward increasing control. But it could help US investors. Signs that the government will ease up on its recent tech sector crackdown sent Chinese stocks soaring, and deregulation in general often unlocks more economic growth.
Chen said also said a more prominent yuan would have another benefit, as the emergence of multiple global reserve currencies would provide a hedge against the collapse of any single currency.
“Think of pillars holding up a board,” he said. “The more pillars that hold it up, the more stable the board becomes.”
Foreign Countries Will Ban the US Dollar
Russian legislator Mikhail Degtyarev has likened the US dollar to a “worldwide Ponzi scheme“… one he has claimed will end with the collapse of the dollar in 2017. He submitted a bill to protect Russians against the “collapsing US debt pyramid”, saying growing rates of US debt would cause a US dollar collapse if spending isn’t remedied.
Degtyarev’s bill would ban US dollars from circulating in Russia and forbid private citizens from holding Russian bank accounts in US dollars. Those with dollar-denominated accounts would have to convert their accounts to other foreign currencies (his bill would not ban the euro, pound, yen, or renmibi).
While the bill acknowledges the weakness of the dollar, it’s also rather authoritarian: anyone caught holding dollars would have them seized and reimbursed in rubles… thirty days later. However, the bill would not forbid Russians from holding offshore bank accounts denominated in dollars or buying goods priced in dollars online. And, like any good law, the government would be exempt.
Federal Reserve insolvency will cause a 90% drop in the dollar
Financial expert and author of Currency Wars Jim Rickards believes the “international monetary system is headed for a collapse.” Rickards sets the record straight on what an “economic collapse” is, saying it doesn’t mean we all go live in caves. In fact, he says, we’ve seen three economic collapses in the last one hundred years.
In his new book, Rickards suggests the dollar will see the worst of the next economic collapse as part of the “death of money”, lamenting that “we are on a global dollar standard”. He says a fiat currency standard can work, but only if countries inject confidence into the system and welcome business with open arms. Of course, neither of those factors exist in the United States.
Among Rickards’ chief reasons for predicting a dollar collapse: quantative easing, a “lousy business environment”, high taxes, and low growth. He says that dollar-euro swaps from the Fed will make the next collapse much bigger than the last one.
Even the US government will stop using the dollar
Jeff Berwick, editor of The Dollar Vigilante, predicts that things will get so bad that even the American government will view their own dollar as toxic waste. He says the average American is in “la la land” obsessing over TV shows or the next Presidential race. He says what just happened in Ukraine could easily happen in the United States.
And while Ukraine saw their currency crisis coming for some time, the US dollar collapse could happen overnight, he says. Berwick says the US is “turning a corner” and headed for total financial ruin as early as “this year”, and quotes Jim Rogers who says “there is no paper money in 2014 and 2015 that’s going to be worth much of anything.”
Berwick often predicts the “end of the monetary system as we know it” and claims that, once all of the capital controls have been implemented and the US government starts confiscating assets to pay creditors like China, it will not even accept the tainted US dollar.
The US dollar collapse will be worse than the situation in Spain or Greece
Billionaire Donald Trump says the dollar is on the edge of economic ruin, and an economic collapse is the only remedy. He painted an ugly picture of the US economy during an appearance on Fox News. In fact, he issued a warning to Americans to prepare for “financial ruin”.
Trump claims the United States is no longer a rich country because rich countries don’t borrow money. In the interview, Trump claimed that the US is becoming a third world nation forced to borrow money and issue debt. Trump also suggested an answer to the question “When will the us dollar collapse?”, saying that when US debt hits the $21 to $22 trillion mark, things will get much, much worse.
Harvard economist starts a “bank run” over dollar collapse fears
Classical economist and Harvard professor Terry Burnham told the world that he was withdrawing $1 million from his Bank of America checking account because of the negative consequences Ben Bernanke and Janet Yellen have had on the US dollar, and is trying to start a bank run by getting others to do the same.
He claimed a dollar collapse is also underway because the Fed’s manipulations had two adverse effects on the currency: decreasing overall wealth by distorting markets, and redistributing wealth from unsophisticated investors to the political elite through the currency.
Burnham said he couldn’t stand getting paid zero interest by Bank of America anymore, and didn’t trust them to keep his money safe. At zero interest, he was losing tens of thousands of dollars in purchasing power every year due to inflation, while his well-connected bank benefitted.