The de-dollarization process is in full swing. It was big news last month when the world found out that Russia's US securities holdings had plunged from $96 billion to $48.7. On July 18, it was reported that Moscow had done it again, once more selling off 70% of its US treasuries, leaving it with only $14.9 billion of that $48.7.
Sanctions and trade wars? Yes, the US use of punitive measures as tools of foreign policy prompted the move, but that wasn't the only motive. This is a part of deliberate, long-term policy to put Russia in a strong position globally, taking advantage of the country's negligible amount of international debt and the availability of its sizable gold reserves.
Moscow is steering a course away from the dollar in order to diversify its reserves and boost its economic independence. It has been building up its gold reserves for the last 11 years. Gold is rightly seen as a safe haven that will protect the country against any fluctuations and instability.
In 2017, the Russian Central Bank more than doubled the pace of its gold purchases, bringing its fraction to over 17 percent, making Russia the world leader in its quest to stockpile the precious metal. In May, 2018 the Bank of Russia's gold holdings rose by 1% in May to 62 million troy ounces valued at $80.5 billion. This year, Russia surpassed China to become one of the world's five leading holders of gold, with reserves topping 1,900 tons. All in all, the Russian gold cache has grown by more than 500% since 2000.
The country is also the third-largest gold producer. During the last ten years, it has mined more than 2,000 tons of gold. Annual production is expected to rise by 400 tons by 2030.
Another way to protect itself from the ubiquitous dollar is by using other currencies to pay its bills. Moscow and Beijing have constructed a non-dollar payment system. China can buy Russian oil with the yuan, its national currency, which Russia can trade for gold on the Shanghai exchange.
Analysts from the Bank of America (BofA) Corp. believe that the global stock market is in for a crisis that will echo the events of 1997-1998. Bloomberg cites the BofA's strategists, led by Michael Hartnett, who wrote in a recent note that "US decoupling, flattening yield curve, collapsing EM - all echoes of 20 years ago." IMF Managing Director Christine Lagarde holds the same opinion, stating, "The clouds on the horizon ... are getting darker by the day." She believes that "[t]he biggest and darkest cloud that we see is the deterioration in confidence that is prompted by [the] attempt to challenge the way in which trade has been conducted, in which relationships have been handled and the way in which multilateral organizations have been operating," obviously referring to the United States. George Soros, the US financier and business magnate, also thinks a major financial crisis is brewing, triggered by a surging dollar and the capital flight from emerging markets. Addressing the German parliament in early July, German Chancellor Angela Merkel raised the specter of a financial crisis provoked by US-launched trade wars.
It looks like the US economy has been cursed to relive a crisis every ten years, thus negatively affecting the whole world. Back in 1997-1998, Russia took a hard hit, but it learned its lessons and took steps to prepare for contingencies in advance. There seems to be some wisdom behind Russia's policy. Others would do well to take a leaf from Russia's book. Christine Lagarde has described the financial situation in Russia as "good news." In her remarks at the St. Petersburg International Economic Forum in May, she praised Russia for "admirable macroeconomic framework-saving for a rainy day, letting the exchange rate float, introducing inflation targeting, and shoring up the banking system." The country has virtually no fiscal deficit, a solid current account balance, and very little debt.
Indeed, Russia has a thick cushion that will protect the country in times of trouble, with gold reserves that have grown to $461 billion.
In the past, crises were accompanied by a drop in oil prices. This time it's different. The picture in the energy markets is a favorable one for exporters. Oil prices are expected to be high enough to boost the Russian economy. This month, Morgan Stanley hiked its forecast for Brent crude prices up to $85 a barrel. According to the Bank of America Corp., oil prices could rally to $100 in 2019.
Russia has ensured that it is protected against economic trials and tribulations, financial crises, punitive measures, and other menaces. This does not mean it will not be affected at all, but it is in a much stronger position than the US and the EU - the ones who wanted to cripple its economy with sanctions and failed. Like it or not, one should give the devil his due - the Russian government and the Central Bank have shown themselves in the past to be masters of the art of making the country stand on its own two feet, well prepared to face the future.
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