Bengaluru: Earlier this week, President Joe Biden signed a Bill enabling the seizing of Russian assets in US banks, amounting to $6 billion, drawing plaudits and criticism in equal measure for the long-term impact of the move. The supporters of the move hailed it as necessary to cripple Russia’s war effort against Ukraine, but many warned that the US was risking the dollar’s predominance as the global reserve currency, which is part of the American pre-eminence.
The seizure of the assets in American banks comes on the heels of the discussion in the European Union (EU) to pass on to Ukraine the earnings of the $300 billion or so lying in the European financial system, to help Kyiv to stay afloat. Kremlin spokespersons have warned that seizure of Russian assets in the US or in Europe would amount to “theft” and would draw retaliation including seizure of western assets in Russia.
Russia’s assets have been frozen by the EU after the war began in February 2022 because of economic sanctions imposed by the western nations. Although the Russian central bank has not provided the exact value frozen, Reuters made a calculation in December 2023, which could be closer to the truth.
According to Reuters calculations, at the beginning of 2022, the Russian central bank held around $207 billion in Euros, $67 billion in U.S. dollars and $37 billion in British pounds. It also held $36 billion in Japanese yen, $19 billion in Canadian dollars, $6 billion in Australian dollars and $1.8 billion in Singapore dollars. Its Swiss franc holdings were about $1 billion. The assets were mainly invested in foreign securities, bank deposits and nostro correspondent accounts.
The Russian central bank’s biggest bond holdings were in the sovereign bonds of China, Germany, France, Britain, Austria and Canada. Russia’s gold reserves were held in Russia.
Russia has dismissed the US move to seize its assets as inconsequential, as the Russian state financial institutions had stopped dealing with their American counterparts well before the war began on February 24, 2022.
“As for the possible confiscation of our gold and foreign exchange reserves, it will not have any impact on financial stability, as we have halted operations with them long ago, we do not use them,” Chairman of the Russian central bank, Elvira Nabiullina, told the media on Friday. The Russian central bank had been diversifying its assets over the years and had negated risks, she said.
What Nabiullina meant was that Russia had been converting its assets into gold, and had been trading with its partners in mutual currencies, to avoid dependence on dollars. China and Russia are already conducting most of their $240 billion in mutual currencies. India, whose trade with Russia has zoomed to $50 billion, mainly due to energy imports, and due to trade imbalance, Indian companies have excess roubles in their vostro accounts.
Russia’s confidence stems from the BRICS nations’ decision to float their own currency as a reserve for trade among themselves and their associates. While that may be some time away, the increasing number of applications for BRICS membership, which crossed 11 this year, could reach 20 by the end of the year, tells its own tale.
Of the BRICS members, Russia and China have been vocal about the need to ‘dedollarise’ the global economy, meaning that the use of the dollar should be reduced in mutual trade dealings, in order to cut US power. The US virtually controls the world economy, by printing the dollar bills. The US Treasury bonds are a major investment asset world over.
One of the reasons the dollar became the world’s reserve currency at the end of World War II was because it was backed by the US gold reserves, the world’s largest. Gold for centuries has been the guarantor of currencies. But in 1971, then President Nixon delinked the dollar from gold. The dollar from then onwards became a paper currency, with the US Treasury having the sole right to print as many as America needed, or required.
Any attempt to challenge the US dollar supremacy met with failure. Libya’s Moammar Gaddafi, backed by his country’s vast oil resources and 140 tonnes of gold and an equal amount of silver, announced his plans to launch a pan-African reserve Dinar. Within two years, Libya was engulfed in a civil war, and Gaddafi was dead.
Soon after the Ukraine war began, Russia took a bold decision, and decided to link the rouble to gold. The Russian currency was fixed at 5,000 rubles for 1 gram of gold. The radical move stabilised the Ruble. The current price is 6,900 rubles, and at a time when the global price of gold is zooming, that is a jaw-dropping achievement. Surprisingly, Zimbabwe, a country which suffers an astronomical inflation rate, has decided to link its dollar to gold, in order to stabilise its slide.
The US move to seize Russian assets in American banks, and the EU move to sequester earnings from Russian deposits in Europe, could have grave ramifications. The faith in the global financial system led by the US and Europe could erode. Countries across the world, fearful of such punitive moves, could begin to withdraw their assets from western financial institutions, although most countries would neither make such moves in fear of US retaliation, or might make them subtly.
More importantly, it could spur efforts to find an alternative to the dollar as a global reserve, or at least an alternative. The BRICS bid to launch a currency for trading among the member nations could be the beginning.
(Disclaimer: The views expressed in this article are those of the author alone. The opinions and facts in this article do not represent the stand of News9.)
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