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No, Virginia, Russia Won't Dethrone King Dollar

Despite years of harebrained conjectures, Russia--alone or in tandem with China--has neither the strength nor the interest to challenge U.S. financial hegemony.

This post first appeared on Russia Insider

Talk of Russia and/or China burying, destroying, unseating, dethroning, etc., the U.S. Dollar has been bounced around for years, perhaps most recently here on Russia Insider, which yesterday carried a piece by F. William Engdahl on this topic.

Mr. Engdahl did a good job hitting most of the clichés of the genre.

<figcaption>Broke, corrupt, and dominant</figcaption>
Broke, corrupt, and dominant

Oftentimes, bury-the-dollar prognostications involve Russia and China selling off their U.S. Treasury debt holdings, leading to a “crash” in the Dollar.

Although Engdahl did not use the word "crash", he did suggest that Russia’s inclusion of a small proportion of Chinese yuan in its reserves would be “to the detriment of the dollar.”

He also claimed that Russia and China can eventually precipitate "a snowball exit from the U.S. dollar"—a "crash" by another name.

This reverses-shifting-away-from-the-Dollar line is so widely-discussed and so fundamental to the genre that I can’t fail to debunk it before moving to other points.

Fact is, China has already sold most of its long-duration U.S. bonds—which were quickly and painlessly mopped up by the Federal Reserve’s “QE” operation—and nothing happened. We can see that any slack in demand is immediately compensated for by the Fed and other central banks.

As for Russia, its U.S. bond assets—now somewhere under $200 billion—are inconsequential in the greater scheme of things. A few years ago, the Fed was buying that volume of bonds about every three months, and it can (and probably will) start doing so again.

So if Russia wants to move a few billion of its Dollars into yuan, that’s not even worth talking about. It’s not to the “detriment” of anything at all.

As for the hypothesized crash, snowball, or what-have-you, keep in mind that rates move inversely to prices. Thus, given the pull of Treasuries over the rest of the Dollar debt market, a cataclysmic sell-off of U.S. bonds would lead to skyrocketing yields on all Dollar-denominated bonds and interest rates on all Dollar loans generally.

This would crash all Emerging Market economies—where rates fluctuate much more sharply in response to the same global stimuli, and where Dollar loans and the need to constantly roll them over have ballooned in recent years—and perhaps even the yen and euro, leaving the U.S. as almost the only man standing, even if not too firmly.

So if you thought the Fed raising its Funds rate by ¼ percent would be bad for the developing countries (including Russia), just wait until “doomsday for the U.S. dollar.”

Hence, the economic and financial illiteracy of the “Russia and China bury the dollar” folks making this argument is apparent.

Yet this cultish crowd of zombified mantra-chanters—most of them with not the slimmest background in Russia, China, or finance—has a few more arguments up its sleeves.

For example, there has been much talk—repeated by Engdahl—about the significance of Russia and China signing gas contracts to be settled in their own, respective currencies.

Great! I wish them well. But this has nothing to do with ending the Dollar’s supremacy. It is not symptomatic of “an accelerating process of de-dollarization”, as Engdahl claims.

It is what it is, for what it is, but it’s nowhere near anything that could affect the Big Picture.

In truth, the Dollar couldn’t care less what currency sign Gazprom prints on its gas bills.

Because when Gazprom takes on new debt from the Global Financial Market (though sanctions have made that difficult for the time being), of course it takes out those loans or sells those bonds for Dollars. Or euro. But not rubles. Or yuan, for that matter.

And Gazprom must also repay those loans in Dollars.

Not only are the "money center" banks and institutional investors not interested in Gazprom's ruble-denominated debt, but no foreign private company is going to sell high-tech gear or provide its services to Gazprom for rubles. Because those companies owe Dollars (or euro, or yen) to their suppliers and creditors, both domestic and international, and so on down the chain.

And that's a global currency for you! It is a deeply entrenched monster that in its current iteration took a hundred years to develop.

So unless or until the entire Global Financial Market implodes and fragments into dozens of stand-alone currency/debt markets or is replaced by a “one world”, SDR-type master currency—with the Dollar being just one currency of hardly greater import than the ruble—then Russia can have no impact whatsoever on the Dollar.

Put another way: The Dollar will be the world’s Reserve Currency until it is no longer the world’s Reserve Currency for reasons that have nothing to do with Russia. Russia is a bit player in global finance, and cannot impact the master trends one way or another. At most, Russia can seek to ensure its own sovereignty by, for example, further working out its own national payments system, so that no one can suffocate Russia through financial sanctions. But the master trends will continue to move independently of Russia.

Anything else is fantasy.

Beyond that, Engdahl speaks of gold and the ruble. In that context, he gets confused, and his facts are off.

First, contrary to his writing, Washington does not "adamantly hold to the story line that the Federal Reserve sits on 8133 tons of gold reserves.”

That figure refers to all alleged U.S. Government gold, over 95 percent of which is held by the U.S. Mint, part of the Department of the Treasury.  Over half of that is allegedly stored at the Fort Knox bullion repository, which is a Treasury, not a Federal Reserve, facility.

The Fed does maintain a vault under Manhattan Island, New York. This vault “safeguards” not only the alleged five percent balance of U.S. gold not held by the Mint, but also the gold of many foreign states, including Germany.

It is some of this gold that, as Engdahl mentions, Germany asked to be returned in 2012.

Yes, the Fed is dragging its sulfurous hoofed feet on that, probably because it has loaned most of the gold out to other central or even private banks.  After all, no one ever expected a call on the stuff.

But again, this has nothing to do with Treasury’s hoard at Fort Knox or any other U.S. Mint storage site.

If Engdahl can’t differentiate between the U.S. Treasury and the Federal Reserve System, then all of his other claims are suspect as well. You just can't be this sloppy.

Nor does it really matter if Fort Knox is empty.  Proving that the gold is not there would not, in Engdahl's words, "spell curtains for the dollar as reserve currency", simply because that gold (if it's there) has been sitting untouched for generations and makes no difference to anyone at this point.

It is not a part of the economy or the financial system. Bond traders in New York, London, or even Moscow do not wake up thinking about it.  It can't possibly have anything to do with the Dollar's reserve status.

But let’s move back to Engdahl's talk of a “gold-backed ruble.”

Notice that although one of his headings reads, "The Golden Ruble is coming", in his text Engdahl does not actually speak of a “golden ruble”, per se. Rather, he merely claims that Russia’s build-up of its gold reserves may ultimately strengthen the ruble.

I don’t disagree. At the same time, it may not. You see, this is not the 19th century. In a world in which currencies are not convertible into gold or anything else except each other, there is no direct relationship between the size of a state’s gold reserves and the strength of its currency.

Even more importantly, today, Russia needs a weak (but stable) ruble to stimulate its domestic production in the context of Western sanctions and the Kremlin’s renewed drive for economic sovereignty.

In short, a strong ruble would sabotage much of what Russia is now working to build.

Thus, Engdahl seems to be repeating banter and clichés for which the shelf-life expired with the dawn of the Ukraine crisis. He is not speaking to current economic and political realities.

Our world is in deep, systemic crisis, and we are in desperate need of genuinely new ideas, not the sort of warmed-over, pseudo-“freethinking” mush where one blogger presents ideas from some other blogs that got their ideas from perhaps a YouTube home video or a "Billionaire insider says buy gold, crisis coming!" pop-up ad from three years ago.

Because that’s nothing more than a mirror image of the flawed, religiously-fanatical conventional wisdom that readers come here to avoid.

As for a real, gold (not gold-backed) ruble, which even Engdahl (despite his heading) did not dare propose, actual gold ruble coins would be price-arbitraged out of circulation almost immediately upon release. Likewise for any type of gold-convertible ruble, even in digital form.

Millions of Russian citizens would become speculators overnight, seeking to profit from even minor fluctuations in the world gold price and/or the ruble exchange rate.

Indeed, the paradox of the Gold Standard is that the first countries to leave it (e.g. the UK in 1931) came out ahead, whereas the first country to come back on it would simply be giving its gold away to the rest of the world, i.e. it would be sabotaging itself and ensuring that no others follow in its footsteps.

So I am glad that Engdahl at least did not go there.

In conclusion, I wish to point out that unlike Engdahl and Co., Russia's leadership is fully-informed and sober and has no wish to dethrone King Dollar, nor do they think they could ever do so.

Rather, they are taking small, wise steps towards some level of financial and economic sovereignty for their nation, as they have been doing since 2000, albeit now at a faster clip.

And that is good enough.

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