Increasing Gold, Decreasing Dollars: Russia’s March To Financial Independence

Russia has increased its gold reserves to $109.5 billion this month after increasing them by $7.5 billion in just a matter of a few weeks. The Eurasian Giant increased the share of gold in its international reserves – estimated at 529.083 million dollars – by 20.7%, the data published by the Central Bank of Russia shows.

Russia’s international reserves have not stopped growing since February 2013 and help stabilize Russia’s national currency, just as a backup plan in the event of a possible collapse in oil prices or the never-ending increase in US sanction regimes against Russia. With the price of gold is expected to continue to grow in the near future, the increase in demand pushes up the price of gold.

According to many investors, future economic turmoil could be triggered by trade wars, Brexit or even the escalating tensions between the US and Iran.

The Russian Central Bank has continued on the path of increasing its gold reserves and decreasing its dollar assets. Although Russia had been one of the largest investors of US debt, in May 2018 the Russian central bank got rid of most of its US Treasury bonds at a time when Moscow held US debt securities worth $14.9 billion.

In June 2019, the country continued this trend and reduced its bonds to around 12,000 million dollars, a historical minimum that had not been registered in the last 12 years. Russia seeks to exchange the dollar for national currencies in bilateral trade with other countries. Previously Moscow accused the US of abusing the dollar status as the global reserve currency.

It is for this reason that Russian President Vladimir Putin said in June during the International Economic Forum held in St. Petersburg that “After obtaining the status of the global reserve currency, the dollar has now become an instrument that helps the country that issues it to exert pressure on the rest of the world.” The tendency to leave the dollar has also been revealed in the recent reports of the BRICS group countries, which reduced their use in mutual trade by 20%.

Gold is especially important as the US Dollar abandoned the gold standard in 1944 in the city of Bretton Woods, in the US state of New Hampshire. With delegates from 44 countries agreeing to create a global monetary system: the US dollar became the main international currency. Its rate was set with the gold reserves of the United States, which at that time was almost 70% of all the world’s reserves. The price of the precious metal was set at $35 per ounce and member countries maintained their reserves primarily in the form of gold or dollars, and had the right to sell their dollars to the United States Federal Reserve in exchange for gold at the official price.

But over time it became clear that in the context of rising inflation and the foreign trade deficit, the US was not able to maintain the parity of gold at the long-established level. The situation was aggravated by US spending in the Vietnam War. The fall of the Bretton Woods system was imminent as it generated problems such as the Triffin dilemma, the growing US trade deficit, which called into question the use of the dollar as a reserve currency in the international financial system.

France’s then Minister of Economy and Finance, Valéry Giscard d’Estaing, openly called the Bretton Woods system “an exorbitant privilege” for Americans. European countries were not willing to continue paying for uncontrolled US emissions. During his famous speech on February 4, 1965, the then French President Charles de Gaulle said: “Why should the richest countries in the world be allowed to monopolize the benefits of creating international reserves to finance their own deficits? Why should the Bank of France participate in the financing of US policies, policies in which France had no voice and with which I could disagree completely?”

Ejecting gold from the financial market and curbing the rise in gold prices over time would become the main objective of the United States. It is checked by the stenographies of the meeting between the then US Secretary of State Henry Kissinger and his assistants, published on the website of the US Department of State:

Mr. Enders, an assistant of Kissinger says “It’s against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 11 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We’ve been trying to get away from that into a system in which we can control.”

Thus, the US began to divest itself of precious the metal actively, so that European partners could do the same. Several hundred tons of the US Treasury’s gold reserves were sold. Then the International Monetary Fund and European central banks followed. In five years, the banks sold 1.23 thousand tons of metal. In the 1980s, sales stopped and resumed only in the 1990s. So already in December 2000, the price of gold fell to a record low of $271. At the same time, the position of the US dollar in the world reached its maximum level.

The situation changed dramatically after the 2008 crisis, which was accompanied not only by a global economic recession, but also by the bankruptcy of financial institutions, which until recently seemed indestructible.

In particular, in February 2008, the Northern Rock Bank was nationalized in the United Kingdom, a month later the American bank Bear Stearns was bought by JP Morgan Chase for only $240 million, although a year earlier its value was estimated at more than 30,000 million dollars. In the summer of the same year, the US Federal Reserve She was forced to save the mortgage companies Fannie Mae and Freddie Mac. The crisis culminated in the bankruptcy of Lehman Brothers, one of the world’s leading financial conglomerates.

In these circumstances, central banks had to think again about the diversification of their reserves and safe assets.

In the opinion of some experts, the increase in investment in precious metals is a way to diversify the structure of reserves in the face of growing uncertainty in world trade and financial markets. There are some who consider this approach as anachronistic. However, it is impossible not to recognize that in recent years, central banks have significantly increased their investments in gold. Apart from the economic and political uncertainty, the US sanctions against countries like Turkey, when the Turkish lira fell by 20%, or against China, which faced restrictions and tariffs on its products, made betting not on the dollar but on other more stable assets. Analysts say that gold can be considered a true “anti-dollar asset.”

“Gold does not change its nature: it can be in bullion, coins; it has no nationality, it has been around for a long time, and it is accepted by the entire world for its stable value. No doubt the value of any currency is determined by direct connections or indirect, real or supposed, with gold,” said De Gaulle. And it seems he was right.