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Monday, March 27, 2023

How Biden Undermined World’s Trust in US Dollar by Freezing Russian Central Bank’s Assets

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Washington freezing the Russian Central Bank’s dollar assets held in US financial institutions over Moscow’s special operation in Ukraine could backfire on the world’s economic and financial order and erode trust in the US dollar, according to international observers.

“This move in the long-term will have disastrous consequences for Washington and the US Federal Reserve Bank”, says Thomas W. Pauken II, a Beijing-based Asia-Pacific affairs commentator and author of US vs. China: From Trade War to Reciprocal Deal. “Anytime a nation anticipates the US will rupture bilateral relations with them, the rival nations to the US will demand a withdrawal of their foreign currency and gold reserves from Wall Street banks. The nation making the request will spark a banking panic as bankers will know the other sovereign government is planning to hit the US with tough actions. But, if Wall Street bankers refuse to hand over the reserves to the proper owners, you could deem it an ‘act of war.”

Pauken does not rule out that many countries that don’t trust the US “will start to slowly and quietly take out their reserves’ holdings from Wall Street banks”. Consequently, US and European banks will see a trend of foreign nations stopping their business dealings with them and moving their cash back home or to Asian banks, such as in Singapore, according to the Beijing-based commentator.

“The US dollar won’t be harmed substantially”, he believes. “But Wall Street banks as trustworthy holders of other nations’ holdings and stockpiles of foreign currencies and gold will be destroyed. These banks will lose a lot of business in the future and deservedly so.”

Russia’s assets were frozen on 28 February, after Moscow invoked Article 51 of the UN Charter and launched the special operation to de-militarise and de-Nazify Ukraine on 24 February. On 11 March, US President Joe Biden signed an order banning the sale or delivery by any other means of dollar-denominated banknotes to Russia.

The move accelerated the process of the de-dollarisation of the Russian economy that has been ongoing since 2014, when the US and its NATO partners went on a sanctions spree in response to Crimea’s reunification with Russia.

On 18 March, members of the Eurasian Economic Union (EAEU), which includes Russia, Belarus, Kazakhstan, Armenia, and Kyrgyzstan, agreed on a phased transition to settlements in national currencies, according to the head of the Ministry of Economic Development of the Russian Federation Maxim Reshetnikov. Earlier, Russia started bilateral trade in national currencies with China, India, Turkey, and Iran. Moscow also diversified its Central Bank’s reserves: by mid-2021, just 16.4% of Russia’s national wealth was held in US dollars, according to Reuters.

Washington Has Shot Itself in the Foot

Although Russia’s de-dollarisation does not pose an immediate threat to the greenback’s dominance, according to financial observers, the Biden administration’s decision to freeze Russia’s assets definitely does.

“The best word to describe the US-initiated move to freeze assets of the Russian Central Bank as part of a welter of economic sanctions being levelled against the country is quite simply ‘daft’. It is a case of shooting yourself in the foot – a self-inflicted and hobbling injury”, writes Anthony Rowley, a veteran journalist specialising in Asian economic and financial affairs, in his op-ed for the South China Morning Post (SCMP).

“US President Joe Biden and Secretary of State Antony Blinken could not have done a better job of undermining the international role of the dollar… if that had been their conscious objective.”

According to Rowley, if central bank assets held in US dollars are no longer inviolate, then other countries could eventually be pushed into “dumping reserve dollars and cutting dollar reliance in trade, finance and banking.”

The whole point of central banks’ foreign reserves is that they are a store of wealth that is safe and accessible, and can be deployed as and when required”, writes Kimberley. “Sanctioning nations felt that, in the circumstances, they had to act to freeze the assets but other countries might feel that an unhealthy precedent has now been set which necessitates a response, perhaps accelerating the pace of reserve diversification”.

Kimberley warns that Beijing “itself might feel that further diversification of China’s $3.2 trillion of foreign reserves would be appropriate”.

*Saudi Arabia’s Apparent Motive to Use Yuan in Oil Trade*

Meanwhile, the Wall Street Journal broke on 15 March that Saudi Arabia is apparently considering pricing some of its oil sales to China in yuan. The WSJ also reported about an upcoming visit of Chinese President Xi Jinping to Saudi Arabia, “citing people familiar with the plan”. Both WSJ pieces are referring to the strained relations between Saudi Arabia and, in particular, Crown Prince Mohammed bin Salman, and the Biden administration.

While The Hill notes that Riyadh used to threaten Washington with moving away from the US dollar in oil trade when US-Saudi relations became tense, Bloomberg suggests that this time Riyadh could have another motive.

“Many sovereigns, including US-aligned countries, have realized owning massive amounts of dollars lead to an illusion of stability”, says Victor Xing, principal at Kekselias Inc., as quoted by Bloomberg. “In any moment, a political decision could lead to that dollar reserve being frozen or seized. The Saudis could be anticipating this shift, and pricing crude in yuan would increase their trade surplus in yuan and reduce dollar holdings in an organic way.”

Riyadh and Beijing decide to use the yuan in mutual oil trade, it’s good news for them, deems Pauken.

“Both countries have little trust in the Biden administration”, the Beijing-based commentator says.

“They anticipate Washington will impose tough economic sanctions on them sooner or later, so they are taking the right steps to overcome the challenges that could await them. By settling energy trade in yuan, they can ignore US-led sanctions.”

Washington’s move to freeze Russia’s dollar assets is likely to trigger a domino effect with other nations diversifying the composition of their own reserves, writes Neal Kimberley in his SCMP op-ed. Eventually, this will result in “worldwide economic and financial change,” he forecasts.

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