The National Wealth Fund (NWF) of Russia has officially divested itself of all U.S. dollar-based assets and replaced them with other assets denominated in currencies such as the eurozone euro, Chinese yuan, and gold. The official makeup of the fund is now 40% euro, 30% yuan, 20% gold, 5% British pound, and 5% Japanese yen. I have written before about the likelihood of this eventuality and the desire of Russia to avoid further impact of U.S. sanctions on its economy. But there are also more fundamental reasons provided by Russian monetary authorities for owning gold that may make sense even at the individual level, including for American citizens. Today, we will look at the historical asset mix of the Central Bank of the Russian Federation, why gold makes sense for that country, and why a similar strategy could be beneficial for the average American today.
Dollars Reduced from 40% to 0%
As recently as 2018, 40% of Russian NWF assets were held in U.S. dollars. This pool of dollars has been on a determined and steady decline to 0% since then. Granted, the NWF makes up only a portion of Russian reserve assets, but recent moves might be viewed as a precursor to similar adjustments to the country’s reserves as a whole. More importantly, the removal of dollars from the NWF of Russia could be seen as a trial balloon for other nations similarly looking for a way (and permission) to diversify out of the dollar. While previous efforts by Russia and others to diversify away from dollars were looked at as a logical way to reduce the impact of U.S. sanctions that may or may not occur, current efforts seem to be focused on protecting purchasing power from the dollar itself.
In a recent press conference regarding Russian economic and financial policies, Elvira Nabiullina (Governor of the Bank of Russia) was quoted as saying, “As regards [to] de-dollarisation [sic], we have been implementing the policy of de-dollarisation [sic] for many years already, and not only in the financial system, but in the Russian economy in general. Moreover, our monetary policy aimed at maintaining a steadily low inflation rate supports the de-dollarisation [sic] of the Russian economy as previously people often opted for foreign currency fearing that their savings and incomes denominated in Russian rubles might depreciate. Therefore, the inflation targeting regime in itself and low inflation should and will make the Russian currency more attractive.” She clearly stated the Russian goal to reduce the effects of inflation and did not directly mention the issue of sanctions. This perhaps reveals that the greater threat perceived by Russia today is not U.S. sanctions, but the U.S. dollar itself.
Dollar - From Source of Safety to Source of Inflation
Many Americans own financial assets and instruments that are denominated almost entirely in U.S. dollars. If the Bank of Russia perceives financial danger in holding dollars, perhaps we, as individuals, should consider their reasoning, and determine if we are exposed to similar dangers. One of the primary reasons Governor Nabuillina gave for pursuing “de-dollarisation [sic]”, was a desire to be protected from the ravages of inflation. Rather than a source of safety from inflation, the dollar has seemingly become a source of inflation itself. What has been one of the world’s most stable currencies over the past several decades, has become shakier and more devalued recently. When the dollar is dropping in value, that means the purchasing power of those holding dollars is also dropping. For non-American holders of U.S. dollars, it is like importing unwanted price inflation for every purchase.
While the stated strategy of purchasing euros, yuan, and gold to replace dollars seems to work well for Russia, we would have to customize this strategy to be beneficial for the average American. While most Americans purchase foreign-made products, nearly every time a purchase is made, those purchases are made with dollars (not euros or yuan). Aside from the few Americans directly involved with importing goods from overseas, most of us might have a hard time finding someone that would accept euros or yuan to complete a transaction within the borders of the United States. One of the reasons Russia has increased its allocation to euros and yuan is because the country maintains active trading relationships across Europe and China. Ironically, many of these relationships were strengthened during periods of U.S. sanctions. As such, markets were developed outside the sphere of U.S. influence, and today have become major trading partners for Russia. While American citizens might have little use for euros or yuan, we could perhaps benefit from de-dollarization by exchanging our paper bills for precious metals.
De-dollarization for Americans
The idea is not that you would walk into the store with a gold coin or bar of silver and make a purchase directly. Rather, by converting a portion of your dollars to gold or silver today, you would be able to re-convert the gold or silver back into whatever the new American currency of the future happens to be, and potentially maintain or improve your purchasing power. Holding dollars – or any fiat currency, for that matter – can be a losing game when held too long. Later in the press conference, when asked if Russia would be getting rid of all U.S. dollars held by the Bank of Russia, Governor Nabiullina said, “We are not aiming to achieve complete de-dollarisation [sic].” There are still some trading opportunities that exist between the United States and Russia, and Russia seems to want to have enough cash on hand to capitalize on those opportunities. In the same way, we, as individuals, will most likely want to maintain some savings in dollar form to purchase necessary items in the near future.
Positive vs. Negative Real Interest Rates
Another reason the dollar seems to be seen as a liability to Russia right now has to do with current interest rates in the United States versus those in Russia. Governor Nabiullina highlighted in her speech that while inflation was running at 4%, interest rates were being raised to 5.5%. In this way, savers are earning a positive real return. In the United States, we have official inflation rates currently spiking over 5%, while the yield on the 10-year U.S. Treasury bond is below 1.5%. (A quick note on the inflation rates cited: Current inflation numbers are based on June 2021 prices compared to prices in June 2020, when the country was deep in the midst of pandemic related lockdowns and resultant economic stall-outs, which doesn’t make for a completely apples-to-apples comparison (although, higher prices are still not good for ordinary Americans’ everyday lives). Additionally, according to calculations from the Bureau of Labor Statistics at the time of writing this article, the 5%+ rates currently being experienced seem to be largely driven by huge spikes in a few individual categories like Energy, which is currently showing a year-over-year increase in prices of 24.5% (for the overall category), Used Cars and Trucks (part of the larger Commodities category), which is currently sitting at a whopping 45.2% year-over-year jump, and Airline Fares (part of the larger Transportation Services category), currently ringing in at 24.6% higher than in June of 2020. However, all categories measured in the CPI except one – Medical Care Commodities, down 2.2% - do look to have increased over the last year.) Because Russia carries little, if any national debt, the country is able to raise interest rates to fight inflation without further increasing its indebtedness. Typically, when interest rates are increased, so is the value of a nation’s currency, such as the Russian ruble. But the United States carries too much debt to raise interest rates in a meaningful way, which further devalues the dollar.
In the end, Russia has done what we have been recommending American citizens do for years. Namely, pay down debts as much as possible and store a portion of your savings in precious metals. In that way, you will have future resources available to purchase what you need – no matter where in the world it is manufactured.
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byBill Stack