The de-dollarization of the world economy continues to proceed as countries around the world sign swap agreements to trade in their own currencies and remove the US dollar from transactions with their non-U.S. trading partners.
It is no secret that Russian President Vladimir Putin would love to further this process and damage the United States economically as much as possible by minimizing the use of the dollar globally, and undermining its status as a global reserve currency. The Western sanctions on Russia are starting to bite as the Ruble approaches forty to the dollar.
Unfortunately for Russia, it cannot harm U.S. interests on its own. She does not have the economic strength and is playing this hand from a position of weakness. However, there is a way the Kremlin could seriously harm the United States. Combined efforts by the BRIC developing economies would have a devastating impact on the value and influence of the dollar.
China is also keen on reducing USD hegemony in the global economy. India and Brazil are as well, although to a lesser extent than China and Russia. If these four nations teamed up to sell U.S. treasuries and remove the dollar from their foreign transactions, we could see the bottom fall out of the dollar’s valuation. The Federal Reserve would also most likely lose control of the bond market. So you would have a dual shock to the American economy–significantly higher interest rates and a weak currency. We also would have trouble finding buyers for our bonds to support our ravenous spending habits if the BRICs refused to participate in U.S. treasury auctions.
This scenario is almost certainly being planned and implemented by Moscow already, with the latest indications being that they’re shifting their assets out of the greenback and into hard commodities like gold. In a recent commentary on its website, Birch Gold Group, a national dealer of precious metals, noted that “Besides retaliating with more sanctions against the E.U. and the U.S., the Russians have been one of the world’s biggest buyers of gold this year. Over the past six months, according to the World Gold Council, Russia has added 54 metric tons to its gold reserves; Russians now have the 6th largest gold reserves, higher than both Switzerland’s and China’s.”
Perhaps the Russians know something we don’t?
With the recent Western sanctions targeting the life blood of the Russian economy, the main state-owned hydrocarbon producers, the Russians have been looking East. Russia recently signed a multi-year natural gas deal with China to lock in a long term customer, albeit just above cost. Moscow is also very aware of Western Europe’s efforts to diversify away from Russian gas supplies.
The point is that cooperation with the historically belligerent neighbors is already underway. In the same commentary, Birch Gold observed that “Russia is also unloading U.S. dollars and euros and increasing its Chinese yuan reserves – which could hurt the dollar in the long run. China and Russia have recently agreed on a draft document to exchange currencies. Their central banks will swap currencies to stimulate further development of direct trade between the countries.”
The wildcard in the BRIC adverse scenario is the actions of India and Brazil. Relations with India soured significantly last year after the U.S. arrested an Indian diplomat for alleged visa fraud. Since the election of Modi earlier in 2014, the United States has been keen to repair relations and have warmed up to the new Indian leader. Perhaps the Obama administration realizes America needs more friends in the world, not less. Relations with Brazil and the United States are also at an all-time low. This comes after the news that the NSA was spying on the Brazilian president. Efforts by the Obama administration to repair this relationship have so far been fruitless.
So it seems the United States finds itself in a situation where all of the BRIC countries are at odds with the United States’ policy agenda. Therefore, the potential for these countries to unite and coordinate their efforts to harm the United States economically is substantial. This bodes ill for the status of the USD and influence of the United States in the long run. In other words, a perfect storm.