Zero Hedge: The U.S. expanded sanctions against Russia on Wednesday after President Vladimir Putin moved to recognize breakaway territories in Ukraine as independent states. The standoff may further Moscow’s de-dollarization movement and see the Chinese yuan play a more-important role in Russia’s trade and finance.
The initial global implications from the escalation of the Ukraine-Russia tensions were to add to the inflation trouble that many parts of the world are already struggling with. Inflation expectations embedded in the U.S. two-year breakeven rate surged to a record, while the probability of a 50bp move at the Fed meeting next month inched up.
Bloomberg’s commodities index hit the highest since 2014, the year when Russia annexed Crimea. The Crimea crisis didn’t have a persistent impact on global markets, but Russia’s stronger financial position, including larger foreign reserves and higher energy prices, means it can sustain more sanction pain.
A byproduct of the sanctions is that they are likely to force Russia to further reduce the role of the dollar in its economy, a move that started when the West imposed restrictions following the Crimea annexation eight years ago. The dollar’s share of Russia’s foreign-currency reserves, currently at $640 billion, has declined to 16% in 2021 from 46% in 2017. In comparison, the yuan’s share rose to 13%, from less than 3%, while the euro’s gained to 32% from 22%.
The U.S. currency’s dominance in Russia’s trade payments has also diminished. Its share in Russia’s export receipts has declined from 69% in 2016 to 56% in the first half of 2021, while the euro’s doubled to 28%, according to a study by UBS’s economist Anna Zadornova.
The de-dollarization trend is more clear in Russia’s trade with China. Read More …
Opinion: Many of you that heard my radio broadcast with Jimmy DeYoung on January 1, 2022 may remember we discussed this very issue. It was based on an article that Jimmy sent me and asked me to comment on:
China and Russia to establish independent financial systems
Russia and China have agreed to develop shared financial structures to deepen economic ties in a way that will not be affected by pressure of third countries following talks between the top leaders, Russian media outlet RT reported on Wednesday.
The move will help both countries deter the threat of the US government’s long-arm jurisdiction based on the US dollar denominated international payment network, experts said.
As the old adage says, hindsight is 20/20, and when we view that headline today with a Russian invasion of Ukraine underway, it is indeed every clear.
The two men, Xi Jinping and Vladimir Putin, appear to have had this all planned, and setting up trade between the two nations while avoiding the US dollar looks like a slam dunk.
Both men are taking advantage of a weak US president. Here is what I wrote in December:
Both nations have been trying to remove the US dollar as world reserve currency for over a decade. The move appears to be Russian’s response to a series threats that the US could push to disconnect Russia from the Brussels-based SWIFT financial system. China would like to see the digital yuan, first of its kind, as world reserve currency …
What I didn’t know then is that in a few short weeks the US would be buying 250,000 barrels per day, thanks to Joe taking us out of oil production, and a sanction as tough as kicking Russia out of the SWIFT financial network, just might put the US in dire straits for oil.
Now for the bigger problem. Both China and Russia have developed digital central bank digital currencies (CBDCs) making trade between the two countries possible while avoiding the dollar. I’m guessing, but it just may be that they could invite other nations into their digital club, like Iran for instance.
A quick Google search turned up this headline from just 10 days ago:
February 14, 2022
Sanctions and trade: Iran aims to develop a central bank digital currency
As payment methods continue to evolve, new innovations are improving financial infrastructures that have been in use for years. Currently, central bank digital currencies (CBDCs) are a topic that has grabbed the attention of many nations worldwide including the Islamic Republic of Iran.
The Middle Eastern nation has faced considerable economic and financial hardships due to sanctions imposed on it by the United States and believes that piloting a CBDC can resolve problems associated with the blockade.
The question often asked, “Where is the US in prophecy?” may be right in front of us.
P.S. The US Federal Reserve has been dragging its feet on a digital dollar.