The very rich and powerful families who control the US military industry complex reacted by trying to revert to their tried strategy of re-activating a new Cold War that paints Russia as evil and tries to cripple or severely weaken her. Ultimately it was a stupid decision being implemented by very stupid people, who believe they are very smart.
One of the unintended consequences of their stupidity is the fact that because of the foolish US decision to impose economic sanctions on Russia over Crimea’s annexation, Washington has forced Moscow to react by selling Gazprom bonds not in the dollar market but rather in the fast-emerging Chinese Yuan. The US has just shot itself in the foot.
OAO Gazprom, the world’s biggest natural-gas producer, plans to issue Chinese Yuan-denominated debt in the coming days. Because of Obama Administration sanction threats, the interest rate for Gazprom debt in dollars is rising dramatically while that of Yuan debt is falling, making it attractive to issue the Yuan debt. But this is a decision that makes more than business sense. It accelerates a trend by Russia, China, Iran and other countries to abandon the US dollar as world central bank and trade reserve currency.
Wars with other countries’ money
The role of the US dollar as the world’s leading reserve currency is more than a status symbol. Since the creation of the Bretton Woods monetary order in 1944, the role of the dollar as reserve currency has been at the center of American power. After August 1971, when Nixon ended the convertibility of foreign-held dollars for US Federal Reserve gold stocks, the dollar has been a fiat currency whose relative value has fluctuated up and down.
Today, despite the worst economic depression in the USA since the 1930’s and despite three decades of US trade deficit, combined with a soaring Government debt that is now over 103% of GDP, the US Government is able to finance wars in Syria, Libya, Afghanistan and elsewhere because of the reserve currency role. Other trading nations like China or Russia who buy or sell dollar-priced
goods must have dollars for trade, so their central banks invest their trade surpluses into “safe” US Treasury bonds.
Ironically, that has in effect meant that the US has been able until recently to finance its foreign wars and trillion dollar military budget using Chinese, Russian and other nations’ dollars.
When the Euro threatened the reserve currency status of the dollar in 2010 as Washington ran annual trillion dollar+ budget deficits, the Chinese and others began buying bonds denominated in Euros instead to diversify their risk of a possible US default.
To prevent the emergence of the Euro, Washington launched a financial warfare operation using key Wall Street banks like Goldman Sachs and JP MorganChase together with the US-based credit rating agencies Standard & Poors and Moodys and the US Federal Reserve to prevent the shift to the Euro. It was called the “Greek Crisis.” The Euro fell and the dollar was suddenly “safe haven…”, for a while.
But other national central banks took notice that the dollar was losing its value, as Washington continued to print money without limit, in order to rescue the bankrupt Wall Street banks with what the Federal Reserve calls Quantitative Easing.
China, Russia and other major trading nations have quietly begun to develop alternatives to using the US dollar for their bilateral trade.
Dramatic shift in dollar role
A new report by the International Monetary Fund reveals a dramatic shift in the role of the US dollar as reserve currency. Some 23 countries today report holding Chinese Yuan as official reserves. That, despite the fact the Yen, much like the French Franc after World War II, is not yet fully convertible into other currencies. The Chinese are moving to convertibility in very carefully measured steps.
Not only do 23 other central banks hold Yuan officially, twelve more have invested in Yuan without officially declaring so.
The most dramatic point in the IMF report is the fact that the relative role of the US dollar in central bank reserves is rapidly declining. Yes, the dollar is still the largest reserve currency. But whereas in 2000 some 55% of all reserves worldwide were in US dollars, today it has declined to 33%. And the trend is accelerating. The IMF does not list the Yuan as an official reserve currency as it is not yet convertible. In its statistics the Yuan falls under the category “other currencies.” The Other Currency share according to the IMF has doubled since the US invasion of Iraq in 2003.
In recent years the central bank of China has been buying gold in huge amounts to prepare for Yuan becoming a fully convertible currency. Now, with Russian companies increasingly looking east to China and Asia generally, the shift away from the dollar could accelerate dramatically, forcing US interest rates sharply higher and significantly increasing the pressures on Washington’s government spending.
The foolish Obama sanctions threats against Moscow are simply accelerating the refocus of giant Russian companies like Gazprom and Norlisk Nickel to the huge Asian market. Russian mining companies, including OAO GMK Norilsk Nickel, the world’s largest producer of nickel, are stepping up activities in Asian markets in the last month.
A China-Iran-Russia Triangle
The NATO-led Ukraine coup and ensuing crisis have dramatically accelerated the trend not only by Russian companies to look east. Other nations realize they could someday be target of Washington sanctions and are looking to lessen their dollar exposure. Iran and Russia recently announced a huge barter deal that allows the two to skirt US-imposed economic sanctions.
On April 2, the two countries agreed a barter deal that would reportedly be worth up to $20 billion, enabling Tehran to boost vital energy exports in defiance of Western sanctions. Reportedly Moscow would buy up to 500,000 barrels a day of Iranian oil in exchange for Russian equipment and goods. Russian technical assistance in building two new nuclear plants in Iran are reported part of the deal, as well as purchases of various metals and perhaps Russian missiles. The dollar, of course, would play no role. Washington was furious, but why should Russia or Teheran obey US-dictated measures of economic warfare when both now are being attacked by them?