Russia is gradually showing the world that the de-dollarization process is getting closer than many people think. According to the latest data from the Russian Central Bank, Russia currently holds more gold reserves than the USD. This is a warning to the US that Russia is ready to take the risk of de-dollarizing its economy.
Since 2014, Russia has reduced its holdings of the USD, instead accumulating gold and non-US currencies, especially the Euro.
Gold and foreign currency reserves
As of January 28, 2022, Russia's foreign exchange reserves reached about 634 billion USD, the world's fourth largest foreign exchange reserve. Of these, the Euro accounts for 33%, gold accounts for 23%, the USD accounts for 22%, and the Chinese yuan accounts for about 12%.
Russia's international reserves have reached historical levels. The country is investing in assets such as gold and foreign currency in the context of an increasingly unstable economy, with inflation soaring after a global borrowing spree.
The Russian Central Bank sets a target of $500 billion for international reserves. The Kremlin first surpassed this threshold in 2008 with 598 billion USD. Russian reserves have fallen several times in recent years, including the lowest level of $356 billion in 2015 after oil prices plummeted in 2014.
In addition to gold and foreign currency, Russia's reserves also include the Special Capital Withdrawal Rights (SDR). SDR is a reserve payment vehicle issued by the International Monetary Fund. Russia's SDR holdings have increased significantly from $7 billion to $24.6 billion.
Impact on the US
The increased shift away from the US dollar is part of President Vladimir Putin's broader strategy to "de-dollarize the economy" to ease the impact of US sanctions in the context of increasingly deteriorating relations with the US.
Governments are holding gold in store for a volatile future, possibly another world war or a global economic crisis. Therefore, Russia is hoarding gold to better prepare and protect itself from the potential collapse of the USD when US spending is out of control.
To pay for the COVID-19 response in 2020, the US government spent $4 trillion. That is more than the GDP of any country except the top three: the US, China and Japan.
$4 trillion is larger than the GDP of the world's least 135 countries. It is also larger than the total GDP of the ocean and Africa, of the entire South American continent and the GDP of the Middle East and North Africa combined.
With $4 trillion, the US could build a Panama canal 425 times more. Adjusted by inflation, $4 trillion is the cost of all US wars combined, except World War 2.
In fiscal 2020, the US government spent $6.55 trillion and total revenue was $3.42 trillion. Thus, the US budget deficit will reach 3.13 trillion USD. That deficit surpasses all the debts the United States has been charged from 1776 to 1990. This period included the Civil War, the Great Depression, two World wars, conflicts during the Cold War and the first Gulf War.
The only force that keeps the US dollar from collapsing and causing super inflation is the global demand for the currency. According to the IMF, about 59.2% of international trade is still conducted in USD. Many countries buy USD to trade or hold as reserves.
In addition to Russia, in January 2021, the European Commission outlined 15 key actions it plans to take to promote the Euro as a world reserve and exchange rate, as well as compete with the USD. Currently, 20.5% of the world's reserves are in the Euro.
Without demand for foreign dollars, the US economy and the country's huge money printing activities will collapse. According to Data Driven Investor, the era of "the monopoly of the US dollar to become the world's main reserve currency is gradually coming to an end".
