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Apr 27, 2022
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Dollar reserves start playing hide-and-seek with the US

Dollar reserves start playing hide-and-seek with the US

Photo: Zuma/TASS

Freezing the reserves of the Central Bank of Russia may push other countries to change the model of holding their assets. About this in an interview with the Wirtschafts Woche newspaper, Professor Jan Peter Cranen.

The US use of the dollar to pressure Russia in the Ukraine conflict is having an impact on its status as the world’s top reserve currency.

“All anti-Western states will now ask themselves whether they should continue to keep assets in accounts in the West – or they, too, risk suddenly losing access to their foreign exchange reserves in the event of a political conflict,” the scientist noted.

In his opinion, financial institutions can hide foreign exchange reserves by creating “state shell companies.”

“Their likely reaction is to diversify—not only in the reserve currencies they use, but also in where and how to store them. This can be done in secret. Foreign exchange reserves can be hidden, and central banks have ways and means to hide their identity in the financial market,” he said.

Attempts by anti-Western central banks to hide their reserves, the expert believes, will intensify in order to reduce external vulnerability. In particular, small amounts of money can be held in the private capital market, making it difficult to identify their owner. As a result, countries in conflict with the West will have the opportunity to invest in Western financial markets.

As SP said Valery Mironov, Deputy Director of the Development Center Institute, National Research University Higher School of Economics, the question of the possibility of alternative options for storing foreign exchange reserves is now being actively discussed by experts.

– Including in terms of the fact that the United States has a very large public debt. If, for example, China dumps its reserves held in US bonds, then this will bring down the US market and expose the great weakness of the US economy, it may lose sources of funding for its large debt due to a budget deficit. But this is a shock. This is a direct impact with the aim of causing direct damage to the American economy with the agreement of a number of large countries. Japan and China would have made it easy, but Japan is a supporter of the US. China also has huge reserves, although it is unlikely to do this, but it is theoretically possible.

“SP”: – If China decides to strike at the United States, how will this affect the rest of the world, given that the American economy is the largest, and that the economies of other countries are closely connected with it?

— Of course, the American economy greatly influences the world economy. But China is unlikely to strike such a blow. There is a threat that there will be less demand for US assets, not from the point of view of a blow, but from the point of view of avoiding sanctions.

The gold and foreign exchange reserves of other countries, including developing countries, will accumulate not in other assets, most likely in the assets of neutral countries – Swiss francs, yuan, as well as in the currency of India, Brazil. Most likely, the price of gold will rise, perhaps the precious metals that are used in microelectronics – the engine of the current economy. In addition, it is obvious that the fashion for gold and foreign exchange reserves will pass, there will be more investments in current development.

Of course, China will also try to diversify its trillion-dollar reserves.

“SP”: – And what about the “dummy” companies?

– It’s not even about “dummy” companies. Both some of our state-owned companies and Western ones have huge debts and foreign exchange reserves. Only one such company can have tens of billions of dollars, and there are many companies. Such companies may have on their accounts resources in the form of currency holdings. They can act as a secret purse for storing the gold and foreign exchange reserves of a state. And that’s not to mention hidden companies.

But why are hidden companies, if any companies that are affiliated with the state, but do not fall under sanctions, can have completely legal gold and foreign exchange reserves that can be used.

Why is the ruble so stronger now, despite the frozen reserves? Because companies do not accumulate reserves, but sell them on the market. 80% of foreign exchange earnings go to the market, this supports the ruble.

“SP”: – But after all, sanctions can be introduced at any time against companies that this measure has so far passed. Then again it turns out that the reserves will be frozen?

“It will immediately bring down the American and European economies. They will fall into a recession because oil prices will rise to $200 per barrel etc.

Our economy is closely connected with the global one. Much more damage is caused by sanctions not to the Russian economy, but to the American and European ones, because the greater blow is inflicted on countries that have more gold and foreign exchange holdings. And who has more of them, who issues them? In this case, the branch on which the American economy sits to a large extent is cut. They make their currency unreliable, half the world begins to doubt it. This is a psychological phenomenon.

The freeze on Russian reserves is an unprecedented blow to the strength of the US dollar. First of all, it will cause a spillover into alternative forms of wealth accumulation or accumulation through companies that are closely associated with the state.

Independent financial expert Mikhail Khromov he was skeptical about the idea of ​​the German scientist. Nor does he see options for moving away from the dollar as the main reserve currency.

– I recently made a schedule of interbank lending in different currencies: the share of foreign interbank transactions in euros has not yet reached the level of 2007, when the biggest financial crisis came from America. This crisis has led to the fact that the share of the dollar in interbank transactions has grown. Now there will be a crisis in Europe: either low growth or recession, depending on the severity of anti-Russian measures etc.

The euro will clearly not be a competitor. In addition, there are no reserve currencies that would occupy a significant share.

In addition, the main holders of reserves in the world are Japan and China. China’s main trading partner is the United States. Chinese reserves in large quantities are formed as a result of the trade surplus between the US and China: China sells more goods to America, so there is a dollar proceeds so that Beijing can continue to sell and buy goods in America. The difference lies in the US. Around the world, the picture is similar, but these are the two largest economies.

Nobody wants to arrange a showdown between China and America. At the moment, globally everyone is satisfied with the status quo. Petty showdowns and economic wars go on all the time, political dives over Taiwan and Hong Kong as well. This situation will not go anywhere in the next decade, because this requires a radical restructuring of the two largest economies in the world.

“SP”: – And what is the idea of ​​”state shell companies”?

– I don’t understand what a “dummy company” is, which operates in the legal field.

“SP”: – But is there any alternative to storing reserves? Gold?

— Our Russian reserves came out of American securities. There are 1-2 billion left, but not 150 as it was eight years ago. However, this did not help much from blocking, because the system still passes through developed economies.

Gold must be sold, it is a commodity. Now it costs the same as at its peak 10 years ago. Now it is about two thousand and is considered overvalued, and at the peak of the last crisis it was, it seems, 1600. The crisis will pass, gold will plummet. It doesn’t provide any benefit in the long run.

Foreign exchange reserves and therefore foreign exchange to be in the money.

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