On typical winter day, you can ice skate from Russia to Canada.
Theoretically, it’s just a short jaunt over the frozen Polar Cap.
Across the frigid waters of the Arctic Ocean, the two former Cold War adversaries share the top of the world. Now with the U.S. dollar sliding faster than a polar bear on skis, the two polar neighbors will share much more.
Russia’s central bank will add Canadian dollars to its foreign reserves. Along with the Canadian dollar, also known as the “loonie,” the Russians have signaled that they plan to acquire other currencies to reduce their dependence on the U.S. dollar.
Historically, trying to decipher Russian stratagems – economic or political – is like slogging through the endless plot details of Tolstoy’s “War and Peace.” But with the dollar testing new lows against major currencies like the euro and the yen, the Russians are banishing the greenback to the abandoned gulags of Siberia.
Russia’s reserves, the world’s third largest, are made up of 47 percent U.S. dollars, 41 percent euros, 10 percent pounds and 2 percent yen. The country keeps about 35 percent of its international reserves in U.S. Treasury debt.
The Ruble Is Gaining Fast
As the world’s largest energy supplier, the Russians are desperately trying to offset the gains the ruble has made against the dollar.
Over the past three months, the ruble has picked up nearly 9 percent over the dollar. This drop has undercut Russia’s global buying power as the value of its U.S. dollar reserves has dropped.
After World War II, the international financial system was governed by a formal agreement, the Bretton Woods System. Under this accord, the U.S. dollar was placed deliberately at the center of the system, with the U.S. government guaranteeing other central banks that they could sell their U.S. dollar reserves at a fixed rate for gold if they so desired. European countries and Japan deliberately devalued their currencies against the dollar in order to boost exports and development.
Recently, nations, especially in Asia, have been stockpiling reserves at levels previously unknown, especially in U.S. dollars. They have done this in an effort to strengthen export competitiveness by weakening their own currencies.
The Russians followed suit by taking on huge reserves of the U.S. dollar. They are panicking because a weaker dollar not only hurts their purchasing power, but any notion of competitive pricing on their exports, especially energy.
Of late, it has been the Chinese who have been most vocal about concerns over the solvency of the U.S. economy and the continued stability of the dollar. Now our former Cold War nemesis is getting into the act.
Last June, in a communiqué that shook the foreign currency world, Russian officials strongly hinted they may invest more of their reserves in their BRIC partners (Brazil-Russia-India-China). Their stated goal was to shield themselves from further declines in the dollar.
This action by the Russians also comes at time when the dollar is facing historic lows against the Japanese yen.
According to recent reports, the Russians are now in active talks with both Brazil and India use their currencies in trade. The Russians already have an agreement with Beijing to use the ruble and Chinese yuan in cross-border trading.
Behind the Hike in Gold Prices
The Russians have also been diversifying their reserves by increasing the central bank’s holdings in gold as another means to reduce the risk posed by the dollar’s dominance. Although Russia remains one of the largest gold mining countries – 7 percent of the world’s total production – the accelerated purchases by its central bank have been a major factor in boosting gold prices to their current record levels.
Russian President Dmitry Medvedev blames the global financial crisis on the world’s over-reliance on U.S. currency. Now it appears that it has struck an even stronger alliance with China to unseat the dollar’s pre-eminence.
Over the past few months, several OPEC countries like the United Emirates and Iran have also joined the rising chorus of those advocating a shift away from the dollar as the sole global reserve currency. With Russian preparations under way to purchase Canadian dollars to supplant a portion of its U.S. dollar holdings, the previously unchallenged supremacy of the greenback has come under sharper fire.
Unless and until the U.S. financial system regains its footing, the assault on the dollar will be bloodier than Tolstoy’s account of the Napoleon’s battle at Austerlitz.
Enjoy your Thanksgiving.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
