Over the past several months, while sitting here in Moscow, it has become increasingly obvious that while the US Dollar is the world’s leading and liquid reserve currency, it comes with a high price if you are not the United States of America. I have opined and written about the trend towards de-dollarization before, but with the latest US –Turkish spat it has hit the wallets and markets in a number of sovereign countries, be they aligned with Washington or not.
This serves as a further example for many nations for the clear need to diversify to an extent away from the greenback, or risk being caught up in its volatile, changing and unpredictably risky political directions. The Dollar and the geopolitical winds from Washington are today as never before openly being used as policy, which can be called the “carrot and stick”, a distinctly Pavlovian approach. Sadly, few if any can make out what the carrot in this US brand of worldview is.
Tariffs, sanctions, pressured exchange rates, the Federal Reserve loosening or tightening, trade agreements and laws ignored or simply trashed… there is a lot going on which is negatively affecting America’s allies as well as those on Washington’s politically popular “poo-poo” drama list.
Just now from a press conference in Turkey, I watched Russia’s foreign minister Lavrov say that through the actions shown by the US, the role of the US dollar as a secure global reserve currency for free trade will diminish as more countries switch to national currencies for international trade.
He clearly spoke for many nations when he said; “It will make more and more countries that are not even affected by US sanctions go away from the dollar and rely on more reliable, contractual partners in terms of currency use.” Putting the situation in a nutshell he went on to say “I have already said this about sanctions: they are illegal, they undermine all principles of global trade and principles approved by UN decisions, under which unilateral measures of economic duress are unlawful.”
Turkey, a long-standing NATO ally and a key line of western defense during the long cold war years fully agreed with his Russian counterpart. The Turkish foreign minister Mr. Cavosoglu openly warned that US sanctions or trade embargoes can and are being unilaterally imposed against any country at any time if they do not toe DC’s political line. He said at the same press conference; “Today, sanctions are imposed on Turkey, and tomorrow they can be used against any other European state. If the United States wants to maintain respect in the international arena, then it is necessary for it to be respectful of the interests of other countries.”
What is happening in Turkey is symptomatic of much of the developed and emerging markets globally. When trillions of dollars of newly issued lucre is up for grabs thanks to several developed country central banks, it was comparatively easy for governments and companies just like Turkey’s to borrow funds denominated in dollars, not their national currencies.
Turkey has relied on foreign-currency debt more than most EM’s. Corporate, financial and other debt denominated mostly in dollars, approximates close to 70% of it’s economy. Therefore as the Turkish lira loses value, it is very costly for those companies to repay their dollar-denominated loans, and even now it is clear many will not. The concern rattling around the underbelly of the global markets is what can be reasonably expected for assets and economies that were inflated by cheap debt, the United States included. All this points not so much to a banking crisis as has happened eight years ago, but a systemic financial market crisis. This is a new one, and I doubt if any QE, QT, NIRPs, or ZIRPs will make much of a difference.
Meanwhile, de-dollarization is ongoing in Russia and is carefully studied by a host of countries, especially as the Russian government has not yet finished selling off US debt; it still has just a few billion to go. The Russian Finance Minister A. Siluanov said this past Sunday that Russia would continue decreasing holdings of Treasuries in response to sanctions.
The finance minister went on to say that, Russia is also considering distancing itself from using the US dollar for international trade, calling it an unreliable and risky tool for payments.
Between March and May this year, Russia's US debt holdings were sold down by $81 billion, which is 84% of its total US debt holdings, and while I don’t know the current figure it is certain to be even less.
The latest round of tightening sanctions screws against Russia were imposed by the State Department under a chemical and biological warfare law and should be going into effect on August 22. This in spite of the fact that no proof was ever shown, not under any established national or international law, or with any of several global biochemical conventions, not even in the many ever-entertaining "courts" of public opinion.
Whatever Russia may continue to do in its relationship with US debt or the dollar, the fact of the matter is that Russia is not a heavyweight in this particular financial arena, and the direct effects of Russia’s responses are negligible. However, the indirect effects are huge as they reflect what many countries (allied or unallied with the US) see as Washington’s overbearing and more than slightly unipolar trade and geopolitical advantage quests, be they Mexico, Canada, the EU, or anyone else.
Some of the potential indirect effects over time may be a similar sell-off or even gradual reduction of US debt exposure from China or any one of several dozens of countries deciding to reduce their exposure to US debt by reducing their purchases and/or waiting for existing Treasuries to mature.
In either case, the trend is there and is not going away anytime soon. When Russia clears its books of US dollarized debt, then who will be next to diversify their US debt exposure risks? Then what might be the fate of the US Dollar, and what value then will be the international infusions required to finance America’s continually growing debt? We are truly living in interesting times.