Back in February 2022, sanctions were imposed against Russia, foreign exchange reserves were frozen and the USD/RUB surged. The intension from the West was to crush Putin’s ability to run an economy and essentially end the invasion of Ukraine through currency wars.
Whilst initially this hit Russia hard, by late May 2022 the Ruble bounced back and hit its highest level against the US dollar for years. The simple reason was that Putin dumped the dollar and began to sell his assets in his native currency to parts of the world and the Ruble became more popular as did their proclivity to trade in anything other than the US Dollar.
Following meetings with China earlier this year, Russia has made it clear that they now see the Yuan as their preferred medium of exchange. In fact, China has spent more money in the first two months of 2023 in Russia than the whole of 2022 through mainly oil purchases.
Then there are the BRICS nations. Russia – a key player in the BRICS formation many years ago, has opened its arms to other oil-producing countries and now Iran and Venezuela which together with Russia account for around 40% of oil produced are now trading in Yuan.
The petrodollar has been under threat for years, and it is starting to turn the corner in a big way. Among the many countries that have applied for BRICS membership the powerhouse of oil producing, Saudi Arabia, heads the big names on the list. Let’s not forget the Kingdom was the reason the petrodollar was formed in the 1970’s with US and Saudi Arabia agreeing swaps for military protection while reinjecting their petrodollar wealth into US debt purchases.
The potential of BRICS nations should not be underestimated. Their share of the global economy has surpassed that of the G7 nations. More interesting however is their penchant for Gold. BRICS have been net buyers for years and in the last few their central banks have seriously upped their purchases.
Just in 2023 China has purchased over 100 tons. Rumours are rife that the reason for this is it will be used to back a rival world reserve currency. Time will tell however it is clearly seen by the East as structurally important as they become less and less reliant upon the US currency.
So does the East really want a collapse of the dollar? We’re not so sure given the ramifications this would cause across the globe. However one thing is certain: since the sanctions against Russia, a lot of countries have run scared that their foreign exchange reserves could be frozen should the US begin wielding their axe. Therefore the theme of selling dollars for Gold or certain fiat currency doesn’t look like slowing down any time soon – particularly from the BRICS nations.
The US dollar has weakened significantly recently; however with just over 50% of the world’s foreign exchange reserves in US dollars (down from nearly 70% ten years ago) it still has global might, however the potential to get ugly quickly if global de-dollarising continues shouldn’t be underestimated.