U.S. economic sanctions are being applied like never before. Current targets include North Korea, Syria, Cuba, Iran, Turkey, China, Russia, and Venezuela. Several other countries are under consideration for tariffs and sanctions or on a waiting list.
These sanctions are highly effective. The Iranian economy almost imploded in 2013 under prior sanctions and is imploding against today under new sanctions imposed by President Trump. Yet, those policymakers in Washington imposing sanctions are ignoring the admonition, “Be careful what you wish for.”
U.S. sanctions’ success is generating a backlash that could undermine the role of the dollar in the long-run. The most active opponent of U.S. sanctions is Russia.
Right now, Russia is being sanctioned with tariffs, account freezes, penalties and capital market bans because of its actions in Crimea and Eastern Ukraine. This has had some negative impact on the Russian economy, but Russia is fighting back.
As described in this article, Russia has sold off most of its holdings of U.S. Treasury securities and vastly reduced its dollar-denominated reserve holdings. At the same time, Russia has tripled its gold reserves in the past ten years and now has more gold in its official reserves than China. In fact, Russia is the fifth largest gold holder of any nation after the U.S., Germany, France and Italy.
Relative to the size of its economy, Russia has the most gold in the world. These gold holdings insulate Russia from dollar-based sanctions and protect Russia from dollar inflation.
Russia is one among many countries that are taking steps to escape from the dollar hegemony imposed on the world by the U.S. No one country can erase the dollar’s advantage by itself, but collectively these actors can build a non-dollar based payments system and non-dollar reserves that escape the reach of U.S. sanctions.
This movement has started small but could gain momentum suddenly and unexpectedly. The U.S. Treasury is not ready for this, but you can be by simply allocating some of your investment portfolio to Russia’s favorite asset – gold.
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