Washington D.C. (SCF) – The US Treasury Department report for April published on June 15 revealed that Russia sold $47.4 billion out of the $96.1 it had held in Treasury bonds (T-bonds). In March, Moscow cut its Treasury holdings by $1.6 billion. In February, Russia reduced its bond portfolio by $9.3 billion. Other holders did it too. Japan sold off about $12 billion, China liquidated roughly $7 billion. Ireland ditched over $17 billion.
The tariff wars unleashed by Washington stirred fears that financial markets may be in for a rough ride with American treasuries dumped by some partners, including such major holders as China and Japan, each holding over $1 trillion in bonds.
Russia has cut its holdings in American securities following numerous rounds of sanctions imposed by Washington against Moscow and amid the ongoing trade wars between the US and its allies and partners.
This is bad news and an ominous warning for Washington. The foreign demand is critical to offset an expected surge in federal borrowing needs. The Treasury Department needs to finance the huge spending bill along with tax cuts that were passed by Congress in December 2017. It plans to auction off around $1.4 trillion in treasuries this year with a glut of sellers and a shortage of buyers in the bond market the government plans to add $600 billion to.
The companies buy back their own shares to boost capitalization. The stock prices are overvalued. The FRS monetary policy does not spur economic growth amid the growing national debt. The bond market does not look attractive anymore. Looks like there is a big change on the horizon that nations will dump US debt in case of trade war.
And the supremacy of the US dollar is not as solid as many people believe it is. A sell-by date as a global reserve currency is looming. The process of de-dollarization is gradually gaining momentum.
Moscow and Beijing are making agreements to move away from the American currency. On June 8, their leaders signed an agreement to raise the share of trade settlements in national currencies. Last year, nine percent of payments for supplies from Russia to China were made in the Russian rubles. In October 2017, China launched a payment system for transactions in the renminbi and the Russian currency. The launch of the petro-yuan allows Moscow and Beijing to use national currencies for settlements.
Russian companies paid for 15 percent of Chinese imports in the renminbi. For comparison, only three years ago the respective figures were two and nine percent. The gradual shift away from the USD is on the agenda of BRICS. China and Japan started direct trading of their currencies as far back as 2012 to hedge the risk of the dollar’s fall in the long run.
Stanley Druckenmiller, the billionaire investor, believes that this is the time when “all you need is gold and all other investments are rubbish”. Top money managers are also recommending gold. Other countries are repatriating their gold reserves from the US Federal Reserve.
Russia has increased its gold reserves in order to diversify away from the dollar. It has recently concluded a cooperation agreement with China on developing the Klyuchevskoye gold ore deposit in the Trans-Baikal region. It is expected to extract 12 million tons of ore to produce 6 tons of precious metal yearly. Gold is considered important by both countries. The Central Bank of Russia has been increasing its gold holdings for three years now. Today, it has the fifth largest gold reserves in the world to make Russia immune to fluctuations of global currency market. This is a good investment to fend off US sanctions, tariff impositions, and dollar fluctuations.
The worse the US relations with other countries become, the more likely are other nations to reconsider their reliance on the dollar. The US bonds market is going through hard times, the dollar is facing uncertain future and gold is becoming the best investment one could think of. With sanctions constantly used as a tool of foreign policy, trade wars waged, and the huge debt growing, America’s economic prospects are clouded in doubt to make other countries gradually move away from its currency and T-bonds. It does not augur well for the US. Its policy of confrontation makes it weaker, not stronger. There are clear signs the American century is coming to an end.
This post by Arkady Savitsky originally ran on Strategic Culture.
Arkady Savitsky is a military analyst based in St Petersburg, Russia.