Russia - Gold, yuan or Bitcoin for its foreign exchange reserves?

The global monetary order is falling apart. More and more nations are shunning the dollar for their foreign exchange reserves. The time for bitcoin is coming.

The Russian central bank is drowning in yuan

In a report released last Friday, the Central Bank of Russia declared not really having any other option than to use the yuan for its foreign exchange reserves.

The main reason being that the currencies of countries “non-hostile” to Russia are even less stable and less liquid than the Chinese currency.

“Exchange rates are very volatile and their financial markets are illiquid. In addition, some countries restrict capital movements”can we read in the report.

The question of foreign exchange reserves is a priority for Russia, half of which (300 billion dollars and euros) has been frozen since the start of the conflict in Ukraine.

Since then, the Russian economy has redirected its exports to Asia. In particular, India absorbed the majority of Russian oil exports previously intended for Europe. The Russian president regularly encourages exchanges in local currencies to circumvent Western sanctions.

“Vladimir Putin supports the use of the Chinese yuan for transactions between Asia, Africa and Latin America. This position is part of the current trend towards dedollarization and the evolution towards a multipolar world order. »

But there are limits. For example, Moscow finally stopped accepting the Indian rupee. The reason being that New Delhi doesn't sell much that Russians are interested in. Accumulating too much would be a mistake.

Currently, Russia's international reserves stand at $590 billion (including $300 million frozen). If the Russian central bank has stopped communicating the exact composition of its reserves since January 2022, we imagine that the yuan now takes the lion's share.

In fact, the USD/RUB pair now only represents 39% of Russian foreign exchange market volumes, compared to 80% before the war. The CNY/RUB pair has replaced it now that 80% of Sino-Russian trade is settled in yuan or rubles.

Gold back in vogue

Russia would certainly prefer to avoid putting all its eggs in one basket. If the two giants are clearly experiencing a honeymoon, the yuan is not immune to a massive fall if trade relations with the United States sour.

Overall, record purchases of gold by central banks suggest that confidence is eroding sharply in the dollar, which still represents 58% of global foreign exchange reserves. This is, in essence, what the governor of the central bank of Uzbekistan said in a recent paper from the world bank:

“Gold continues to play a vital role in the global financial system. It serves as a hedge against inflation, a safe haven and a reserve asset for central banks. Gold's role as a reserve asset for central banks has been an important driver of gold demand in recent years.

Mr. Alimukhamedov lists several economic and geopolitical challenges that benefit the barbarian relic. These last are :

“The disruption caused by the 2008 financial crisis [le QE de la FED…]. The Sino-American trade war. Brexit. The prolonged period of negative real interest rates and geopolitical uncertainty caused by financial sanctions imposed on Russia through the freezing of its foreign exchange reserves. All this has reinforced the strategic importance of gold to protect against financial instability. »

The governor adds that it is the central banks that fear Western sanctions the most that buy the most gold:

“I think the sanctions against Russia are causing central banks to abandon the dollar (Treasury bills, aka US debt) in favor of gold and other commodities. We are moving from the Bretton Woods II era (reserves in the form of Treasury bills with risks of freezing), to Bretton Woods III, (reserves in the form of gold bars and other raw materials).”

“It remains to be seen whether other countries will follow Russia's lead and increase their gold reserves”he writes.

What about Bitcoin?

If gold returns to the center of foreign exchange reserves, it will probably not be long before bitcoin also joins.

Bitcoin is indeed gold, only better. For two main reasons:

-Almost no transaction fees.

A few cents are enough to transfer the equivalent of tens of billions of dollars. Conversely, gold must travel by plane with an escort. Bitcoin is a currency as well as a digital payment network. Two in one.

-Absolutely finite monetary mass.

This is not the case for gold, whose production continues to increase. That of bitcoin halves every four years. 93% of the 21 million bitcoins are already in circulation.

Coming back to Russia, note that the country is on the verge of taking second place in the world in the production of bitcoins. Our article on the subject: Bitcoin Mining – Russia soon to be number 2 in the world.

Furthermore, we are entering an increasingly inflationary world. Global growth continues to decline and the imminent oil peak does not bode well. The fruits from the lower branches have been picked. Unless there is an energy miracle, inflation will accelerate.

Furthermore, interest rates cannot remain high for long. Look at the American government which, with an average rate of 3.2%, already pays 1,000 billion dollars in interest. This represents almost a quarter of tax revenue!

Inflation and low rates mean that debt securities are no longer stores of value. Inflation in the United States was 24% over the last four years. This was absolutely not offset by the yield on the debt which was around 10%.

BlackRock understands this and all central banks will sooner or later face the facts. Debt securities will be increasingly abandoned in favor of absolute stores of value like bitcoin.

Bitcoin is a technological breakthrough which, like all those that preceded it, will eventually impose itself naturally. Don't miss this article: Bitcoin must replace the dollar.

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