The currencies market is on the boil over mounting news that China and Russia are plotting to end US dollar hegemony. Moreover, the economic sanctions imposed on Russia may be inadvertently acting as a gravitational force, pulling economic activity away from western europe to the East. If the trend continues this is likely to result in the BRICS (Brazil, Russia, India, China and South Africa) nations increasing in strength at the cost of a weaker US dollar.
During a session at the St. Petersburg International Economic Forum on May 22, Anton Siluanov, Russia's finance minister revealed that Russia has been considering diversifying its debt portfolio away from countries that have imposed sanctions on it. So that implies a likely Russian exit from Western Debt Securities. Russia will instead invest in sovereign debt, “papers” in its partner BRICS nations. The new economic sanctions imposed by the European Union, United Kingdom, United States, Japan and Australia against Russia over its annexation of the Crimea and for supporting anti government forces in eastern Ukraine, might also have an impact on the sovereign debt market. If the geopolitical situation in the Ukraine deteriorates over the coming months we may see a trend in Russian investments in sovereign debt flowing out of the West and into the East. Although, Russian investment in Western debt is relatively small and unlikely to have much of an impact on the market if Russia were to exit the debt.
Speaking at the annual investment forum in the Black Sea town of Sochi. Russia's finance minister said that Russia wants to diversify its investment basket, looking for higher yields without too much risk. Furthermore, he reiterated that the ministry will consider buying papers issued by BRICS. Perhaps hinting that Russia isn't planning to hit the exit door on Western debt, unless geopolitical tensions over the Ukraine deteriorate further, said Mr. Siluanov.
"We would like to walk away from investing in papers of the countries that impose sanctions against us,". He added that the reshuffle would be carried out gradually. However, Russia's finance minister, Mr. Siluanov, didn't elaborate on when the first purchases of Brics debt may take place.
Playing down the move, Mr. Siluanov said that action wouldn't be aimed at punishing the West because Russia's share in their papers is so small they wouldn't feel the effect.
But imagine what could happen to the sovereign debt market if that trend were mirrored by China. Would that not in itself cause a sovereign debt crisis in Western debt?
China is keeping no secrets about its economic ambitions and its eagerness to lighten up its investment portfolio on low yielding western sovereign debt. But, with the world in chaos what asset class is likely to be the recipient of this reshuffle. Could it be gold?
The big story making waves with bullion traders is about China looking to dominate the gold market with the International Shanghai Gold Exchange. This is likely to change the way the gold market is priced and perceived. Bearing in mind the recent well publicised scandals, even in the mainstream, about the London “gold fix” involving a cosy club of big players i.e. banks who were accused of manipulating gold prices. Incidentally, that is not the only scandal to rock the markets. Before that was the LIBOR (lending rates) scandal, when, as little as two years ago, it was revealed that the big international banks had long been manipulating the LIBOR rate. So, while the rest of us are left speculating and guessing the elite cosy club literally sit around a table and make it up as they go along.
So the BRICS are trying to take on the kingpins of the financial world by launching their own currency, central bank and now even their own gold exchange. China's International Shanghai Gold Exchange will give foreign investors direct access to their gold market. The big gold consuming nations, like India and China want to have more of an influence over the gold prices. Moreover, when the BRICS nations are investing/trading on China's new gold exchange they are doing something else, ditching the US dollar and boosting the yuan's global use.
The Shanghai Gold Exchange will start trading contracts in the city’s free-trade zone. It will be linked to its domestic spot market and made available to approximately 40 international members including Goldman Sachs Group Inc. and UBS AG. Previously, access was limited to Chinese institutions. Gold prices in China this year have fluctuated between a range of being as much as 31 USD an ounce more and 42 USD less than the London spot price, according to data compiled by Bloomberg.
Meanwhile, the drive for the BRICS nations to launch their own currency to challenge US hegemony continues to gain momentum. Western sanctions imposed on Russia is giving further impetus for Russia to spearhead a BRICS currency to challenge US dollar as the world's reserve currency. Prime Minister Dmitry Medvedev announced at the investment conference in Sochi that Russia, along with all other nations, should be trading in their own national currencies and outside the scope of a US dollar controlled reserve currency.
So the sanctions might be backfiring and could be a catalyst for accelerating a global shift away from the dollar as the reserve currency. Furthermore, restricting the Russian government and business interests from access to the SWIFT system (International payment system) might be spurring on the Russians to collaborate with the BRICS nations to create their own bank and alternative currency swap mechanism. The highlight of the 6th BRICS summit in Fortaleza, Brazil, on July 15 was the creation of a 100 billion USD reserve bank and a currency pool. It's aim-to cut US dollar dominance. So it looks like the US dollar has got a new kid on the block.
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