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Russia is building up a war chest of gold as its gold reserves now make up 23% of the country's GDP. While the news might be surprising to some, this is not a sudden move from Russia. The tussle between Russia and the US is known to everyone. The countries have had a complex and contentious relationship over the last century.
The United States of America has been holding the position of world superpower since WW2. When the US stepped in to help Allied forces win the war, the world was already crippled. Britain was unable to maintain its place in the world which was held before.
The world needed a new leader and a new economic recovery system from back-to-back world wars in the 1st half of the 20th century. The Bretton Woods system placed the Dollar as the international mode of payment. All currencies were pegged to the US Dollar, which was pegged to gold.
The system was so good and reliable that by the 70s, it was fully in practice worldwide. When the US sensed that the world economic system was fully dependent on the US dollar, they ditched gold as a base and the Dollar became a purely fiat currency.
Many economists warned the US administration that it could backfire in the future, but they weren’t listening. Now five decades later, we are hearing the calls from emerging leading nations to adopt an alternative payment system instead of the Dollar. Many nations want to ditch the Dollar in the way that the US ditched gold.
According to a Bloomberg report, Russia’s gold reserves now make up 23% of Russia's central bank reserves. Russia is seeing the Dollar system used as the guiding stick by the US for enforcing its political agenda on nations in different parts of the world.
To tackle this, Russia embarked on an ambitious plan to reduce its dependence on the US Dollar. Even though gold purchases were halted by Russia last year due to the Covid-19 pandemic, Russian reserves for gold kept increasing.
Gold now stands as the 2nd largest contributor to Russian reserves after the Euro.
The situation wouldn’t be threatening US hegemony if Russia were acting alone. US policymakers should worry that Russia's actions are part of President Putin’s international “de-dollarization” policy, which China also agrees to.
Both nations think that the US is trying to weaponize their currency to manipulate nations to agree to its agenda. Both Russia and China are also increasing reserves of each other’s currencies as well as the Euro.
Russia’s central bank has been buying a lot of gold recently. The 4.3 billion Dollars worth of gold purchased between June 2019 and July 2020 isn’t Russia's only large purchase of yellow metal. Over the last five years, Russian has spent more than $40 billion Dollars on gold.
On the other hand, Russia has also been selling a lot of gold. $47 Billion Dollars worth of gold was sold by Russia in 2018 alone. The situation is getting problematic for the US, as Russia is gaining allies on their quest to de-Dollarization. In an interesting move last year, BRICS (Brazil, Russia, India, China, and South Africa) nations agreed to launch a new digital currency (pegged to gold) for mutual trade payments.
Similar initiatives and decisions will keep happening until US policymakers take the matter seriously and do something to remedy the situation. But recent US moves such as blocking several Russian banks from Swift (Society for Worldwide Interbank Financial Telecommunication) has caused many other nations to think about their political and diplomatic security with regards to the United States if they are dependent on the US dollar.
Swift is an international transaction security and verification system. The US blocked Russia because Russia didn’t agree to sanction certain nations with the US.
The US is confident that the quest to ditch the Dollar will not be successful. However, if Russia finds more allies like China, the Dollar’s days as an international mode of payment will be numbered.