Head of Largest Russian Oil Producer Says Gold Could Rival the Dollar
Mike Maharrey

The head of Russia’s largest oil producer says gold could become the dollar’s main competitor in world trade.

Russian policymakers have a vested interest in undermining the dollar, so their rhetoric should be taken with a grain of salt, but it’s worth paying attention to what they say. Others around the world undoubtedly sympathize with the Russian viewpoint thanks to America’s weaponization of the dollar.

Speaking at the Verona Eurasian Economic Forum, Rosneft CEO Igor Sechin said continued restrictions on the dollar create more opportunities for using national currencies in trade and developing new “universal instruments.”

"Using the dollar as an instrument of sanctions is a big mistake because trade will never stop. Both energy security and life in general depend on it. Alternatives will always be found. Gold will be the dollar's main competitor, which mankind has been using for thousands of years for settlements."

The U.S. and its Western allies have aggressively sanctioned Russia in the wake of its invasion of Ukraine. They locked Russia out of the SWIFT financial system and froze around $300 billion in Russian central bank assets. U.S. Treasury Secretary Janet Yellen even floated the idea of selling those frozen assets and giving the proceeds to Ukraine.

One can certainly argue that sanctions are justified, but it’s important to consider the blowback. An Associated Press report about Yellen’s comments conceded the weaponization of the dollar comes with risks. 

“There are tradeoffs since the weaponization of global finance could harm the U.S. dollar’s standing as the world’s dominant currency.”

As Sechin pointed out, trade will continue, and sanctioned nations will find alternatives if locked out of the dollar system.

He’s also correct that gold is the logical choice to usurp the dollar, given that it has served as money for thousands of years. People universally recognize the value of gold, and it is accepted as money around the world. It can easily be converted into any currency and comes with no counterparty risk.

Sechin also took shots at what he described as sagging U.S. influence globally.

“It is also obvious that the U.S. has allowed itself to lose its leadership in the scientific, technological, industrial, and financial spheres, which was hard to imagine 20-30 years ago.”

He accused the United States of trying to create “special conditions” for its economy at the expense of other countries – including its own allies, saying that it has bungled its leadership role by failing to create the necessary conditions for “maintaining a fair world order.” 

"Conflicts are being deliberately aggravated and created in the Middle East, Ukraine, Latin America, and the Asia-Pacific region.” 

The Weaponization of the Dollar and Its Ramifications

The U.S. has a long history of using its privilege as the issuer of the world’s reserve currency to further its foreign policy aims.

The U.S. government utilizes a “carrot-stick” approach. It showers billions of dollars of foreign aid on its friends. But enemies can have access to their own dollars cut off, as Russia learned.

The dollar’s status as the global reserve currency, along with the SWIFT system, provides the U.S. significant leverage over other nations.

Using the dollar as a weapon can certainly advance foreign policy goals. But there is a big potential downside when the U.S. uses its economic privilege to bend other countries to its will.

Nobody wants to be bent. 

If you realized somebody had leverage over you, what would you do?

You would try to find a way to get out from under their thumb, right?

More specifically, if you’re worried that the U.S. and its allies might cut off your access to dollars, you would try to minimize your dependence on dollars.

In other words, if you are concerned that the U.S. could pull the "dollar rug" out from under you, why not pull out from the dollar system first?

This is exactly why you see a trend toward de-dollarization. Dollar reserves globally have dropped by 14 percent since 2002, and de-dollarization accelerated after the U.S. and her Western allies aggressively sanctioned Russia. 

It’s important to note that de-dollarization won’t happen overnight. Given the dollar’s dominance in the global economy, countries that spurn it take on financial risk. This is why plans for alternative currencies and payment systems are moving at a snail’s pace.

Russia was pushing hard for BRICS to consider an alternative payment system to replace the dollar-denominated SWIFT system before its fall summit. But after the meeting, Russian President Vladimir Putin conceded that there was no immediate plan, saying the economic bloc “have not and are not” creating such a system.

But Russia isn’t the only country pushing hard to topple the greenback from its dominant perch. The Chinese are also taking steps to minimize dependence on the dollar. The South China Morning Post recently reported that China is encouraging African countries to use local currencies in a bid to “de-dollarize” trade.

Even a modest drop in demand for dollars would be problematic for the U.S. economy. That’s because demand for dollars props up America’s massive national debt.

Because the global financial system runs on dollars, the world needs a lot of them, and the United States depends on this global demand to support its borrowing and spending. The only reason the U.S. can run huge budget deficits month after month is the dollar’s role as the world reserve currency. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies.

Even a modest de-dollarization of the world economy would cause a dollar glut. This would cause the value of the U.S. currency to further depreciate. You and I would feel the impact through more price inflation eating away at our purchasing power. In the worst-case scenario, global de-dollarization could spark a currency crisis and lead to hyperinflation.

Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.

www.moneymetals.com