Politics

Bad Omen: Biden – Putin Summit Meeting / Abuse of U.S. Dollar Status

Current developments in bilateral relations between the U.S. and Russia do not paint a good picture for the upcoming meeting between Joe Biden and Vladimir Putin in Geneva next week. On the contrary, something is happening here that could indeed affect the financial markets, but has so far attracted little attention.

Last week, the St. Petersburg Economic Forum held a number of surprises for many observers. In sight of the escalating foreign policy situation between the United States and the Russian Federation, it came as little surprise that, according to official statements, Russia’s National Asset Management Fund will now completely abandon the U.S. dollar.

Putin: Don’t need the U.S.
The Moscow Kremlin, which is now apparently blamed by the Washington administration for all sorts of things that go wrong in the world and in its own country, finds itself not only in the crossfire of accusations of being (partly) responsible for the recent cyber attacks in the United States, but also guilty of an increasing expansionist policy towards Ukraine, in addition to interfering in the elections in the United States.

The recent episode of the forced landing of a Ryanair plane by the leadership in Minsk, Belarus, has only intensified these discussions in the West. Last Friday, Russian President Vladimir Putin responded to these developments in his own unique way, pointing at the Washington administration that it does not need the United States.

Rather, it is becoming increasingly clear, Putin said, that the Washington administration is misusing the U.S. dollar’s status as the world’s reserve currency as a tool for waging political and economic wars against rival nations.

Russia’s national asset management fund divests all USD assets
On Thursday, the day before, the Russian Federation’s National Asset Management Fund, which is worth the equivalent of about $185 billion, announced its intention to dispose of all its remaining U.S. dollars and U.S. dollar assets in order to redeploy the freed-up capital into euros, Chinese yuan/renminbi and physical gold.

On the following day, Putin warned that the Russian Federation might soon consider selling its oil and gas on the basis of other fiat currencies, especially the euro.

The Russian Federation, along with Saudi Arabia, the United Arab Emirates, Kuwait and Qatar, is proving to be one of the largest and therefore most influential oil and gas producing countries in the world.

Petrodollar targeted
This threat has certainly not gone unheeded in Washington, as the entire construct of the so-called petrodollar – and with it the hegemonic claim of the United States over the rest of the world – is proving dependent on precisely this global acceptance of the petrodollar.

Referring to Putin, he said it would prove to be a serious setback from the U.S. dollar’s point of view if Russian oil and gas production companies decided to stop conducting their international business on the basis of the U.S. dollar. Putin added that Moscow’s leadership, however, is not actively pushing companies at home to adopt such a strategy.

Systems ready: Putin calls for energy settlement on euro basis
In this context, however, Putin did not miss the opportunity to once again call on the countries of Europe to settle Russian gas deliveries on the basis of the euro. For some years now, Russia’s leadership has made no secret of its strategy of diversifying its currency reserves and assets.

In the course of this, the process of de-dollarization in the Russian Federation is progressing at seven-league pace. The main reason for this is an anticipation of intensifying sanctions by the United States against its own country. Putin reiterated in his speech that payments for gas supplies on a euro basis are absolutely acceptable from the perspective of the Russian Federation.

Already at this point in time, he said, the systems needed for this were ready, so that in the long run it would not only be possible to settle Russian energy bills on a euro basis, but that it should rather come to that.

Abuse of U.S. Dollar Status & Bilateral Relations at Extreme Low Point
In this context, Putin went on to say that the role of the U.S. dollar as a global reserve currency would be persistently weakened if Washington leaders did not refrain from abusing the U.S. dollar as an instrument to eliminate economic competition and in the sense of a political all-purpose weapon.

According to Putin, defusing these conflicts would require relaxing of the bilateral tensions between the two nations. At this point, bilateral relations between the United States and the Russian Federation are at an “extreme low-point,” Putin said.

No breakthroughs Expected at Summit Meeting
It remains to be seen whether the talks between the presidents of the two nations to be held in Geneva on June 16 will change this. In his speech, Putin made the additional accusation that the United States was trying to sabotage the development of its own country.

In Russia, he said, no one has any problems with the United States. Rather, it is the United States of America that has a problem with Russia, Putin said. The U.S. political leadership is even openly talking about wanting to put a spoke in the wheel of Russia’s development.

In view of the current situation, which is extremely tense, and the rhetoric between the two leaders, which has intensified once again in the past week, observers and experts do not yet expect that the talks at the highest level on June 16 will actually result in any major successes, including an improvement in relations between the two nations.

Nor are there likely to be any “breakthroughs” in the talks. Yesterday, at the beginning of the week, the stream of news from the Russian Federation continued. Obviously, the political leadership in the Moscow Kremlin would like to follow up their words with deeds soon.

Russian Finance Ministry Working on Incentives for Currency Shifting
As the Russian Finance Ministry announced yesterday, incentive plans are being worked out to shift more of the country’s currency reserves into euros and euro investments. At the same time, state-owned enterprises are to be encouraged to carry out payment settlements and other transactions based on the euro.

According to the Russian news agency RIA Novosti, Moscow is preparing adequately for Western calls and demands to intensify sanctions against its own country. This also included preparations for a potential disconnection of Russian banks from the international SWIFT system.

The Russian Finance Ministry then clarified once again that it would encourage its own companies to make greater use of the euro against the U.S. dollar, but that it would not introduce any formal restrictions on the use of the American currency.

Referring to Bloomberg, both RIA Novosti and Tass had backtracked a bit on their own previous reporting, having previously said, with reference to Russian Finance Ministry officials, that the Russian Ministry of Finance was working on drafting directives to force domestic state-owned companies to use the euro against the U.S. dollar.

However, in view of the previous reporting, this could also have been a kind of test balloon that the Moscow Kremlin had allowed to rise for a short time in order to assure itself of the reactions in the United States and the rest of the West, as was said in some quarters.

Even weaker dollar would further heat up US inflation
Be that as it may, news of this kind seems to be supporting the euro at the moment, which can be seen, among other things, from the fact that the U.S. dollar, despite repeated rally attempts, has so far not managed to move up and away from the upper edge of a highly important trend support line in chart terms.

From the current perspective, the U.S. dollar rather gives a battered impression in relation to the euro. If the current support line fails to hold, we would likely see a significant pullback in the U.S. dollar against the euro and one or two other major fiat currencies.

In the United States, which imports much of its products and goods from abroad, such a development would add fuel to an already accelerating inflation.

For several years, Russia’s President Putin has warned the U.S. government that Washington’s leaders were themselves helping to promote the global process of de-dollarization through their use of the dollar as a weapon against other countries. Then last month, the Russian Federation announced the achievement of a new milestone after recent data showed that less than fifty percent of Russian exports and exports were paid for by means of a use of the U.S. dollar.

If the People’s Republic of China, where calls to reduce dependence on the U.S. dollar in international trade are growing louder, follows the same path, the leadership in Washington will at some point have no choice but to take notice of this development and take seriously the warning shot it sends.

Putin’s signing of the law marks the end of the Open Skies agreement
As was also revealed yesterday, President Putin has signed a law formalizing the Russian Federation’s withdrawal from the arms control treaty called Open Skies.

Open Skies previously proved to be a pact that allowed unarmed surveillance flights over respective member countries. After U.S. President Joe Biden signaled to the Russian leadership back in May that he did not want to rejoin the Open Skies agreement after the Trump administration declared its withdrawal, all hopes for a reinstatement of the pact have evaporated by now at the latest.

According to the Moscow Kremlin, the unilateral decision by the United States to withdraw from the Open Skies agreement last year “upset the balance of interests,” which is why it was no longer possible for the Russian Federation to adhere to the agreement.

According to the Moscow government’s website, the Russian Federation has not only been threatened in terms of national security, but transparency and trust have also been severely damaged.

Despite everything, it was communicated to regret the unilateral decision taken by the United States in Moscow, because the current development is unlikely to contribute to constructive talks in Swiss Geneva between the two leaders.

DepthTrade Outlook

As already addressed in the report East and West drifting further apart, the current developments and tensions between the United States and Russia on the one side, and the European Union and Russia on the other, remain to be closely monitored.

Before all the current talk and hoopla about inflation, deflation and a whole range of other distracting issues, things are happening in the background at the geopolitical level that have the potential not only to completely derail globalization itself, but also to divide the globe into different spheres of influence again in the medium to long term along the lines of the Cold War era.

On the market exchanges, developments of this kind are actually not yet almost at all discounted, discussed or even held in prospect. The only thing that counts there is the here and now, which could well mean that only very few market players will be adequately prepared for new shocks or prepared against them.

Asbjørn Rasmussen

Mr. Rasmussen has been researching financial, monetary, and economic systems since the Dot-com bubble in 1999. His focus is on the analysis of American stock markets and the market driving policies. In addition to his journalistic activities, Mr. Rasmussen works as a self-employed energy and investment consultant in Norway.
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