Putin's Strategy: Undermining the Dollar

Vladimir Putin took advantage of his state visit to China to call on the world to stop using the dollar. What if we replaced it with Bitcoin?

The greenback in the tsar’s sights

Faced with a large audience of journalists, the Russian president reminded everyone that the dollar is at the center of geopolitical tensions.

When asked about Chinese banks recently deciding to stop dealing with Russia for fear of American sanctions, Mr. Putin said he “understands the motivations of financial institutions”, warning nevertheless that they should also take into account “the risk of incurring losses due to the illegal actions of the United States.”

This was a barely veiled reference to the freezing of 260 billion euros belonging to the Russian central bank. For Mr. Putin, the West will not take them to paradise:

“What the American elites are doing is stupid. They are shooting themselves in the foot by undermining confidence in the dollar as an international reserve currency and global unit of account. And this even though the dollar offers them immense privileges.

Since the end of the Bretton Woods agreements and the end of the Gold Standard, the value of the dollar rests on the printing press, or more nobly, on the strength of the American economy. Many countries accept their scraps of paper out of trust in the American economy.”

Mr. Putin hammered that the dollar gives an “enormous and unfair advantage to the American economy and financial system”. According to Russian economists, this privilege represents “$10 trillion dropped from the sky simply because the dollar is the international reserve currency.”

There's a reason the US and EU have decided you shouldn't hear what Vladimir Putin has to say.

There's a reason they ban Russian Media, there's a reason they lie constantly about him and Russia

They are terrified you will realise he's telling the truth, and that they are lying pic.twitter.com/XhmC2D0qix

— Chay Bowes (@BowesChay) May 18, 2024

An exorbitant privilege of $10 trillion

These $10 trillion roughly represent the cumulative deficit of the American trade balance since the end of the Gold Standard. This deficit means that the United States has the privilege of being able to import more than it exports.

Any other country in this situation would see the value of its currency collapse, except the United States. This small miracle is due to the fact that exporting nations place their dollar reserves in American debt. This so-called petrodollar system keeps the dollar afloat despite a chronically deficient trade balance.

Not for long, if we believe the Russian president:

“By undermining confidence in the dollar for political reasons, American authorities are weakening the main instrument of their power [the dollar]. They are sawing the branch they are sitting on. It’s thoughtless, but they seem unable to stop themselves.

It is unacceptable to use financial and economic instruments to impose one’s will on the rest of the world, including on the political stage. Just look at how quickly dollar-denominated reserves are decreasing to realize that all countries are aware of the risks. The world is reacting. I believe dedollarization is inevitable. The process of making payments in national currencies, or creating other settlement instruments, has begun and cannot be stopped.”

The latest example: China. The Middle Kingdom has gotten rid of Treasury bonds worth more than $50 billion in the first quarter. Saudi Arabia, which recently joined the BRICS, is also distancing itself.

Replace the dollar, but with what?

Trading in national currencies has its limits. Russia recently refused the Indian rupee as payment for its oil. The reason being that the “normal” inflation rate in India is over 6% and the country does not produce much that interests the Russians.

The BRICS need a new standard that can satisfy the whole world. What are these “other settlement instruments”? The mystery remains. In the meantime, it should be noted that the yuan is rapidly internationalizing:

The yuan is gaining ground as the preferred currency for trade settlement among China’s partners, and not just with Russia. Higher dollar rates are one explanation. Geopolitics is another. Read my piece with @x1skv on @TheTerminal. https://t.co/CHbqR06ptt pic.twitter.com/Xbb1eNyV7W

— Gerard DiPippo (@gdp1985) December 18, 2023

The latest Chinese data shows that the yuan represents nearly 30% of cross-border payments. These payments are made through the Chinese CIPS network and are therefore not counted in the Western data of the SWIFT network.

That said, the question of the global standard remains thorny. For example, it is unlikely that India will agree to replace the dollar with the yuan. Something else will be needed. CBDC, gold-backed Stablecoins, Frankenstein currency composed of a basket of currencies?

Anything is possible, but the West will have to accept this currency. The IMF vice-president recently warned against “the fragmentation of the global payment system according to geopolitical alliances, which will give rise to new payment systems with limited or nonexistent interoperability.”

The West will not accept that China enjoys the exorbitant privilege. The only viable solution is a currency and an international payment system that no nation would control.

The only currency ticking these two boxes is the stateless bitcoin, whose decentralization is based on a Proof of Work of 600 exahash per second. A Bitcoin Standard would allow nations to trade on an equal footing.

Embrace bitcoin or go to war for monetary hegemony?