Weaponized fiat currency

In all the media coverage of the Ukraine war and the stuttering bargaining between Presidents Putin, Trump and Zelensky, one crucial aspect often gets neglected - money. $300 billion to be precise.That's the estimated amount of Russian reserves sequestered by the West as punishment for the country's invasion of Ukraine in February 2022.

The majority of these assets are Euro-denominated bonds, together with US Treasuries amounting to some $70 billion, and about £29 billion in British bonds. Amid the flurry of trilateral talks over ending the conflict no-one seems to be taking note of this huge sum of fiat currency, which is about the size of Alabama or Finland's gross domestic product (GDP). Some European politicians and pro-Ukraine organizations are pressing for an outright seizure of these frozen Russian assets; they argue that the money should part fund the cost of rebuilding Ukraine - put at $524 billion by the World Bank in February this year.

Western governments might try to confiscate and use this sum to rebuild Ukraine but only if it wants to risk two things - a mammoth legal case brought by Russia and more seriously a collapse in confidence in their fiat currencies. Whatever happens this mess is yet another indication that our governments fail to think through the implications of their actions.

Russia invades Ukraine? Don't respond with guns, just grab its overseas money.

Whoops! That wasn't such a good idea.

Is it legal?

The G-7 countries agreed in October last year to use the more than $3 billion in annual interest earned on these frozen assets to back a loan of $50 billion to Ukraine. But taking the $300 billion will open a legal can of worms. On one hand Russia is accused of violating fundamental international laws and thus confiscation is an appropriate counter-measure. On the other hand such counter-measures are intended to induce compliance with international law and should be capable of reversal if such compliance is made - which would clearly be impossible if the Russian assets are confiscated and used to rebuild Ukraine.

So if Western countries opposed to Russia's invasion of Ukraine can get their act together and agree to take and use these assets (a Big Ask) we can expect years of legal wrangling from which only lawyers will ultimately profit.

But more serious is the long-term damage that will be done, has already been done, to the fiat currencies at the heart of the matter - the Dollars, Euros and Pounds. When they can be frozen and confiscated - no matter how difficult that may be - why would any sovereign nation risk holding them? Far more sensible to diversify your assets away from Dollars, Euros, Pounds. Into gold, which as the Russo-Ukraine war has shown, cannot be confiscated or frozen if you have your hands on it.

Holding reserves in fiat currencies has become riskier. Which is one obvious reason central banks have been buying gold and holding it close to home.

Central bank gold purchases

Weaponize at your peril

The Dollar started losing its domination of foreign currency reserves a while back. Its weaponization via international sanctions imposed on many countries - Russia is only the latest example - has damaged, perhaps fatally, its 'untouchable' status. Central banks have various tasks, not least ensuring financial stability.

Those nations that are trying to muster continued support for Ukraine are gradually moving towards outright confiscation of Russia's frozen assets. That will turn out to be a big mistake. At the very least it will undermine confidence in their currencies, which in turn will reduce confidence in their systems of government. It's a nail in the coffin of Dollar hegemony - and will further boost investor interest in holding gold.

The background economic picture is darkening. The much-followed university of Michigan consumer sentiment index for March dropped to the lowest seen since November 2022; the year-on-year decline was more than 27%. The equity markets have been extremely volatile. So far this year the S&P 500 is down more than 3%. Interest rates in the US and the UK are on hold, their central banks fearful of a resurgence of high inflation. Stagflation is being talked of more and more.

The price of gold is now above $3,000/ounce. In the past 12 months that's a rise of more than 40%. Some will fear that we have reached the peak and that gold's impressive bull run is over. But what if this bull 'run' proves to be just one further indication of a global shift in how money is defined? Far from being a 'run' it may instead be just one tectonic plate shifting alongside many others. No one has a crystal ball; but central banks are adopting a more defensive posture, trying to minimize their risk against the unforeseeable. Join the defense; join and use Glint.

For UK and rest of the world clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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