Updated- What Russia Doubling its Gold and Yuan Holdings Really Means

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by VBL
Saturday, Dec 31, 2022 - 17:15

First Take: What Russia's Doubling in Gold and Yuan Holdings Really Means


UPDATE12:09 p.m.

***This post has been updated for ZH readers to include the rest of the content previously behind a pay wall. Happy New Year ***


What Happened

Authored by Goldfix

On Friday, Russia’s Finance minister announced their National Wealth Fund (NWF) is now permitted to allocate up to 60% of its holdings in Chinese Yuan and up to 40% of its holdings in Gold Bullion. This is a doubling in permitted allocation percentages up from 30% and 20%.

Simultaneously the fund reduced its holdings of the British Pound and the Japanese Yen to zero.

Reuters reports from Moscow:

Russia's finance ministry on Friday said the maximum possible share of Chinese yuan in its National Wealth Fund (NWF) had been doubled to 60% as it restructures its rainy-day fund to reduce dependency on currencies from so-called "unfriendly" nations. Source

The NWF had been recently used to finance the widening budget deficit in 2022 due in no small part to sanctions by the G7. The Fund stands at $186.5 billion according to Reuters.

The official statement out of the ministry read in part like this:

"The Russian finance ministry is continuing its consistent reduction of the share of currencies of 'unfriendly' states in the structure of the National Wealth Fund's assets."

The news agency notes these measures are in no small part a counter to the sanctions by western nations.

Comment: This Is Not Temporary

We would strenuously add that while this “counter” explanation is true, the circumstances creating the situation are not likely to reverse even if sanctions are lifted and Ukraine magically healed itself.

The world, in our opinion is very different. The trust is broken. Nations are countering existential threats (in their view), with increasingly mercantilist policies that fragment trade irreparably.

Pic From ZeroHedge's: What Do Michael Every and Zoltan Pozsar Even Disagree About?

The news agency characterized the G7 actions as “freezing” in this story however:

After the West blocked Russia's central bank from dealing in U.S. dollars, euros and pounds, and froze around half - or $300 billion - of its international reserves, Moscow accelerated a campaign to shift its substantial reserves into more accessible currencies.

Footnote: That "half" was everything held outside of Russian borders if we understand the math correctly.

We think freezing is a fact, but confiscation is a risk if not also a reality. For instance: Just a month ago, the EU moved to legitimize using those frozen Russian assets to rebuild Ukraine.

The European Union is stepping up work to confiscate the Russian-owned assets that have been frozen under EU sanctions and use them to finance the costly reconstruction of Ukraine.

The plans, which include re-investing the international reserves of the Russian Central Bank, represent a challenge without precedent for the bloc and are ridden with legal risks and obstacles.

"Russia must also pay financially for the devastation that it caused," said European Commission Ursula von der Leyen on Wednesday morning. Source

More Like Who Confiscated Russia's Central Bank Reserves...

Would you trust currency of a country that confiscated your assets?

Stealing in Russia’s Eyes

You cannot confiscate (as opposed to just freezing) the assets of a nation as held at the IMF or other “safe” institutions as was done by the West, and expect that nation to continue to carry assets in your currency. This is not spite-work by Russia, it is economic survival. While this is a horrendous development, in their (Russia’s) eyes it is the lesser evil now.

People can debate if this is justified or not all they want. But it is happening, and there are global consequences that will manifest locally for everyone.

Establishing the Golden Yuan and PetroYuan

Reuters also goes on to add that Finance Minister Anton Siluanov said the trend will continue next year when Russia resumes growing that fund by allocating oil and Nat Gas revenues to this rainy day fund.

We would note again as a second order knock-on effect: If sanctions do not work, and Russia is making money to be held in Bullion and Yuan; then the west must move from Financial sanctions to Commodity action. That means somehow they must get Oil lower to kill Russian revenues , as some suspect they have been doing with rehypothecation in WTI.

As Russia buys gold with oil revenues, it attempts to create a defacto Gold and Yuan peg. Our point is, law follows economic practice. If enough people use something, it becomes the standard. The announcement is made after the broad acceptance, not before.

The next step for BRICS is growing the liquidity pool for pricing in their local currencies. Look for that to come in exchange and blockchain form which is already happening having been planned for at least 4 years. September 2017:

Deals are being done, Russia/china oil for gold using Blockchain over the past several months. A few months ago $3b trades that way. And the info  I got was that the gold paid to Russia never left the Chinese vault. - VBL

Historically that fund has been a holder of Dollars, Yen, Euros and GBP

"In order to hedge exchange rate risks, we have always (replenished the NWF) in foreign currency," Siluanov said earlier this week.

"From among the currencies of 'friendly' countries, the yuan has the characteristics of a reserve currency to the greatest extent, as well as sufficient liquidity in our domestic foreign exchange market," he added.

The Moscow Exchange, Russia's largest bourse, said yuan-rouble trading volumes would surpass dollar-rouble trading volumes next year as financial links between Moscow and Beijing continue to intensify.

Bottom Line

Russia is buying gold and swapping some of it for Yuan for trade and reserve diversifitication. It’s that simple. The Yuan in turn is implicitly backed in part by Gold. Russia does not act monetarily without China’s approval. It ends in protracted economic pain for all, or War now. We think the next western move financially is to break Russia by breaking oil. How that happens, who knows. But expect a ramp up in policy, tech, and rhetoric on the West’s side with regard to Energy procurement and use in the coming year. Everyone has doubled down. Tripling down is next.

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