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It’s a little-known fact in the West, but Russia has very little sovereign debt.
In fact, if you ignore the corruption and misallocation of capital in the Russian economy, you could make the case that Moscow has been more financially responsible than Washington over the last several decades. The Bank of Russia skillfully raised rates to head off further devaluation of the ruble during the recent recession, and the Kremlin is famous for building up rainy-day reserve funds during the oil boom years, pots of money they have heavily relied on during the period of Western sanctions and the collapse of oil prices on international markets.
In fact, after draining the funds for use to plug holes in the federal budget, the Kremlin has once again started building the funds back up, albeit very slowly.
Russia’s central bank has only just recently started tapping the international markets once again, from sources of funds unswayed by Western restrictions, to raise cash to try to balance the national budget.
It seems like Vladimir Putin learned a great deal about financial markets during the crisis and currency collapse which led to Russia’s default at the turn of the last century, causing misery among the population — think 1929 and people jumping out of windows. But the most striking development over the last several years has been the unyielding push from the Kremlin to buy gold.
Recent IMF declarations in January from participating countries showed that Russia is now the fifth largest buyer of the barbarous relic, edging out China in declared gold reserves. This is significant. Either Mr. Putin believes the U.S. is running up a massive financial debt and currency crisis on its own, or Russia is preparing for that inevitability, or both.
Russia, China, Iran and others have been working to undercut the dollar’s central role in international trade for some time now. Swap lines have been set up for trade in their own currencies, chipping away at the Bretton Woods agreement implemented at the end of World War II that enshrined the greenback as the currency of choice of the international financial system. There is a war on the petro dollar.
The Kremlin has also displayed a keen interest in cryptocurrencies, as a way to free the world’s financial and monetary systems from Western control and leverage. Bitcoin and its imitators also represent a high-tech engine to help Russia diversify its economy away from a reliance on hydrocarbons. An economy that Sen. John McCain famously dismissed as a “gas station masquerading as a country,” Russia could become a giant money laundromat.
However, the current hoarding of gold means that the Kremlin very clearly appreciates the risks of fiat currencies. Moscow understands that competition between nations in the future will not just be on the battlefield, but between central banks. When nothing tangible backs the value of a paper currency, that currency is only worth what people think it is worth.
Economic weakness begets military weakness. With Congress and the White House throw gasoline on the $20 trillion debt fire with the recent spending package, the Kremlin is playing the long game, waiting for the point where the bond vigilantes punish the United States for its fiscal malfeasance and take back control of interest rates from the Federal Reserve. When that happens, it’s Katy bar the door and the U.S. will be in a world of financial hurt.
Many of you may remember the “misery index” under Jimmy Carter — high inflation, high unemployment and 20 percent mortgages. At some point, the market will start to question if the United States has the will or the ability to pay back all of this debt. Interest rates could spike, wreaking havoc on our economy.
The same thing happened to the Romans, to the Weimar Republic, and, more recently, to Venezuela. It’s not a new phenomenon.
And that, my friends, is why Russia is buying gold, lots of it.
Originally posted at The Washington Times