The Russians Look for a Fistful of Yuan

And they may find it, too:

Russian companies are preparing to switch contracts to renminbi and other Asian currencies amid fears that western sanctions may freeze them out of the US dollar market, according to two top bankers.

“Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies and to set up accounts in Asian locations,” Pavel Teplukhin, head of Deutsche Bank in Russia, told the Financial Times.

Both Russia and China have come a long way from the days when both had state controlled “soft” currencies, as described here and here.  But one thing hasn’t changed: the U.S. Dollar was then and is now the world’s reserve currency.  That in turn has created the condition of “dollar hegemony”, which has insulated the United States from the consequences of its fiscal profligacy.  Put another way, the only way we have been able to run up the public (and to some extent private) debt we have is because of dollar hegemony; if same is lost or faded, we’ve got a mess on our hands.

With the shrinking American share of the world’s economy, the likelihood that dollar hegemony to be seriously challenged increases.  That shrinkage isn’t due solely to our own anemic/nonexistent recovery from the Great Recession, although that doesn’t help.  It’s because the rest of the world is growing and finding its way out of poverty.

The U.S. has a strong interest in keeping dollar hegemony intact.  The two keys to that are the strength and size of our own economy and the free convertibility of same currency.  One way to screw the latter up is to apply sanctions and restrictions on capital flow, and that’s what has the Russians concerned these days.

Up to now the U.S. has not pushed sanctions very hard, probably because people who know what’s going on a) realise that sanctions are a blunt instrument that can backfire in the current situation and b) have some input to the Occupant’s decision-making process, such as it is.  If someone decides to overplay the U.S.’ hand in the situation–and with the self-confidence level at an all time high here, that’s a distinct possibility–the targets of such a policy will look for a “Plan B”, and either having one or responding to those of others aren’t American strong suits either.

Many Americans are looking for an apocalyptic “dollar collapse” but a more likely scenario is a chipping away at dollar hegemony which leads to a tipping point.  Currently our government, deep in public debt, is putting ongoing pressure on the Fed to keep interest rates in the tank and so keep the debt service manageable.  I can’t help but think that, sooner or later, they will lose control of the situation, and a recession of dollar hegemony would only make that more likely.

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