The decision to freeze Russia’s $600 billion cash reserves as sanctions for invading its small western-backed neighbor, Ukraine, could backfire and cause other countries to lose confidence in the reserve-backed currencies, most of which are in U.S. dollars.
This could mark a turning point for the U.S. dollar as a reserve currency, according to market analysts who spoke to Bloomberg.
With Russia losing access to its foreign currency reserves, a message has been sent to all countries that they can’t count on these cash reserve stashes to actually be theirs in the event of political tension, said Zoltan Pozsar, the global head of short-term interest rate strategy at Credit Suisse AG, in an interview with Bloomberg’s Odd Lots podcast.
This unexpected jolt to global financial systems as central banks look to move into gold or other forms of reserves – like Bitcoin – could drag the value of the dollar lower and weaken the U.S. standing as a global store of value.
Russia is the second country in recent times to have its dollar reserves frozen. The Joe Biden administration’s move to seize Afghanistan’s cash assets and block access to the Taliban was another recent signal that cash reserves can be frozen.
Russia attacked Ukraine in a full-scale invasion on Feb. 24 after a months-long buildup of hundreds of thousands of troops at its border while denying that it planned an actual attack. The situation on the ground in Ukraine is extremely fluid after the Russian army made several missile strikes, with its forces said to have reached the outskirt of the capital Kyiv.
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The U.S. and its allies shut off the Russian central bank’s access to most of its $630 billion of foreign cash reserves after Moscow attacked Ukraine. While the West has frozen Russia’s stock of foreign exchange, is has not blocked the inflow of new dollars and euros.
The 1997 Asian Financial Crisis scared developing countries into accumulating more funds to shield their currencies from crashes, pushing official reserves from less than $2 trillion to a record $14.9 trillion in 2021, according to the International Monetary Fund.
While central banks have lately sought to buy and repatriate gold, gold makes up just 13 percent of their assets.