Dollar Confiscations by US Government Sign of Greater Appetite for Gold

August 16 2018

While gold prices have collapsed to below $1200/oz, the US government is pushing foreign central banks away from the dollar and toward gold and alternative currencies. Iran was an earlier victim of this eagerness to confiscate US-based dollar assets by the US government. And Russia wants to prevent being the next in line. Especially after the latest round of US sanctions.

How the Iranian Central Bank Suddenly Lost Its Dollar Reserves

It was 2016. The US Supreme Court had just decided that president Obama was right by declaring that Iran had to be held “financially responsible” for the bombings of 1983, in which 241 US marines lost their lives in Beirut, Lebanon.

Despite the fact that Iran denied any responsibility, the US allowed a confiscation of $2 billion of dollar assets held by Citibank in New York on behalf of the Iranian central bank. These $2 billion dollars of Iranian foreign exchange reserves were meant to be used as compensation for the families of the marines and victims of other bombings. The Iranian president Hassan Rouhani called the confiscation “blatant robbery.”

It may not be a surprise that Iran’s currency has lost over half of its value in less than a year.

Even More US Sanctions against Russia

Despite a promising surprise meeting between Putin and Trump, the US government introduced a round of new economic sanctions against the Russians last week. This time, because of the alleged involvement with the poisoning and death of a former Russian spy in Salisbury, England. The Russians have reacted to the new sanctions by arguing that they are a part of an “absurd theater that never seems to end.”

An important part of the sanctions consists in obstructing and preventing orders to the extent of hundreds of millions of dollars of important assets that were purchased by Russian (state-owned) companies. Moreover, the US is threatening with a complete ban on Russian imports and with withdrawing Russian airlines Aeroflot’s landing rights on US destinations. The Russian banking system also appears to be affected; it is becoming increasingly difficult for Russian banks to access the international payment system.

Russian Central Bank Is Not Dumb and Taking Precautions

Given the experiences of Iran with the US, Russia appears to be preparing for the worst-case scenario. Because an important part of the international payment system is dependent upon US banks and/or other foreign banks that cannot afford to be excluded access from the US banking system, the US government has tremendous possibilities to use the important of the dollar and its domestic banking system on the negotiation table. Bank sanctions are the ultimate financial nuclear weapon to which the US has resorted many times over the past few years.

A news item in Dutch newspaper Financieel Dagblad observed, for instance, that: “In two months’ time (…), Russia liquidated four fifth of its US Treasury portfolio.” Also see the following chart used by FD (originally courtesy of Bloomberg): 

Russian central bank is selling its dollar exchange reserves. Source: FD.

Now, we are partly speculating, but the evidence strongly suggests that Russia has been converting a part of its dollar reserves into euro´s and yens. The Chair of the Russian central bank, Elvira Nabiullina, has admitted earlier that she wished to diversify Russia´s foreign exchange reserves.

Bloombergasked the former Chair of the Russian central bank, Sergey Dubinin, about this recent shift in Russia´s central bank policy and wrote the following:

“But for Sergey Dubinin, Russia’s central bank chief from 1995 to 1998, there’s no mystery at all -- the sales were simply a prudent “hedge” against confiscation, a possibility that looks more likely every day. Russia, he said, has learned from Iran’s experience and is converting its dollar assets into other currencies to safeguard its reserves against any attempts at seizure.”

So, Iran. At any rate, we will find out later this year whether Dubinin was right, because only then the Russian central bank will announce what exactly it has changed to the composition of its reserves.

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