By Nantoo Banerjee
The international financial system governed by western powers no longer offers safety to foreign currency deposits in their chests from other parts of the world. Even foreign private deposits and investments in assets are being frozen. The latest financial sanction imposed on Russia and its oligarchs freezing their accounts may appear to be the severest, but the United States has always been happy to pull financial trigger whenever its strategic interest is challenged by any government in the world. This time, the US, European Union and Japan barred Russia’s central bank from tapping into billions of foreign reserves Moscow had been saving up in their banks. Last year, the US impounded the Afghanistan central bank’s foreign reserves in order to prevent the Taliban from accessing the funds after it seized the power in the country. Earlier, the US froze foreign exchange reserves of Iran, Syria and Venezuela. In fact, US Dollar assets have become very political.
The frequent use of financial fusillades by the US is also gradually eroding the hitherto enviable status of popular international currencies such as the US$, Euro, British Pound and Japanese Yen. The 2014 sanction on the Russian Republic by the US and its allies for the country’s role in supporting dissection of Crimea from Ukraine seemed to have made Russia partially smart. Before the recent Ukraine attack and the imposition of financial sanctions by the West, Russia had parked substantial amount of its reserves with banks in China. The People’s Bank of China had a multi-billion dollar currency swap with Russia’s central bank, allowing the two nations to provide liquidity to businesses so that they can continue trading. China has also signed Russian banks onto its homegrown payments settlement system, seen as an alternative to the SWIFT messaging system, now banned for Russia.
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) works as a cooperative to provide safe, secure and fast financial transactions for its members. The payment network allows individuals and businesses take electronic or card payments even if the customer or vendor uses a different bank than the payee. SWIFT assigns each member institution a unique ID code that identifies not only the bank name but the country, city, and branch. The US and its Western allies, including Britain, have come together to prevent the Russian central bank from using reserves parked there after cutting selected banks from the SWIFT international money transfer system.
Thanks to the Russian central bank’s smart decision to hold 13 percent of its reserves in Chinese Yuan, the US-backed foreign reserves freeze has not cut off Russia from access to its foreign currency entirely. China has rejected the Western financial sanction against Russia on legal grounds. Russia’s central bank has been stockpiling foreign reserves ever since Russia last invaded Ukraine in 2014. Since then, Russia’s holdings of foreign currency and gold have almost doubled, ballooning to $630 billion today from $368 billion over seven years ago. The US has stopped the Russian government from paying its sovereign debt of around $600 million from reserves held at American banks, in a move meant to eat into Moscow’s holdings of dollars. The value of US Treasury securities held by residents of Russia was approximately US$3.9 billion till December 2021.
Almost all major countries in the world maintain their dollar stocks with US banks, making dollar the world’s most sought after currency. But, they are now rethinking on the practicality of the practice after the most punishable Western financial sanction on Russia. According to reports, China had steadily accumulated US Treasury securities over the last few decades. As of October 2021, the second largest economy owned $1065 billion, or about 3.68 percent of the $28.9-trillion US national debt, which is more than any other foreign country except Japan. However, China’s total foreign currency reserve assets, including Hong Kong’s, is worth $3,700 billion, the world’s largest, as against Japan’s $1,260 billion. Interestingly, the USA’s own foreign currency reserves were valued at only $252.2 billion as of February 2022 and they are held mostly in Euros and Yen. The UK held just around $135.4 billion in foreign reserves as of January 2022.
The US Treasury Department data showed that India held securities worth $220.2 billion at the end of June last year. It was the 11th largest holder of US securities. India has been steadily hiking its exposure to the US treasury securities since March, 2021, when it was at $200 billion. In April, the holding rose to $208.7 billion and then to $215.8 billion at the end of May. The country’s holding was at $182.7 billion at the end of June 2020. When most of the economic activities were ravaged by the coronavirus pandemic, the exposure of India to the US Treasury securities jumped by nearly $40 billion. However, India’s total foreign currency reserve assets at the end of last year were much larger. It was worth $569.9 billion, ranking it the world’s fourth largest holder of foreign currency reserve assets after China, Japan and Switzerland.
The trend shows that more and more countries are moving away from securing their reserves in the US treasury securities. China’s Yuan, Japanese Yen and Euro are becoming increasingly preferred currencies. Maintaining foreign currency reserves is vital to the economic health of a nation. Although a country can hold foreign reserves in its own banks, most governments choose to keep their reserves overseas to avoid costly cross-border transactions and gain direct access to foreign currency and debt markets. Foreign currency reserves are very useful to insulate a country from global economic shocks. They are equally useful for managing domestic inflation. A central bank can buy and sell foreign reserves in order to stabilise the value of its own currency. Also, the rich across the world save part of their fortunes in foreign countries for individual security. However, they are often much smarter than governments in securing funds abroad as the latest US hunt for huge fortunes of Russian oligarchs is believed to be facing offshore barriers. With US dollar linked assets becoming increasingly political, governments and oligarchs are expected to diversify their foreign holdings more actively for financial safety and security. (IPA Service)