The conflict in Russia and Ukraine has been at the forefront of international affairs in 2022. As it has led to economic sanctions and formations of new trade alliances, some have speculated that what is unfolding is essentially World War III. Moreover, many proponents of this view argue that World War III will not be like its predecessor World Wars, as it may be characterized more by fourth/fifth generation warfare tactics rather than traditional military battles. More specifically, and perhaps of greater interest to investors and traders, is the potential role for economic warfare to be used — specifically, de-stabilization of an opposing currency, so as to debilitate an opponent without physical combat. Is this happening? If so, what does it mean for traders?
It can be argued that such currency warfare is at least partially underway. Consider:
- The US and its allies are clearly attempting to cut off Russia’s ability to trade via currency sanctions
- These sanctions are effectively forcing Russia to build stronger ties with China
- Russia has insisted natural gas it provides be paid for in ruble; some countries are complying with this request, while others are not
What is the impact of these events so far?
To answer this question, we start by observing the value of the US dollar relative to its political and economic adversaries, at least from a currency perspective: Russia, China, Iran, and North Korea. The dollar relative to a normalized basket of those currencies, which we’ll refer to as the Multipolar Currency, has steadily appreciated since 2015 — though the past year has seen rangebound price action. At the very least, we can say thus far, the sanctions and responses have not meaningfully impacted currency valuations on a longer-term, sustained basis.
With that said, it should be noted that the Multipolar Alliance has been increasing its gold reserves. Russia and China still have much less gold than the US claims to have, but the rate of increase does beg the question: why are they accumulating gold? The Kremlin has stated they are considering pegging the Russian rouble to gold, which may explain the gold accumulation; to peg the currency to gold, so that the currency maintains a fixed value to the price of gold, meaningful holdings of gold would be prudent to increase the probability that the peg can be safely maintained.
The charts below show the accumulation of gold by Russia and China, followed by the accumulation by the US, over the past 20 years.
To summarise: the US has attempted to cut its declared enemies, specifically Russia, out of the global financial system as what is seen by some as a political move that may ignite World War III (though such a war may not be as physically violent as its predecessors). Russia has responded by attempting to use natural gas to buoy its currency, as well as positioning itself to use gold to back its currency. Ultimately, though, the US dollar has maintained and even increased its strength, both in the short-term as well as on a multi-year basis.
The opinions are strong and harshly divided. If there is a popular theme, though, it may be that multipolarity is a slow-moving, non-linear event — and so trading around it may be difficult.