Understanding the turbulence in the world and its effect on investments

Russia – Hit with Sanctions

Russia was sanctioned soon after they invaded Ukraine with the intention of bringing them to their knees. Russia is the most sanctioned country today, ahead of Iran and North Korea.

Western “experts” like Peter Zeihan thought they would not be able to continue pumping oil without western equipment and people. ( See this – https://www.youtube.com/watch?v=5Gcl1dO2_0s )

He also said that due to sanctions Russia would not be able to sell oil as they will even be able to pump out of the ground and the oil well itself will get destroyed/ unusable due to perma-frost! Yet, here they are selling oil in large quantities and making decent money.

However, Russia was able to weather the sanctions, and fight its war without let up for over 26 months now! Surprisingly, Russian production of war materials far outpaces what the US and the West produce!

Not just that… they are in a position to sell ( Su-57 for instance ) / deliver their military wares to other countries who are interested in them! India is expected to start getting deliveries of two remaining batteries of S400 from next year, in spite of all the sanctions. They have been able to export crude oil and gas too, with sanctions, price caps, insurance denial for their ships etc.

US again wanted to corner Russia using crippling sanctions on technology and chips. Yes, the chip flow stopped to Russia. The S400 uses 660 nm chips that is not just legacy, but decades-old process. This should mean S400 is way behind the west. However, it is acknowledged as the most effective missile system by US itself! ( far ahead of THAAD, and far cheaper for a three-layer system against a single layer THAAD). The radars used in the S400 system are probably the best in the world. Hence, It is not technology alone, but the ingenuity of designers and the implementation that carries the day.

Western sanctions have not been able to cripple Russia. In fact, they are doing fine. Russia grew by 3.6% in 2023, which is ahead of almost all western countries, many of which are in recession or on the verge of a recession.

Sanctions on China / India

The West led by the US tried to impose tech sanctions on China by restricting supply of Extreme Ultra Violet (EUV ) and Deep Ultraviolet equipment used in Chip manufacture. The West wanted to restrict flow of advanced tech and manufacturing capabilities to China. Inspite of that Huawei launched their Mate 60 phones with 7 nm chips in August 2023! US was shocked… they did not know China can do it inspite of sanctions. What’s more, high-end Huawei phones have turned into iPhones killers ( Iphone sales in China down by 20% ) – not just because of the phone, but because of the people who rally behind their company and country as they see that the West is unfairly targeting their country!

Sanctions and tech denial has happened so many times with India even while US claims India is a strategic partner. Sanctions come in the form of whom India can/ cannot buy oil or other products from or export our goods to! When India bought S400, US was mulling sanctioning India under CATSA.

Another instance – US along with its cronies imposed sanctions on India wrt Cryogenic engine technology. That meant huge delays and India had to go through the entire process of creating it from the ground up, with some Russian help. But now, we have the technology. Our satellite launch vehicles are among the most competitive in the world, which is sweet revenge.

Sanctions won’t work especially with major countries. It was effective in some cases. But US power is on the wane. It is a multi polar world now, which US cannot hector at will. US is the sole super power in some senses only. It is a power past it’s prime and on the wane.

Sanctions can blowup in the face

US especially (along with its coterie) sanction whatever is inconvenient for it, or when it feels some country is going against its writ. This has been an entrenched policy tool for long.

It tried that with Russia by freezing its dollar assets to the tune of USD 300 billion. It also wanted to give that to Ukraine for its rebuilding! Robbing Peter to pay Paul!

While this was a setback for Russia, it also proved to be an even greater setback for US – for dedollarisation started from here in the real earnest. Weaponisation of the dollar could be a blunder that could crash the dollar and the US itself!

US government and many acolytes pooh-pooh this as idle pipe dream. But is it?

Dedollarisation is real

a) Countries have started trading in bilateral currencies. Russia-China alone are planning to trade USD 260 billion dollars using their currencies this year. While this may be small compared to overall global trade, it has started happening in many countries

b) Many think another reserve currency may not come up to replace the US dollar. Maybe. But we do not need other currency. Bilateral trade done in their currencies results in dedollarisation.

c) Also, countries are doing barter trade too. China will send goods and Iran will send back an agreed amount of oil. No currency is needed.

d) Besides, there could be a BRICS currency, that could come up and be used for trade by many countries. BRICS currency is to be pegged against a basket of commodities and the currencies of all member countries. It is not a fiat currency generated out of thin air like USD. 

e)The government debt of US is over USD 34 Trillion on an economy of about USD 25 Trillion. Hence, to raise new debt, they are offering debt at higher and higher rates. This is a problem US is creating for itself. Besides US is finding that other countries are showing less interest in buying US Treasuries, inspite of the high interest rates. Infact, many countries like China, Japan are selling US Treasuries steadily. China’s US Treasury holding has come down to USD 775 billion now from USD 1.1 Trillion in 2021, a 30% reduction in just three years! Selling further US treasuries, to keep the printing machines going is not going to be easy.

f) Various countries want to promote their own currencies. China is on top of that list and wants to trade in yuan with other countries. It is successful too to an extent considering its vast exports and imports all across the globe

g) Gold became a Tier 1 asset as a reserve currency in April 2019 on par with Fiat currencies like the USD. Gold buying has increased now and dollar reserves among Central banks has fallen to 59% from 71% in 1999.

Dedollarisation is hence well underway, though slowly. But that can change when there are some landmark events.

What will precipitate dedollarisation?

It is difficult to say. But a major catastrophe or a significant event can precipitate that. Since we do not know the future, we can only speculate.

a) The interest rates are high causing defaults in commercial and residential real estate. Banks are getting affected due to that. A banking collapse and a domino effect can quickly unravel the economy and can cause flight of the dollar. Dollar debasement can well happen due to excessive printing and sale of US treasuries by other countries. US economy is in a precarious position and a recession in the economy may well trigger the exodus of US denominated assets.
b) Printing dollars and fomenting wars can be the waterloo moment for the US and its dollar. Which war that could be is unknown – but US is always at it and will get involved in someway. It is in the thick of both current wars.
c) Establishment of a working system to rival SWIFT and its acceptance can accelerate dedollarisation
d) More conflicts where US gets involved and takes some wrong calls that sets off a domino, can lead to dedollarisation

There could be many other scenarios which could precipitate dedollarisation. It is not a question of if it will happen. It is happening. It is just the pace we are debating. And even there, the chances of events happening to precipitate dedollarisation is high.

Apart from these, the situation in the US itself is not rosy. They have an immigration crisis, possibility of real estate defaults and hence bank crisis, ballooning debt and inability to curtail spending, high inflation and lower spending power related problems at the consumer level etc.- all of which could be problematic.

Where would money flow after exiting the dollar

It will broadly flow into four assets –

a) Gold primarily and other precious metals and even commodities
b) Crypto assets
c) Global real estate
d) Global equity

After conducting thorough research, I extensively wrote a series of blog posts on de-dollarization, the shifting global order, and its implications. You can access all of them here, listed in the order they were written – 

1. Seismic shifts that will redraw the world order

2. Changing world order & its Implications

3. The New World We Are In

4. De-dollarisation – a mega trend that will rejig the world order

Should we act now?

Dedollarisation is underway, but the pace is slow for now. Based on this, small changes to the portfolio can be made.

What we do not know is when it can accelerate… that can happen in 2 years or 6 years – we do not know. For those who understand this and are willing to take a position based on this dedollarisation premise, may look at physical assets like Gold and Real Estate or in non-fiat assets like cryptos.

To learn more about gold, read my blog post “The Metal the World Loves!” And for insights into cryptocurrencies as an asset class, check out “Is Crypto an Asset Class Relevant Today?”

In India, Sovereign Gold Bonds (SGB) and Gold Funds/ ETFs are the products to look at. Physical bullion is 10-15% costlier as compared to market prices of gold making it undesirable.

Real Estate investment is mostly a big ticket investment, that makes the portfolio concentrated and makes high-quality real estate inaccessible. Real Estate Investment Trust (REIT) is an option to invest in high-quality commercial real estate.

The other area is global equity. One may invest in global equity through diversified funds that invest across the globe, with low exposure to US and Western countries. Emerging market funds could be a good fit too.

Last word

Dedollarisation is underway in creeping manner. We do not need a new currency to dedollarise – bilateral trade in native currencies, barter, new regional currencies like BRIC currency or wider acceptance of another currency ( though it is not a reserve currency ), will all contribute to dedollarisation.

Whether one accepts it and wants to act on it is a personal call!