HNewsWire- Russia has long recognized the risks associated with having dollars as reserves, and after the invasion of Crimea in 2014, Russia's central bank has gradually stripped its reserves of the majority of US dollar holdings. However, the dollar, euro, and pound continue to account for more than half of its assets, which are situated in France, Germany, Japan, the United Kingdom, the United States of America, Canada, and Australia.

With Moscow and Beijing becoming increasingly allied on the geopolitical stage and China refusing to condemn the Ukraine invasion or join Western sanctions, China's yuan - which currently accounts for just 2.7 percent of global reserves - may be one obvious option for nervous reserve managers in Moscow or elsewhere.

Of course, China has been the largest reserve stockpiler - notwithstanding its tense relationship with the West - since it entered the global trade system 20 years ago under strict supervision of its currency rate. Over $3 trillion of China's $3.22 trillion stockpile has been accumulated since 2000 - ostensibly to counter foreign inflows and keep the currency stable.

However, is this going to change, and did western sanctions on Russia herald the end of the dollar's reign as the world's reserve currency?

Barry Eichengreen, a Berkeley professor and expert on global reserve management, believes that of the two reasons for reserve stockpiling – to intervene or stabilize domestic markets or to act as a war chest in the event of shocks, disasters, or balance of payments crises – the latter may now be in doubt. "The primary consequence," he continued, "may be a decline in demand for reserves."

"If governments see reserves and foreign exchange management as less valuable and accessible, they will have to accept the fact that their currency rates will fluctuate more," Eichengreen noted. "In such situation, they must fortify their financial systems and economies against exchange rate-related disturbances, such as by prohibiting business borrowing in foreign currency."

This in and of itself might have a major effect on global markets and the emerging market and developing economy paradigm.

Even more worrying is former Goldman economist Jim O'Neill's assertion that Western sanctions might eventually result in significant overhaul of the global system.

"As a result of the consequences, some nations may have less of a need to amass foreign exchange reserves," he said, adding that this might actually spawn global "peak reserves." "It may also prompt some of the larger developing economies to consider more substantially reforming and liberalizing their domestic markets, as well as moving away from the US-centric system."

However, the most surprising take comes from former New York Fed staffer, current repo guru, and Credit Suisse money market guru Zoltan Pozsar – who, on any other day, would be a stalwart supporter of the status quo – who ominously stated that the response to Russia may have set in motion a chain of events that ultimately results in the dollar's demise as the reserve currency.

Pozsar, who warned this weekend that Russia's exclusion from the global financial system could prompt central banks to aggressively pump liquidity to stabilize markets, noted that wars often turn into major junctures for global currencies, and that with Russia losing access to its foreign currency reserves, a message has been sent to all countries that they cannot rely on these money stashes to remain theirs in the event of tension.

Since such, he repeats the sentiments expressed above, namely that it may make less and less sense for global reserve managers to store dollars for protection, as they may be withdrawn at precisely the wrong time.

Of all, Russia was hardly the first government to discover the hard way how easily dollar reserves might be weaponized. The Biden administration's decision last year to freeze Afghanistan's cash assets and grab the country's gold kept at the New York Fed in order to deny Taliban access was another such warning that reserves may be blocked.

Pozsar, like O'Neill, contends that this understanding will drive central banks to diversify away from the dollar or to attempt to re-anchor their currencies to assets that are less vulnerable to influence from the United States or Europe. As such, current tensions may herald the emergence of a new monetary system in which nations are far less tied through international bank accounts and reserves.

Pozsar said on the Odd Lots podcast that "the majority of foreign exchange reserves in the world today are all types of inside money, i.e. they are the liabilities of someone."" As a quick reminder, and as we explained over the weekend, central bank deposits, bank deposits, and securities are all "inside money" - money and money-like claims that are liable to someone else - and it is in situations like these that "outside money," or money claims such as gold bullion that are not liable to anyone, reigns supreme, particularly when stored in domestic vaults. In contrast to balances held at the Deutsche Bundesbank, western G-SIBs, or Euroclear, you retain control over your holdings.

Pozsar reiterated what he stated over the weekend, telling Bloomberg that "whether you have a country's sovereign debt, or a deposit at a foreign central bank, or a deposit at a Western financial institution, all of these are kinds of inside money that you do not control." Someone owes you one. And these actions are sanctionable."

"If a central bank finds itself in this scenario and the currency is under strain, will it ever become necessary to re-anchor the currency? Similar to gold? I believe these are all pertinent topics," he continued, overlooking bitcoin and other cryptocurrencies, which an entire generation now considers as digital gold.

"I'm not sure if it will come to that, but if things deteriorate further, you could effectively re-anchor the ruble to a pile of gold, because you need an anchor in situations like this," he said, echoing what we have been saying for years: that if Russia truly desired to exit the current "dollar reserve" world, it should unveil a gold-backed currency, co-sponsored by the Chinese yuan, which would then announce its own gold-backed status.

Others share this pessimistic outlook: only a few days ago, Dylan Grice, a former Societe Generale analyst who has since started Calderwood Capital, characterised recent actions as a "weaponization" of money. "You only have one shot at this card," he tweeted. "China will make it a point to avoid requiring any USD before pursuing Taiwan. This is a watershed moment in monetary history."

Steven Englander, former Citi's head of foreign exchange and current Managing Director of Standard Chartered Bank, offered a similar warning.

"It's a very long-term strategy, so nothing immediate or even on a two- to three-year horizon," he explained. "However, if what we're seeing is a demonstration of the economic and financial forces at work, the logical response if you're at risk of being on the receiving end is to see what you can do to protect yourself." "Intriguingly, there may be a second reaction - what is your prospective economic adversary importing from you, and what can you do to have the most influence on their economy while having the least impact on yours."

Naturally, none of this comes as a surprise to Russia, which has been rapidly depleting its "inside money" dollar reserves, including selling all of its US Treasuries in 2018, according to official statistics, while building a record gold stockpile in the process. Indeed, as Pozsar observed over the weekend, "the Bank of Russia currently has more gold than foreign central banks' deposits!"

Brent Donnelly, another former Citi analyst who now operates Spectra Markets, concurred with Pozsar: "In a cooperative game, more global commerce and the amassing of foreign exchange reserves make sense."" However, "in a competitive game, where your currency holdings are issued by an enemy and are subject to freezing or vaporization at the adversary's discretion... global commerce and the buildup of foreign exchange reserves make less sense."

However, while an increasing number of countries, particularly those ideologically aligned with Russia, such as China and India, may seek to quietly - and not so quietly - exit the dollar, they will face another issue: they will need to convert those trillions of dollars into something, and the pool of suitable assets remains limited for the time being. However, if one desires to escape the fiat system totally - since every asset inside the system is someone else's liability and vice versa - they must seek shelter outside, that is, in non-fiat assets.

Gold is the most apparent possibility here, however as Bloomberg observes, there is a finite supply, which is a limiting perspective - after all, all that would need to happen is for gold to be revalued much higher. In fact, it was none other than a Pimco economist who advised in 2016 that the Fed should acquire gold in order to preserve the economy and depreciate the currency.

Alternatively, the US government may simply seize all actual gold and devalue the currency against it, as FDR did with the notorious executive order 6102.

Therefore, will the Fed begin purchasing gold on the open market? We have our doubts... but with attention now focused on "regulating" (read: banning) cryptos in order to prevent Russian oligarchs from using them to circumvent sanctions, it stands to reason that the next trigger point, as the fiat system continues its relentless march toward terminal disintegration, will be the confiscation of all precious metals. It's just a matter of time until it happens.