Saudi Arabia threatened to withdraw European positions from the reserves – but what would be the alternative?

When financial instruments are misused to exert geopolitical influence, they lose their value in national reserves. But what could replace the classic instruments? We have an idea.

The worst case scenario was just avoided. At the beginning of July, the global financial system was threatened with another crack.

The G7 countries discussed confiscating frozen Russian “assets” worth about $300 billion and transferring them to Ukraine. The proposal appears to have come from the US and was met with approval in Great Britain but skepticism from other countries.

But one country in particular was least enthusiastic – Saudi Arabia. According to a Bloomberg report, the oil sheiks openly threatened to sell off European positions if the G7 group actually confiscated $300 billion of Russian assets.

The Saudi reaction could be seen as a test of strength. Saudi Arabia holds European government bonds worth tens of billions of dollars. That would be too little to destabilize the euro. But it could be the start of a chain effect, and they would not want to sell off a financial heavyweight like Saudi Arabia, whose sovereign wealth fund holds almost a trillion dollars.

But there was no showdown. The G7 states agreed not to confiscate the Russian assets, but to put the interest on them into a fund that would support Ukraine with 50 billion dollars.

Saudi Arabia now has no reason to carry out its threat, or even to stick to it. Instead, Riyadh now denies ever having threatened anything at all.

What alternatives would there be?

But let’s assume that it had come to that. What would the alternative have been for Saudi Arabia?

If the West abuses financial instruments to geopolitically blackmail other countries, and these countries want to free themselves from European and American government bonds and currency positions – what can fill the gap?

The most obvious answer would be Russian or Chinese government bonds. But that would just be exchanging a more stable instrument for a less stable one. Both the ruble and the yuan lose value against the dollar in the medium and long term. Moreover, it is hard to believe in Riyadh that Russia or China would hesitate for even a second to blackmail other countries with their bonds.

Another alternative would be stocks or ETFs. But that almost inevitably leads back to the USA and the G7. Most ETFs are managed by Western financial service providers, and the most stable of them, such as the MSCI World, consist almost exclusively of Western stocks. Therefore, stocks are also likely to be ruled out as an option.

So what’s left? Gold. Saudi Arabia currently holds around 323 tons of gold, which is not a small amount, but only a tenth of what Germany holds and about a 25th of the United States’ holdings. So there is a lot of catching up to do here without fear of overinvestment. If Saudi Arabia held physical gold, this would actually be an asset that could not be confiscated.

China and Russia already hold large amounts of gold, each with around 2,300 tonnes, presumably for similar reasons. However, the largest holdings are still clearly in Western countries. If Saudi Arabia were to decide to buy gold, this would first make the G7 reserves more valuable. In the second step, Saudi Arabia would still be vulnerable to blackmail, as the major industrial nations could devalue the country’s reserves by selling gold.

In any case, one could ask whether gold is still a contemporary asset: Isn’t transport and storage too cumbersome? Are the markets sufficiently liquid? Does gold have the potential to increase in value enough to make up for other losses? And what if it becomes possible to produce gold cheaply? Or simply if new large deposits emerge, for example when the Arctic and Antarctic thaw?

The obvious answer

Unlike stocks, bonds or ETFs, gold could at least be part of the answer. However, if the geopolitical instrumentalization of financial instruments continues to expand and deepens the rift in the fabric of the global financial system, gold is unlikely to be a sufficient answer.

More is needed, and this “more” is – as should be clear to everyone, even to most people from the first line of this article – Bitcoin.

In 2024, the idea is no longer as absurd as it once sounded. El Salvador is already building up a strategic reserve in Bitcoin. More and more companies are following suit, and more and more regions, cities and even countries are starting to think about it. Even in the USA, Donald Trump is advocating that at least the Bitcoins confiscated from criminals should be put into a reserve instead of being sold off.

The idea has long since become legitimate. The more it spreads, the more people believe that Bitcoin would make an attractive reserve currency – the more attractive Bitcoin is as a reserve currency. Because value is and has never been objectively measurable, but rather a matter of collective subjective appreciation.