At a recent gathering of the BRIC leaders in Yekaterinburg, Russia, anti-dollar rhetoric reached a fever pitch. But are China and Russia attacking the dollar too soon?

The man most credited for creating the China miracle is Deng Xiaoping. In 1961, Deng broke ranks with Chairman Mao and hinted at the capitalist pragmatism that would follow Mao’s death: “It doesn’t matter if a cat is black or white, so long as it catches mice.”

With that idea in mind, Deng allowed China to slowly outgrow the shackles of communism, experimenting at the edges until the country transformed itself.

The Venerated Deng (his nickname in China) said something else quite useful too. “Keep a cool head and maintain a low profile. Never take the lead – but aim to do something big.”

If Deng were around today, I wonder what he would think about the open aggression China and Russia have shown against the U.S. dollar. He would no doubt agree with the ultimate aim of doing something big. But in the great game of currency markets, the “low profile” part of his advice may have been shed too soon.

Don’t Go Berserk

Chess strategy is defined by concepts like time, space, force and pawn structure. A critical variable is how much of the board one controls. Another key variable is how effectively one’s forces are deployed.

A common mistake of amateur chess players is taking the “berserker” approach. A typical berserker play would be sending out a knight and bishop to start a fight, seeing one of them get captured, and sending out another lone piece to continue the attack.

The error in the berserker approach is failing to marshal one’s forces – a process that takes time. A well-coordinated assault involves multiple pieces working together. Strong chess players wage full-scale campaigns, rather than stringing troops out for lone attacks.

The value in keeping a cool head and a low profile, as Deng suggested, is that a low profile buys time. It gives the strategist peace of mind and room to maneuver, both needed in coordinating a full-scale campaign. A cool head also counters the hot-blooded temptation of a hasty, ill-advised move.

Medvedev Stirs the Pot

In recent weeks Taipan Daily has talked about China’s stealth abandonment of the dollar, correctly anticipating many of the moves now being made. Your humble editor has also noted, with raised eyebrow, how stealth has turned into blatantly open maneuvering. Russia’s president, Dmitry Medvedev, took all of this a step further this week.

Leaders of the four BRIC nations – Brazil, Russia, India and China – met in Yekaterinburg, Russia on Tuesday. Medvedev played proud host. During the high-profile get-together, he shared some very blunt views on the greenback.

“There can be no successful global currency system if the financial instruments that are used are denominated in only one currency,” Medvedev opined. “Today this is the case and the currency is the dollar.”

In the long run, Medvedev is right. But in the short run, one has to wonder if this counts as a berserker attack.

A Premature Spotlight?

Real action is being taken behind the scenes, as we have repeatedly noted. The latest is a tentative plan for Brazil, Russia, India and China to start trading bonds and currencies more actively. This would be another step towards cutting the dollar out of the loop.

But it’s still early days, and some activities are better suited to the shadows than the spotlight. By definition, early actions will be tentative and small. That is how most things begin.

Normally, you don’t mount a direct verbal offensive until you have something to show (other than a slick set of plans). By talking up plans to abandon the dollar now, before a multi-pronged assault has been well and truly coordinated, Medvedev and company risk looking like the leaders who cried wolf.

The reality on the ground, for now, is that the ruble and the yuan are not quite yet ready for prime time. Russia and China are still too heavy-handed in the management of their respective currencies. This causes liquidity issues, and makes yuan- and ruble-denominated trade less attractive than it could be.

“For all the criticism of the U.S. currency by leaders of the so-called BRIC nations,” Bloomberg reports, “dollar bonds sold by the largest emerging-market countries are outperforming debt traded in reais, rubles and yuan.”

Russia also has serious financial woes. A report issued by Standard & Poor’s this week estimates “troubled assets” in Russian banks at a whopping $213 billion. In result, S&P analyst Scott Bugie estimates, Russian banks could be forced to write off as much as $80 billion – 14% of all loans outstanding – in the next few years.

Why the Big Words?

Russia’s motives in trashing the buck are somewhat understandable. Russia has nowhere near the total dollar exposure that China does, and Russia badly needs a high and rising oil price to help keep the Kremlin out of a jam. (“Praying for High Oil Prices” was a recent headline in The Moscow Times.)

So it may be that Medvedev is simply watching the strong inverse correlation between oil and the dollar, and hoping to jawbone in favor of his own short-term cause a little bit.

China’s spate of loud belligerence, though, is a little more puzzling. In the long run, we are wholly on board with the logic of the “stealth” dollar abandonment plan as previously noted. Working such a plan would seem to favor the cool head and low profile Deng espoused.

But in the short run, a stronger greenback is to China’s benefit. A firmer dollar helps China export more goods at a time when the bamboo shoots (China’s version of green shoots) are most in need of help. It also helps China stockpile hard assets at lower prices – a benefit while the dragon is still buying with both hands – and get better prices for the dollar-denominated assets China quietly seeks to unload.

So for China to beat the anti-dollar drum alongside Russia now, rather than quietly preparing behind the scenes for the day when a real challenge can be mounted... that’s a head-scratcher.

End Game Versus Middle Game

The dollar’s downfall will happen in due time. In fact, the pieces are already coming together as to what the world’s next reserve currency will look like.

But sticking with the chess analogy, right now we are still in the middle game, rather than the end game. That reality will make for some temporary power shifts that could surprise people – especially given the hidden rottenness of the euro, the world’s erstwhile number two. Mixed in with the big trend could be some powerful (and lucrative) countertrends.

In chess, uncertainty is a prime characteristic of the middle game, when there are still a fair number of pieces on the board. At this stage, strategic complexity creates opportunities for surprising shifts in tempo. Only when the pieces have been reduced to the inevitable final few, does the end game truly begin.

Other Related Topics: BRIC Countries , China Investments , Currency Investments , Justice Litle , Russia Investment , Safe Haven Investor

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