In this-section, I relax my previous assumption that sanctions leave the central bank’s gold and Bitcoin untouched. Rather, I now assume that the central bank must offer a discount to market price in order to entice buyers to violate sanctions to transact with the central bank. For example, Katinas and Rushwood (2024) show that Russia offered a discount relative to Brent crude to attract buyers of its oil following its invasion of Ukraine in 2022. The discount has varied over time depending on the type of oil, but has ranged as high as 30 %.
In Fig. 14, I assume that US financial sanctions require a central bank to offer a 20 % discount to sell gold and Bitcoin, effectively reducing the value of the gold and Bitcoin by 20 %. I assume EU financial sanctions result in an additional 10 % discount, and Chinese financial sanctions also result in a further 10 % discount. A central bank sanctioned by all three entities would need to offer a 40 % discount to transact in gold and Bitcoin. In this scenario, renminbi bonds are more attractive, because renminbi bonds diversify against the risk of Western sanctions relatively better than gold and Bitcoin. Thus, Western policies that strictly enforce sanctions on gold and Bitcoin transactions could enhance the international appeal of the renminbi.
renminbi, and Bitcoin allocations."