Beware the Ides of March
by Laurie Meadows
15 March 2022 2230 NZST (0930 UTC)
Revised and updated 10 January 2121 (0838 hrs UTC)
updated 27 January 2023 (0951 hrs UTC)
The current financial system Changes
in use of the Dollar in International Trade The
2 loop international financial and monetary system
not backed by gold The
Trading oil and gas
for physical gold Dollar backed by US
resources An axis of gold hybrid ruble -
internal vs external value Clearinghouses
and blockchain contracts
Currency Bilateral trade using domestic & friendly nation
Use of gold in parity trade
commodity swaps Russia protects
itself from external financial shocks
Note: the first version was done in a bit of a rush in order to put
it up on the actual Ides of March in 2022, especially as it more or
less coincides with the first mention of a project by the Eurasian
Economic Union to develop "an independent international monetary and
The page has been extensively expanded, edited, and corrected since.
Further revisions will appear as the situation and my thinking
The 'Ides of March' of ancient Rome corresponds to todays15th of
March. The Romans regarded the Ides of March as the last day on
which debts could be repaid. It was also the day when Caesar, the
ruler of a militaristic empire, met his end. Could March 2022 mark
the beginning of a period of turmoil that ends the dominance of
the USA dollar?
It seems we are in a time of dramatic change, a time when the
dollar may slip from it's current status of sole global reserve
currency. First, other trading currencies (yuan, ruble, rupee, for
example) may rise alongside the dollar. Second, and perhaps less
likely, a 'euro-like' trading currency may arise in Eurasia (and
beyond), a trading currency pegged or valued against 'baskets' of
other major currencies and - importantly - commodities.
Commodities might include oil, gas, minerals, agricultural
products, perhaps even renewable energy export capacity. Central
bank gold (and silver) reserves in these countries may once again
play a part as a stabiliser of the value of paper money. A third
track may be government issued digital trading currencies.
(Whether intermediated by commercial banks or not).
Part of the driver for these changes is the extreme indebtedness
of the USA, with the prospect of the interest on its debts being
unpayable if more large tranches of money are printed. Government
debt is used to fund social welfare, military costs, interest on
previous government debt, and so on. (On December 16 2021 the US
Government debt ceiling was raised
by $2.5 trillion to just over $31 trillion.) If the debt ceiling
is not raised the Government is at risk of default. The United
States Government is aware of this, and is taking measures to
devalue the dollar to make debt cheaper to pay back, and at the
same time increase it's own GDP by crippling its Eurasian
competitors in the global market for goods and services.
USA needs 'critical' minerals for its factories, and it needs
critical minerals to transition to life with low levels of fossil
fuels. The rest of the world needs exactly the same things. However,
the US mindset is to 'win', and 'win' these resources at everybody
else in the world's expense, hiding it's intentions behind a screen
of virtue signalling public puffery.
Step one in the US plan is to economically wreck Russia, while
simultaneously creating a 'Western' trading 'bloc' under USA
domination. Step two (economically strangle China) can wait.
The US and Europe Introduce almost complete trade
restrictions on Russia - a war of aggression
Taken together, these economic sanctions are a new kind of
economic statecraft with the power to
inflict damage that rivals military might."
US President Joe Biden, 26 March 2022
USA and Europe have introduced so-called 'sanctions' on Russia
that are designed to stop the flow of foreign goods and
investment into Russia, and stop the transport and sale of goods
from Russia to USA, Europe, and those other countries which willing
are to comply with another countries domestic law (or are unwilling,
but are coerced into compliance by the USA).
USA and Europe's purpose and intention is not just to 'damage'
Russia, but to very severely cripple the Russian nation to the point
it can barely function. Years of Russian patience and persistent
diplomatic efforts to overcome mutual irritants in relations with
the USA and West have not overcome the Western bloc's arrogant
obduracy. The US and West want to launch a deeply aggressive war
against the Russian people, but a war without consequences for
The USA and EU plan
The USA wants to 'tank' the Russian economy, cause misery and
deprivation to the Russian public, ideally, in my opinion, to the
point where riots break out and the current government falls.
Obviously, the US would hardly admit they hope to overthrow the
government. The US doesn't want to draw attention to US violent
coups and attempted coups in Syria, Libya, Iraq, Iran, and, of
course, over the decades, in Central and South America.
"As a result of these unprecedented sanctions, the ruble almost is
immediately reduced to rubble. The Russian economy — that’s true,
by the way. It takes about 200 rubles to equal one dollar.
The economy is on track to be cut in half in the coming years...Russia’s
economy was ranked the 11th biggest economy in the world before
this invasion. It will soon not even rank among the top 20 in the
US President Joe Biden, 26 March 2022
At the point where sanctions make the Russian Government deeply
unpopular and in a state of rolling crisis USA would, in my opinion,
finance a candidate of their choosing (and training) to ultimately
take over governance of Russia.
"For God’s sake, this man cannot remain in power."
US President Joe Biden, 26 March 2022
It seems to me the ultimate objective is for a US comprador Russian
government to agree to change Russian legislation to enable the sale
of government shares in major income-earning businesses. Of course,
by then, the value of those assets will be at rock bottom due to
Western sanctions having crippled their operations. The plan would
be for US and EU business interests (or its proxies) to step in and
buy out the crippled assets at bargain basement prices.
The West-imposed trade restrictions are certainly severely damaging
some Russian businesses. For example, the Petropavlovsk gold mining
group, listed on both the Moscow and London stock exchange, lost
over 85% of its share value when the UK 'sanctioned' Russia's
Gazprombank, which is likely the major buyer of gold produced by
Petropavlovsk. Under the new UK rules, Petropavlovsk UK cannot
interact with Gazprombank, whether paying it's outstanding
debt to Gazprombank, accessing Gazprom revolving credit lines, or
selling its gold to Gazprombank (there are legal restrictions on who
may buy gold in Russia, and therefore no obvious alternative buyer).
Petropavlovsk is a major employer in the Amur region of the Russian
Federation. This is but one example of many.
Russian strategic businesses to the West
A useful model for a future Western influenced Russia is Ukraine.
Notably, under Zelensky, legislation was passed to privatise various
government owned businesses. I don't know whether or not 'connected'
US and EU business interests bought them, whether in whole or in
part - time will tell. But big
US and European interests have certainly acquired control of
about 25% of Ukrainian cropping land (one US corporate, Cargill, has
also bought a deep water grain loading terminal near Odessa). In
turn, China has also bought arable land in Ukraine, and now owns
about 5% of the arable land.
"The government says it wants to reduce the
number of SOEs. Economy Minister Yuliya Svyrydenko announced
the government’s intention to reduce the number of
ministry-managed SOEs to no more than 100 in 2022. [There are
about 3,500 registered state-owned entities having a variety
of legal forms. 40% of these entities are deadhead and only exist
on paper. Every third enterprise is unprofitable being a potential
source of fiscal risks. The lack of adequate control mechanisms
and low transparency make state enterprise activities a source of
corruption risk ]
According to Svyrydenko, the largest SOEs will be overseen by
the Cabinet of Ministers. Svyrydenko also said that state
companies will be triaged into operating and non-operating. The
operating enterprises will be further triaged into companies
that will be privatized and ones that will stay in state hands.
Non-operating SOEs will be liquidated or privatized depending
on their condition.
Also, on Jan. 13, Prime Minister Denys Shmyhal instructed the
Ministry of Economy, together with responsible agencies, to
prepare a list of state property to be transferred for
privatization and create a roadmap for 2022 on the
corporatization of SOEs.
No information is available on when the triage of SOEs and the
corporatization roadmap are to be completed."
Ukraine remains one of the most corrupt countries in Europe, in
spite of effort of some European and US non-governmental
organisations to change that. Deeply embedded corruption creates an
excellent environment for Ukrainian national resources to be sold
into foreign hands. By 2014,
"Ukraine’s agricultural land is currently under a
moratorium that bans its sale until January 1, 2016. Despite this
moratorium, at least 1.6 million ha of Ukrainian agricultural land
is currently in foreign hands.According to several reports, just
10 large agribusinesses control as much as 2.8 million ha....In
2001, Ukraine passed its Land Code – legislation that gave people
functional titles to land....A document prepared by the legal firm
Frishberg & Partners details various ways to circumvent
Ukraine has (or had) many agricultural and mineral resources that
need capital to develop. Not only fertile agricultural lands (and
the potential for further expanding agribusiness activities such as
such as crop seed production, poultry and pigmeat production), but
coal, oil, gas, and some in-demand mineral deposits, such as
lithium. The Black Sea i said to contain very large quantities of
natural gas, enough for Ukraine to be self sufficient. But who
benefits from development of these resources?
The firm notes that investors can typically lease farmland for up
to 49 years at a time, saving “millions of dollars in cash” that
would otherwise be required to purchase the land directly. The
firm goes on to explain that the moratorium on land sales applies
only to agricultural land, making it both legal and affordable for
investors to “build and operate a 100% foreign-owned processing
facility on its own industrial land while leasing fields from
agricultural landowners until the moratorium on the sale on
agricultural land is lifted.”
As a result, they suggest that the moratorium “should not serve as
a deterrent to taking advantage of Ukraine’s black, fertile soil.”
A second way that investors can circumvent the land moratorium is
by buying shares of large existing Ukrainian agribusinesses."
Oakland Institute December
"According to Frédéric Mousseau, director of the Oakland
Institute, the “geoeconomic” dispute over Ukraine represents the
biggest clash between the two rival blocs since the Cold War. With
the events of Maidan in 2014, the Western camp prevailed, while
Putin retaliated by taking Crimea and waging war in the Donbass.
The developments marked the beginning of Ukraine’s “annexation”
into the Euro-Atlantic economic sphere, described by Mousseau and
Elisabeth Fraser in a 2014 report entitled The Corporate Takeover
of Ukrainian Agriculture, which gives an account of the redoubled
push by Western financial institutions to “throw open the nation’s
vast agricultural sector to foreign corporations.”
From the West came arms and money in the form of assistance
packages from the World Bank, the International Monetary Fund and
the European Bank for Reconstruction and Development. As usual,
the cash was strongly tied to reforms that Ukraine was required to
implement, all under the banner of fiscal restraint and austerity.
Also according to Mousseau, the drive in Ukraine to privatize the
land market is unprecedented in recent history.
To limit unrestrained privatization, a moratorium on the sale of
land to foreigners had been imposed in 2001. Since then, the
repeal of this rule has been a main goal of Western institutions.
As early as 2013, for instance, the World Bank provided an $89
million loan for the development of a deed and land title program
needed for the commercialization of state-owned and cooperative
Furthermore, Western banks are imposing the optimization and
consolidation of agribusinesses into large entities at the expense
of small producers, who still constitute the majority in the
country, with the goal of increasing “added value,” and, in the
words of a 2019 World Bank paper, “accelerating private investment
in agriculture.” The same report states that “a 30-percent
productivity increase in agriculture could result in an additional
4.4 percent Ukrainian GDP growth in five years, and 12.5 percent
growth over ten years.” It is safe to assume that the growth rates
of private agricultural producers were expected to see far greater
Today, some estimates speak of 3.4 million hectares in the hands
of foreign companies and Ukrainian companies with foreign funds as
shareholders. Other estimates are as high as 6 million hectares.
The moratorium on sales, which the US State Department, IMF and
World Bank had repeatedly called to be removed, was finally
repealed by the Zelensky government in 2020, ahead of a final
referendum on the issue scheduled for 2024."
Luca Celada, ilmanifesto 3
Partial sale of national resources is not always a bad thing, as all
countries need capital to develop, and in the case of land,
consolidation of small plots enables economies of scale.
Who should control and benefit from natural resources? Big money
won't invest unless it can get a good return. Governments generally
don't have deep enough pockets to shoulder the costs of developing
the nations strategic resources - even when they are still in
government hands, as is in the case of Ukraine, and as was
previously the case in Russia.
There is a strong case for a more or less even split in the costs
and benefits of developing a nations resources. But when these
resources are of a strategic nature - a source of natural wealth
that can be used to support the development of society - then
government should not only have a fair split of profits, it should
also have a controlling interest in the management of the resource.
In Russia's case, for example, the Government retains an ownership
interest (generally 51%) in most of the most important companies,
particularly in the gas and oil sector, while selling the balance of
the shareholding to private interests. The government majority means
that the government can prioritise food security for the Russian
people through oversight and a degree of control of grain
production, storage, and sale.
Foreign corporations that control both the management and profit
allocation in a joint venture with a government exploiting local
land and mineral resources are more like colonialists than equal
A Russian government that engineers control of the nation's natural
resources is a brake on the share of profit that a foreign company
could acquire. From the West's point of view, it is only reasonable
that a more compliant government should, if possible, be arranged.
Even if the current Russian government were overthrown by the West,
I seriously doubt that the US and EU would be able to use violent
white supremacist groups in Russia to control a post - insurgency
Russian government (the system the West used in Ukraine). On the
other hand, Russia would certainly be susceptible to increased
corruption, and therefore influence.
Influence sufficient to sell off whole or part of government
shareholdings in oil, gas, and mineral resources to the West. But
first, the Russian government must go. How?
The US Trap - the excuse
for massive 'sanctions' on a nuclear superpower
The 'excuse' for imposing these restrictions is that Russia invaded
Ukraine, a prima facie breach of International Law.
But the USA deliberately and step by step created the conditions
where all other choices for Russia were cut off.
The USA deliberately forced Russia's hand. NATO was all but
permanently resident in Ukraine, right on the Russian border, and
ready to install nuclear capable missiles that would hit Moscow
within just minutes, preventing Russia from having time to mount a
response. A crippling 'first strike' capability, in other words. USA
knew Russia could not allow this - no more than the US would allow
Russia to place missiles in Mexico, right on the US border.
It set Russia up in order to force it to intervene in Ukraine to
prevent the existential threat USA had engineered. How did the US
First, the USA refused to agree to a bilateral security treaty between
Russia and itself based on indivisible security (no one can assure
their own security at the expense of the other party - i.e. NATO
assures Ukraines security, but NATO missiles threaten Russia's
The USA then sank Russia's proposal for a similar bilateral mutual
security treaty with NATO and Europe.
And at the same time, the USA, Germany and France subverted the
implementation of the Minsk security agreement, an agreement with
Ukraine that was achieved as a result of the most intensive and
sustained diplomatic efforts by Russia.
The Minsk Agreement (Minsk
version 2), endorsed by the United Nations, was an agreement
with two main aims: first, to keep Ukraine neutral and free of all
foreign military; and second, to ensure the rights of the citizens
of Ukraine's Donesk and Lughansk regions to their cultural identity
and language. It was an agreement for peace. Ukraine signed up
But Ukraine implemented only minor components. Eight years of
Russian cajoling failed to convince the Ukrainian Government to
fully implement the agreement it had signed up to. In the meantime,
the ultra nationalist Azov battalion regularly broke the truce,
firing on civilian areas of the breakaway regions. Of the 14,000 or
so civilians killed over the 8 years of Ukranian stalling, around
87% died on the breakaway republic's territory.
It became clear Zelensky had no intention of walking the road of
peace, and, with false promises of NATO membership whispered by
Germany and NATO's leadership, Zelensky (and, it is becoming
evident, NATO itself) made plans to take the Eastern regions (and
Crimea) by force. Ukraine's army was already NATO trained and NATO
systems-integrated. The way would then be open for multiple
emplacements of missiles 5 minutes from Moscow, whether US/NATO
missiles or Ukraine's own indigenously developed nuclear armed
"I remember very well President Petr Poroshenko at these
He has said recently that no one ever thought of implementing
the Minsk agreements in Ukraine.
This was a manoeuvre undertaken with for the sole purpose of
winning some time in order to rearm the military to take their
revenge. He said so in public and did not even blush."
Sergey Lavrov 30
By late February 2022 Ukraine was poised to attack the
Russian-speaking breakaway republics with overwhelming force.
Russia's satellite and other intel sources identified the build up
of massive forces and deeply fortified lines soon after it Ukrainian
preparations for force began.
"What if we recognise them and make them part of the
Russian state at their request...but the shelling and military
operations planned by the Kiev regime continue and are inevitable?
They [Kiev] have held two large-scale military operations; it is
true that they did not succeed, but they were held. The shelling
would certainly have continued. What could we do? Launch an
operation. Why wait for them to be the first to do it? We knew that they were preparing to do it.
Of course, this is the inevitable logic of events.
We always saw what was happening there.
For eight years, they have been creating a fortified area that cut
deep enough into Donbass, and of course, venturing there and
suffering losses was pointless – this is the first point.
Secondly, we were well aware that this process would continue,
and it would be getting worse, more difficult, more dangerous
for us, and we would suffer even more losses. Those are the
considerations we were guided by. NATO’s development in that
territory was in full swing – and it keeps on going, just like it
was going on then. Those fortified areas would have spread far
beyond today’s contact line in Donbass – they would have been
everywhere. That’s all there is to it.
...if fortified areas had continued to be built there for several
more years, throughout the country, with personnel being trained
and weapons systems accumulating there (weapons they never had,
weapons many still do not have even now), the situation would have
been completely different for Russia, even in terms of conducting
this special military operation."
Vladimir Putin 27
Russia had to choose. The choice was between stopping a clearly
emerging existential threat before it was literally right on it's
borders with US missiles pointing at it, or waiting, and have to do
it while facing an even bigger and more entrenched Ukranian-NATO
army. An army which by then would be armed with cutting edge
weapons, and in time, unstoppable hypersonic missiles. These
missiles would have a flight time to Moscow of only a few minutes.
An army that was also equipped with US 'first strike' battlefield
nuclear warheads, whether fired by cruise missiles (hypersonic or
advanced-conventional), field artillery, rockets, or dropped as
'smart' glide bombs.
Was the USA aware Russia would have to invade to protect it's own
security? Of course. And the USA had
pre-planned sanctions accordingly.
In other words, the USA's 'Ukraine trap' was a trip-wire for the
US-led West to impose the most severe trade restrictions ever levied
against a country since Japan's central bank was cut off prior to
world war 2.
Illegal 'sanctions' don't
“I must say this very clearly: The sanctions we have
imposed so far don’t work. The best evidence is the ruble exchange
- Polish PM Mateusz Morawiecki April 2022
"They expected sanctions to rapidly produce
a devastating effect on Russia’s finances
and economy, sow panic in the markets, bring about
a collapse in the banking system and create
major shortages of goods in shops.
we can already say in all confidence that this policy has
failed in Russia. The strategy of unleashing
an economic blitzkrieg has been ineffective."
Vladimir Putin, April 18 2022
Cuba has been 'sanctioned' by the USA for 60 years, and is still
coping. Iran and Venezuela are coping. So is Syria. So called
'sanctions' plunge the population into some greater or lesser degree
of misery, but determined peoples still refuse to kneel before the
self-appointed emperor. They live as best they can as sovereign
nations, difficult though it may be.
Even severe trade restrictions probably won't trigger the 'American
dream' of a Russian failed state ripe for plunder.
How can sanctions possibly work against a country rich in minerals,
a country with a superior conventional military machine to US and
NATO, a country with vast reserves of gold, a country with almost no
overseas debt, a country with a fiercely independent people who are
used to hardship, a country which is well lead, a country that is
well educated and innovative in manufacture, a country on the edge
of the largest market in the world, and a country which has market
dominance in very profitable gas sales in Europe? How can sanctions
achieve anything - except even more independence and resilience than
Any thoughtful analysis must come to the conclusion that 'sanctions'
on Russia by the USA and EU are doomed to fail, and therefore
pointless - at least on the face of it.
The real reason for US
throttling Russia's economic life
In my opinion, a major purpose of imposing massive trade
restrictions on Russia is as a bargaining 'tool' for the up-coming
arms control talks. What is applied can be removed. America has to
talk to Russia - and ultimately China - about a new strategic
security treaty. Why? Because Russia's new hypersonic weapons have
shifted the balance of terror in Russia's favor. It is clear to all
parties that new new technology has made the old treaties out of
date. New treaties taking into account present and future
technologies will have to be negotiated.
"...we have failed for the past eight years to build the
positions of long-term strength essential to successful
negotiation. It was doomed because we were unprepared with
new policies or new programs for the settlement of outstanding
substantive issues. .. that by a miracle of personal charm and
public relations the Russians could be cajoled into yielding some
of their hard-won positions of strength - that we had some
conception of alternative settlements that were both acceptable to
us and possibly acceptable to the Soviets...For words and
discussion are not a substitute for strength - they are an
instrument for the translation of strength into survival and
John F Kennedy 14
Unfortunately, USA has this bizarrre and abrasive concept that you
should enter a 'negotiation' from 'a position of strength', with
something to 'give away' for concessions by the other side. But
first, according to the USA playbook, it must cause pain to Russia.
But the US needs an excuse to sell coercion to the public. Any
excuse will do.
This works on the weak. It doesn't work on the strong. The USA is
culturally unable to work openly and honestly, without playing
stupid (and ultimately futile) 'dominance' games.
"Attempts to engage in a dialogue with us from the
position of strength are doomed to failure from the start:
we will retaliate strongly and resolutely against any unfriendly
Sergey Lavrov, 6 July 2021
Finally - and it does seem far fetched - an argument could be made
that the US is deliberately acting to rapidly devalue its currency
in order to make it's exports cheaper and imports more expensive
(stimulating local manufacture). If, at the same time, the US
government issued a minimum basic income, or other transfer payment,
but did it digitally, US debt could be paid off very cheaply, while
- for a time - retaining purchase power of the devalued currency.
Unexpected benefits of the sanctions
Whatever the motive, the 'sanctions' will fail. But what the
sanctions will achieve in the long run is a much more
flexible and self-stabilising non-Western international financial
system. Russia and China have planned for this outcome, but for the
USA and the West, an ultimately positive outcome will be entirely
accidental. This - surprising - argument requires some consideration
of how the current economic system (the Bretton Woods system) came
to be, and why it has 'worked' so far.
The current financial
What is the Bretton Woods System anyway? Here is a short
Very few countries are self sufficient in the minerals needed for
agriculture and industry, and the hydrocarbons to power
industry and homes, and suitable land and climate to grow
all essential foods. Therefore, from necessity, all countries must
trade with each other. Trade requires interference-free flow of
currencies across borders. It requires a stable and trustworthy
system. The Bretton Woods system was supposed to be that well-oiled
Under Bretton Woods, the US dollar would be the anchor for the
world's currency. All other countries currencies would peg their
value to the central, stable entity, the gold-backed US dollar. US
dollars would be redeemable for gold, with gold price firmly fixed
at $35. The US dollar was literally as 'good' as gold. Post-war US
commanded half the world's gold reserves, but convertibility and
careless bank 'promissory note' printing was the US Achilles heel.
The US held a privileged advantage - in addition to money coming
from production of goods and services, it could create money by
writing an IOU to itself.
"It costs only a few cents for the Bureau of Engraving
and Printing to produce a $100 bill, but other countries had to
pony up $100 of actual goods in order to obtain one"
From the 1960's onward the US kept printing more and more dollars to
cover it's out-of-control government spending, an exclusive
privilege it had due to being the major currency of global trade.
- Barry Eichengreen (American economist)
Faith in a currency comes from it's credibility - the belief
it is 'good', that is stable, and the economic system behind the
issue of that currency is also stable, not too burdened by debt, and
unlikely to be damaged by conflicts and embargoes. These are the
pillars that support the US dollar. In 1971 some of those pillars
crumbled. The cost of Americas war on Vietnam and unconstrained
domestic spending led to the issue of banknotes far in excess of the
gold reserves needed to back them. Trust in the dollar started to
In 1965 France had observed the USA's slipping productivity and
unbalanced trade (the cost of imports bought into the US
significantly exceeded the money coming in from American exports).
It decided to redeem some of it's US dollar notes for the gold
backing them. Obviously, if other countries also 'took fright' and
did the same, the US gold reserves would run to zero, and some
foreign dollar 'note holders' would not be able to secure the
physical gold the note represented. The US government would be in
default. (In fact as early as1966 foreign central banks held $14
billion of US currency reserves; but after allowing for the full
redeemability of domestically held dollar notes, only $3.2
billion of the $14 billion foreign-held dollar notes could be
redeemed for gold - France was right to be worried).
Germany abandoned the dollar peg in May 1971, Switzerland cashed in
50 million US dollars for gold, and France did similar. The game was
Meanwhile, in the US prices for consumer goods continued their
inflationary surge. Most people had their day to day
'operating money' (so to speak) loaned to the local bank as a
personal bank account. If they had excess savings they may have
allocated it to an interest-bearing time deposit with a bank or
other financial institution. But inflation caused the purchasing
power of their money to evaporate before their eyes.
Something had to be done.
The dollar is no longer
backed by gold
So in August 1971, on a Sunday night, President Richard Nixon closed
the open window that gold was flying out of. Dollars could no longer
be redeemed for physical gold. 'Temporarily', he said. Which turned
out to be permanently. Other countries currencies found themselves
suddenly unpegged, left floating to find their own level. Floating
rates meant they had to reconsider their central bank policies,
their central bank interest rates policy, and their government
Nixon announced a 90-day wage and price freeze in the hope it would
counter inflation. A 10% surcharge on cheap foreign imports was
introduced, aimed to give price advantage to domestically produced
goods over cheaper imported goods.( A price inflationary move). The
US stock market went nuts, soaring to new heights (temporarily). The
price of a share in gold mining businesses fell sharply.
The American President declared:
"The third indispensable element in building the new
prosperity is closely related to creating new jobs and halting
inflation. We must protect the position of the American dollar as
a pillar of monetary stability around the world."
Once the gold backing the US dollar was gone, and once other
countries were unleashed from using the dollar as the single
yardstick to value their currencies against, the world entered a
fairly bitter period of competitive non-cooperation on currencies
exchange rate values. Eventually, the value of institutionalised
cooperation was realised, and the 'hive mind' of the markets set the
exchange rate between any currency pair you cared to name - but the
dollar still tended to be the 'known' benchmark to anchor to. The US
dominated Bank of International Settlements took an important role
in 'independently' creating benchmark indexes of the major
free-flowing currencies important in global trade, currencies such
as the US dollar, Euro, pound, and, more recently, the Renmimbi
(usually referred to as the Yuan.)
Up until now the system seemed fairly stable. The system's major
weakness is the reliability of the dollar. Other countries savings
have poured into the United States to buy US Government bonds, which
are seen as a low risk investment. They are low risk because they
are backed by the dollar, an extremely important component of global
trade. But, just as the US abused the gold backed dollar by issuing
more face value currency than there was available gold to back it,
so the US has issued truly gargantuan amounts of bonds to pay for
the operation of the US Government. The debt the US has issued has
no prospect of being paid back. More and more debt is issued simply
to pay the interest on debt it has issued in the past.
Some believe this can continue on 'forever' so long as the US
economy expands, and inflation expands slowly with it. Others say
that if the US economy contracts at the same time as inflation
increases, then the US will eventually have to default on its bond
obligations. They will become 'junk bonds', and the US dollar will
plunge in purchasing power as a result.
Recently, the US has found it more difficult to sell its sovereign
debt to other countries. The US Central Bank, the Federal Reserve,
has stepped in and bought large quantities of it. If the 'value' of
the debt held by the Central Bank crashes, then the value of the
Fed's assets relative to its debt may become dangerously low.
However, while the Federal Reserve doesn't own gold - it is held by
the US Treasury - it does own gold 'certificates' giving an interest
in the gold held in Treasury vaults. The paper 'gold' the Fed buys
is bought from the Treasury at the 'statutory rate', which is $42
an ounce. It remains on the books at this price. In an
emergency, it would only take a change in regulations to be valued
at the current market price, which would undoubtedly be a lot higher
I argue that even if the US defaulted on its overseas debt, the US
dollar will always be 'backed' by the advanced nature and
cross-spectrum assets of America. Would there be pain? Of course.
But people cope somehow because they have to cope.
Assets are now the
pillar of stable purchasing power in the post - Bretton Woods
All economies are operationalised energy. The USA quickly arranged
with Saudi Arabia, the controlling oil producer of the time, that
the house of Saud would always demand payment in dollars for its
oil. In return, the USA would guarantee Saudi Arabia's security. The
dollar was now 'backed' by Saudi oil, as well as USA's own
substantial oil production. The so-called petrodollar was born. But
the US dollar was backed by much more than 2 major energy sources,
it was - and is - backed by plentiful mineral resources and the
technically advanced economic operations that arise in any fertile,
well watered, well educated, and relatively well governed land.
All these assets back the dollar, and these assets have scale.The
sheer depth and spread of US import and export activity, and the
mineral and agricultural resources that underpin it are huge. The US
financial structures - banks, insurance industries, financial market
- are also large and globally spread heavyweights. Weight counts.
Although it is a nett oil importer, the US still has huge oil and
gas assets. Other Western countries do not. France, for example, has
none (excluding overseas assets). US has large indigenous forest
assets, huge area of deep prairie soils for industrial scale wheat
and corn production. It has substantial resources of other minerals,
including phosphate fertiliser. It can tap into it's Canadian
neighbours vast supply of potash. And nitrogen fertiliser is made
from nitrogen gas in the air, in conjunction with US natural gas. At
this time, the USA is near self sufficient. Therefore the dollar
will always be 'a good bet', even if the US' recent moves have
destroyed some of the the trust in the dollar as a stable and
in use of the Dollar in International Trade
"Many countries are wondering if it is wise to use US
dollars in mutual trade so widely. Saudi Arabia agreed on using
the yuan. This process cannot be stopped. President Putin has said
on numerous occasions that by addressing their short-term, even if
politically important, considerations in this way, the Americans
are harming their own cause in the long term. The role of the US
dollar will decrease. Trust in it is already falling
16 March 2022 22:54
Foreign Minister Sergey Lavrov’s interview with RBC TV channel,
Moscow, March 16, 2022
The US, UK and most of Europe together engineered historically
comprehensive cross-border trade and banking restrictions on Russia
and Belarus in 2022. Russia's response to these financial and trade
measures has shifted the use of both the euro and the US dollar.
Russia's gas sales no longer use the euro, albeit euros are tendered
and later sold on foreign exchange markets. Russia proposed in July
2022 that large Russian firms (such as Gazprom) should pay negative
interest rates for foreign currency accounts held in Russia. The
idea is to force the corporates to constantly sell their euros and
dollars to buy rubles. This would - to a tiny extent - lean against
the value of the US dollar.
While the ruble is barely traded on international markets, the US
dollar is heavily traded. So what effect will all the measures
mentioned below have on the use of the US dollar? Probably not much.
Apart from anything else, a major reason is that the dollar is used
in financial speculation, where intermediaries bet on the rise or
fall of the value of a vast array of commodities and various
government debt notes. The ruble, in contrast plays a very small
part in these artifices. And now, due to restrictions on trading
with Russia, only 'friendly' countries will be able to buy and sell
'positions' on the future value of commodities.
The most important asset of the US dollar is trust. Trust built up
over many, many, decades. Until it's recent debacle, people (and
governments) trusted the dollar. Not so the ruble. No one in their
right mind would trust the ruble right now. Trust is built from
proven reliability multiplied by time.The ruble seems likely
to become reliable, but time, well, that can't be hurried.
"However, Western anti-Russian sanctions also contribute
to the yuan’s appeal, analysts say. Due to sanctions, bank clients
are seen gradually switching from currencies of “unfriendly”
countries, primarily the US dollar and the euro. Nikita Silkin,
head of the online broker BCS Global Markets, told newspaper
Kommersant that the trend is obvious, both among individuals and
legal entities, with importers forced to switch to conducting
transactions in currencies that are not influenced by sanctions."
But the US has now destroyed trust in the US dollar. With it's own
hands. It is obvious to all countries in the world - including EU
countries - that the US is capable of using it's control of currency
to damage or destroy their economies on any pretext, including US
domestic political consideration. No one is safe. In this situation
countries must spread the risk the best way they can. By working on
bilateral trade using domestic currencies, by working on
goods-for-goods exchanges, by joining trade unions with
independently developed currency transfer arrangements, and so on.
" ...the United States made a huge mistake
by using the dollar as a weapon
in fighting for its political interests. This undermines
trust in the dollar and other reserve currencies. The loss
of trust is big – believe me, I know what
I am talking about. Now everyone is thinking whether it
makes sense to keep foreign currency reserves
not so simple to part with the dollar because
the Americans have created a very powerful system that
keeps these reserves and actually does no let them out. It is
very difficult to get out but everyone has started pondering
over the future"
Vladimir Putin 27
In the longest run - and it will probably take decades - the US
currency will play a much smaller part in global trade. It will be
weaker, which will benefit US exporters. But increase costs for
importers. Which will give a boost to US domestic 'import
substitution' industries. Which in turn will benefit the US economy.
(Except that less demand for dollars globally may tend to drive up
interest rates in USA.) The dollar will still be backed by the might
of the US lucky complement of resources and technological advances.
So long as US politicians don't make another foray into economic
stupidity, the US dollar will probably remain one of the dominant
currencies. One of.
But for now, the dollar is no longer 'as good as gold'. Yes, the
West, and US in particular, have large gold assets. But both Russia
and China now also have massive gold assets, together at least the
equal of the US. There is a reason for Russia and China accumulating
so much gold. They have been preparing for a multipolar, inherently
adaptable financial world for some time.
Who knows, in the long run, the US may join the multipolar trade
organisations it currently reviles. Any sensible politician would.
And there is the problem for the people of the USA.
Inherently Adaptable Financial System
First, I want to say that the framework I am outlining here is
entirely speculative. The general concept has been mentioned by the
Russians, but details are not yet publicised. Time will tell.
At first, it seemed to me that Russia and China were taking the
first faltering steps to a flexible cross-border payment system
based on those currencies that are under-pinned by gold reserves.
Not as an attempt by Russia or China to create a new 'reserve
currency', but simply as an agreed currency valuation used
exclusively for domestic bilateral trade between the partners.
But in late June 2022, a member of the Indian Government mentioned
that the idea of a Eurasian 'reserve' currency similar to the Euro
had been discussed in the past. He seemed dismissive of the thought
that the idea's time has come. At this time, the obstacles to
creation a 'Eura', as a kind of universal currency amongst friendly
nations seems an insurmountably large project.
That leaves a financial system with a system of emergency money
buffer available to governments - a rival to the IMF system.
It implies stabilising Central Banks with a system of lending
to Central banks in need - a rival to special drawing rights,
currently provided by the Bank of International Settlements. This
seems a big task, and duplication.
Foreign Exchange currency valuation
Agreement on what the currencies are 'worth' can be direct between
financial institutes of the two partners, with agreement solely by
consensus. Neither partner can dominate. Or it can be decided by
'the market' via relevant exchanges (within friendly countries).
How the value of any currency can be objectively determined is quite
a task. Health of the economy plays a part, government and private
debt play a part, as do the reliability of the country in paying its
debts, political stability, mineral resources, market dominance,
stability of trading partners, reliability of trading partners,
stability of trading partners currencies, foreign investment in the
country, amount of central bank reserves, Custom duties and tariff
policies, tax policy, and other factors of importance. Demand for
the currencies by other countries who are 'outside' the partnership
would also play a part.
Economies are dynamic, and external events ('sanctions', wars,
floods, drought, volcanic eruptions, forest fires, pandemics) have
an impact on a countries financial security. The initial relative
values of the currencies would have to be re-valued at appropriate
intervals, and perhaps take major externalities into account as they
occur. Then there is the problem of 'pegged' currencies.
And, oddly, as long as one of the partners in a bilateral trade deal
is 'pegged' to the US dollar, the US dollar will influence the
valuation of that partners currency. I am talking about the yuan,
here. The yuan is not, strictly speaking, fully pegged to the
dollar, but its value moves up and down within a band (about 2%)
that is 'fixed' at the daily midpoint value of the US dollar in the
currency markets. Unlike freely floating currencies, the Chinese
government bank intervenes by a variety of mechanisms to keep the
value of the yuan either around or below the value of the US dollar.
This is not really a problem, as in future any partner in a
bilateral trade agreement could, in theory, shadow another currency.
But to do that, that partner must have huge amounts of foreign
reserves, and the central bank of that partner must be willing to
buy and sell its currency to defend the 'target' value. Only China
and Russia have this ability. China 'fixes' its currency value just
under the US dollar to make its exports cheaper. But as energy
becomes more expensive (China is a major energy importer,
increasingly from Russia), China may 'target' a stronger yuan to
make energy more affordable. But state control of the currency is a
privilege for only these two. (US may join the practice in time.)
Fixed or pegged currencies are much harder to trade on the
international currency markets. The value can only be moved if
speculators can sell short or buy very large amounts. They need
large credit lines to amplify ('lever') the force of their bet.
Otherwise they won't achieve the strong market demand or sales that
forces an adjustment in the peg. In reality, this is a strength, not
a weakness, from the Russian perspective.
Russia and China don't want their currencies to be whipsawed 'this
way and that' by big banks and hyper-rich speculators.
A more plausible counterargument is that direct government to
government 'fixing' committees are a recipe for division and perhaps
stalemate, and so are unworkable. It would be simpler to leave
everything to the currency markets in 'friendly countries'.
'Unfriendly countries' can't make mischief because they are locked
out of the official Russian currency exchange by their own
prohibitions. This could easily be made permanent by Russia (at
least). In addition, the Russian Central Bank can easily act as a
'buffer', buying and selling currency, using it's huge domestic
reserves to play a commanding role in setting the exchange rate
bands for the ruble. Or directly cooperate with other Central Banks
to agree on the exchange rate between them. Or allow forex trading
by approved 'friendly countries', including hedging but not risky
'exotic' forms of deravitive with unlimited liability. With an
ability for the Russian Central Bank to step in and cancel trades if
needed. And this is what is being suggested in late December 2022:
"...non-resident banks from EAEU countries, as well as
banks from Tajikistan now have direct access to the Russian forex
market, and the non-residents operating on this market consist of
21 credit institutions.
The bill will give the Russian government the right to
approve a list of jurisdictions, the credit institutions
and brokers of which will be given access to organized forex
trading in Russia.
"The bill also allows for the possibility of giving foreign
credit institutions and brokers from friendly countries
access to trading of derivatives, the underlying assets of
which are forex and interest rates, which will enable trading
participants to hedge forex and interest risks," the memo
The bill stipulates that ...foreign financial ...institutions
will only be able to conduct transactions with the central
counterparty. The Central Bank of Russia will set requirements
for foreign banks and brokers who might be given access to
organized forex and derivatives trading. "In addition, in order
to ensure the stable operation of the financial market, it is
proposed that the Bank of Russia be given the right to set
restrictions on transactions conducted by foreign organizations
on the forex and derivatives markets," materials attached to the
But what would China do? If it sets the Yuan exchange rate band vs
the ruble that is mismatched with the ruble vs yuan exchange rate
set by the Russian Central bank (via indirect control of the Russian
exchange) there will be an opportunity for 'friendly' countries to
make money by arbitraging the mismatch between the two countries.
This will work for relatively small volumes of currency, but won't
work for large volumes. And large volumes of currency are needed for
the oil and natural gas trade with China.
I suspect that large bilateral trades such as long term fixed
contracts for gas and oil with friendly countries may simply be done
as somewhat complex multi-part deals. Some part of the deal in local
currencies, some part in other countries currencies, probably euros
or dollars. Adjustable every year. These 'big' deals are similar to
todays big bank 'over the counter' (OTC) contracts, where currencies
and commodities are bought and sold by direct party-to-party
negotiations on exchange rate, outside the open currency exchange
If you think about it, there are two parallel currency exchange
systems already - the OTC market for the heavyweights, and the open
market for the medium and lightweights.
So an analogous system confined to the 'friendly world' would work.
No need for country-to-country universal currency rate agreement
But a euro-like trading currency whose allocation is by weighted
member economy still has some attractions. As, (unlike the euro)
member countries can retain and trade in their existing currency.
And without the political union aspect of the euro.
Commodity Swaps (Barter)
"In order to mitigate sanctions risks to trade and
economic cooperation between Russia and Latin America, we are
consistently working to introduce alternative financial
mechanisms to Western ones, and that includes non-cash
Foreign Ministry Spokeswoman Maria Zakharov, June
In the early 1990's, in the Yeltsin era, Russia couldn't pay all
it's debts to the New Zealand Dairy Board for it's NZ dairy product
imports. The Russian government of the day suggested
settling the $100 million debt with Russian goods - Russian tanks, 2
MiG fighter jets, or a Russian nuclear submarine (to be converted
into a floating electric power plant).
Obviously, New Zealand had no use for any of these things, and,
implicitly, these would have to be resold (presumably with Russian
middlemen) in Eurasia or the middle East.
In the end, only $30 million was paid back over time. Better than
This story doesn't confirm that commodity swaps can't work. It
simply illustrates that the commodities being swapped have to be in
demand by both parties, and easily saleable. And they cannot be
commodities that are already being produced by the partner country -
otherwise local producers will be displaced and lose their
livelihood. If local producers can't meet existing domestic demand,
and are unlikely to in any reasonable timeline, well, that is a
Commodity swaps (with or without a currency component) between
trusted and stable partners might form a flexibly useful part of an
adaptive financial system. For example, Brazil exported USD387
million of soybeans, USD185 million of frozen beef and USD117
million of peanuts to Russia in 2020. The peanuts, at least, can't
be produced in Russia, and could easily be swapped for Russian
In May 2022 India and Russia signed a barter agreement for the
supply of fertilizers to India. Looks like barter will be a thing,
up to a point.
Saudi oil was sold with US dollars used in settlement. Many of
those dollars were spent by the Saudis in buying US treasuries
(debt). Financing US government spending. As yet, Europe does not
have to pay for oil in rubles. If further trade restrictions are
introduced (such as secondary sanctions) then it is almost certain
oil, too, will be paid in rubles. You might call this a petroruble
system at that point, but it is important to recall that friendly
countries won't be affected. So European countries may be paying in
rubles, and the rest of the world not.
What's more, unlike the dollar, the ruble is very little used on the
international markets. Russia might increasingly use the ruble use
in 'balanced' trade with friendly countries, but even so the ruble
will never be a major currency, it will never be a reserve currency
- and Russia is very happy with that.
Oil and gas make up about 50% of Russia's income, and so
compulsorily binding payment for those hydrocarbons to the ruble
would certainly give confidence to the stability and non-erodible
purchasing power of the Russian currency. What's more, the stronger
the ruble, the cheaper the price of petrol and diesel on the Russian
Long term, I see the ruble as uniquely stable, but, for the
moment, in very limited international supply outside Russia and
the Eurasian Economic Union.
Trading oil and gas for physical gold
The Middle East is a major gold trading center. It may be that
in future a proportion of oil or gas sales may be paid for in
physical gold, at least within countries agreeing on bilateral trade
arrangement that includes a gold component. It may be transiently
important for those involved in arbitraging purchase of discounted
Russian oil with gold (primarily India), then blending the purchased
oil to sell at the true global price (for a tidy profit). This
opportunity will pass as trade restrictions are lifted and as Russia
does more and more bilaterals with friendly countries. Long term
trends depends on developing foreign exchange mechanisms with
countries whose currency is devaluing in an unpredictable manner.
Pricing oil in gold does remove the risk for the seller. It is then
up to the buyer to buy the gold used inn payment (or produce it if
they are a gold mining country).
India is said to have started buying Russian oil for gold. According
to Andrew Macguire the
West's 'oil cap' price (as at December 2022) of $60 is about
the price of 1 gram of physical gold. He claims India has been
buying discounted Russian oil since April 2022 with gold. But India
and Russia are in the process of enabled a bilateral trade in goods
using their own currencies in payment. Perhaps gold, currently at 1
gram per barrel, is the exchange rate fixing mechanism. But here is
a curious effect: if the physical gold used in payment for oil is
bought on the open markets (but not the London, New York or Swiss
exchanges), it may create a shortage in physical gold supply. Why?
Because the gold that is taken out of the market by India ends up in
Russia's Central Bank gold reserves. It doesn't, I assume, end up
traded with the Bank of International settlements (as a percentage
of other Central Bank gold reserves are). And as the price of gold
on the world markets is pushed up, 1 gram of gold presumably buys
more oil. More oil for the 'friendly countries', of course. Not for
The dollar, in the meantime, may devalue, buying less oil. What
happens to the 'dollar price' of gold? Logically, it goes up. If
there is a recession, which many regard as almost certain, oil
demand will fall - not as severely as in the covid period, but still
fall. Dollar priced oil will go down, but gold is likely to retain
(at least) it's oil-purchasing power. Friendly countries once again
win. They are able to buy more oil for their gold. Andrew Macguire
suggests the possibility Russia might open up to selling oil to
'unfriendly countries', but only in gold. I can undersatnad why they
would - they acquire even greater amounts of an appreciating asset.
But I suspect they won't, because the 'friendly countries' lose
their highly advantageous 'cheaper' energy.
But the West is talking about a 'cap' on gas prices. Well, the
consequences will ultimately be the same as for oil.
The new system-emergent gold peg?
Gold may play an overweight part when valuing the ruble.
Russia's tightly held and unencumbered physical gold places a
'floor' on the rubles value, below which it is unlikely to slip.
This 'unofficial' peg, it seems to me, will simply emerge as a
property of reliable state gold holding creating trust in the ruble,
a currency whose greatest use is domestic. All else equal, in the
long run gold helps to stabilise the domestic purchasing power of
rubles, which promotes trust in the currency, a trust which spills
over into the use of rubles in international settlements. Trust is
amplified because the gold is held within a system of governance
that has extremely low government debt and strong exports of
valuable and in-demand mineral commodities.
Mineral commodities are always a 'wasting' resource, in the sense
they are being constantly drawn down from a limited stock.
(Ultimately, the stock is terminal.) Therefore, in-demand mineral
commodities tend to hold their value over time, absent major rival
deposits being discovered elsewhere. Naturally, as minerals
terminally decline, the economy must gradually diversify and
rebalance away from the mineral component. But gold remains
immutable, relatively little is consumed by industrial use, and
therefore gold is likely to be a more important component of ruble
valuation than other minerals such as nickel or lithium, important
in manufacture though they be.
"We see that the dominance of the dollar is
disappearing, settlements in national currencies appear, and,
ultimately, the paradigm is changing. And if we recall the classic
‘money-commodity-money-price' scheme - this is the Bretton Woods
paradigm, then now a completely different formula comes out in
first place – ‘commodity-money-commodity’: first we sold gas, then
we extracted it, our product – our rules. We don't play games that
we didn't make up the rules for....You cannot describe the state
of your energy system or economic system without knowing the rules
of a particular commodity market or knowing the volume of supply
in that market. And in this situation, it turns out that the
institutions of the Bretton Woods system, global international
institutions, lose their meaning. They don't work, and they die
off quietly...The Bretton Woods system of nominal value
regulation, in contrast to the possible control over the supply of
commodities, provides a powerful inflationary impulse.”
Aleksey Miller, Chairman of the Gazprom Management Committee, at
the St. Petersburg Economic Forum, June
The key to ruble - or any other currency - valuation is that there
is a direct relationship between the quantity of the currency
emitted and the value of minerals or agricultural products. Aleksey
Miller argues that any economic system - including the valuation of
currency - is intimately tied to supply and demand of a (implicitly)
essential commodity, as well as the availability (who controls it,
status of economically recoverable reserves) and rules affecting
availability (who has power to set the rules).
Arguably, the valuation of those minerals and commodities has to use
gold as a notional 'currency', as it is the only un-inflated
'currency' in the world. The inevitable consequence of implementing
this system is that credit emission is closely tied to the wealth of
a nation. Excess government spending, or falling (real, not
speculative) productivity effectively de-links money from economic
productive value, reduces money's purchasing power (inflation, in
other words), destroys trust in the currency, and drives up the
interest demanded for lending out money. All of which creates a
A gold peg - or commodity peg which includes gold and is given a
valuation expressed in the current price of gold - probably requires
too much economic and political discipline for most countries. It
more or less already exists in Russia, it could theoretically exist
in USA, and some other well run, resource rich countries, but it
would be very difficult to implement elsewhere. Politically
difficult, and economically difficult.
An 'Axis of Gold? Not realistic.
“A major blind spot in U.S. strategic economic doctrine is the
increasing use of physical gold by China, Russia, Iran, Turkey and
others both to avoid the impact of U.S. sanctions and create an
offensive counterweight to U.S. dominance of dollar payment
systems…Russia, China, Turkey, and Iran constitute a new “Axis of
Gold” prepared to undermine confidence in the U.S. dollar.”
Jim Rickards, 2017
Iran certainly sold oil to Turkey in return for physical gold. Iran
is still under UN sanctions, so maybe the practice continues, I
don't know. Goods for gold will always be traded, especially in the
Middle East, but gold is 'good money', with no counterparty risk, so
holders are normally reluctant sellers (Gresham's law
applies). No central bank using gold as a floor under a given
quantum of money is going to 'sell out' its 'good money'. As noted
above, I suspect both gold and commodities (maybe copper for
example) held as a store of value will help establish the 'value' of
so-called 'gold-axis countries' currency (noting that many goods,
such as wheat, are only temporary stores of value, and minerals -
except gold - are constantly depleting). Again, the bilateral use of
partner countries currencies will be limited to that needed for
balanced bilateral trade.
Beyond that limit, other major trading currencies will be used -
which means only US dollars, euros, and to a much lesser extent, the
pound. These 3 currencies don't have capital controls, and only
these currencies are widely traded.
Of course, a notional allotment of commercial 'trading gold' could
also be used. Not central bank gold. In other words, gold held by
commercial banks. Commercial banks in corresponding countries could
vault each others gold ingots of various weights and send
instructions to transfer ownership to importers and exporters vault
accounts as required for either purchase or sale of goods. The gold
would stay where it was, but title would constantly change.
It is obvious that two countries that intend to do large amounts of
bilateral trade using their respective countries currencies will
need a large volume of gold to underpin faith in the large amount of
currency involved in that trade. Both China and Russia have very
large central bank stores of gold. In fact the Russian central bank
bought, on average, 205 tonnes annually since the first sanctions
were imposed in 2014. Russia has generally bought around 80% of the
domestic gold mine production, but in years when oil prices were
low, it allowed most domestic gold production to be sold to domestic
Russian banks, who then sold it offshore. The important point is
that these were commercial bank exports, not central bank sales.
Russia-China bilateral trade is about $140 billion a year, whereas
US-China trade is about $730 billion, presumably executed in
dollars, with China's US currency reserves being used by China to
buy US treasuries (a strategic vulnerability for China). Therefore
fully 'replacing' the US dollar in trading systems is impossible.
That is just nonsense. But it is simply good risk management to have
multiple currency exchange mechanisms that cannot be controlled by
Maintaining ruble parity with an increasing gold price allows the
Russian Central Bank to issue more currency
If the Russian authorities took a proportionality between Central
Bank gold holdings and the ruble price to be some sort of
'principle', then they could argue for a case where the Russian
government could borrow freshly emitted ('printed') rubles from the
Central Bank to fund domestic projects. When the loans are paid
back, the rubles would be extinguished from the Central Bank balance
sheet, reducing the rubles on issue, and once more driving up ruble
value (all else equal). This 'gold-backed debt' concept is tempting
for a government, but carries risk.
The temptation would be to do as the US Government does, and
'rollover' the loans in perpetuity, never paying them back. But as
loans are interest bearing, in economic downturns interest payments
ultimately become unsustainable - as will likely happen in the US
(US Government debt was 52% of GDP in 2008, and now is about 102% of
GDP). In such a situation, the only cure is some combination of
higher taxes, dramatically reduced government spending, government
control of money creation and means of emission (such as a digital
Russia doesn't usually have a need to 'print' money. Hydrocarbons -
oil and gas - and wheat are Russia's major exports. When they are in
short supply - as they are now - there is plenty of room for demand
to pull up the price, with no slackening of demand. These are
essential commodities. This suggests the ruble will remain strong
until oil, gas, and wheat markets stabilise - which may take several
years. Here's the golden twist - currently the Russian Central Bank
is the sole buyer of Russian-produced gold.
The Russian domestic-gold-ruble ratchet
Bank restrictions mean Russian bullion exchanges have been shut out
of gold trading in London. In addition, London will no longer
certify gold and silver bars produced by the six major Russian
refineries as 'good delivery' (certified as pure and acceptable for
international trade). But Russia has been buying a large amount of
the domestically produced gold for years now, so the impact should
not be too bad. Because domestically produced gold must by law be
sold to the Central Bank, the Central Bank can - and does - dictate
the price. The purchase price is lower than the world market price
because the gold miners have a weak hand - miners are price takers,
and carry debt.
This creates a ratchet effect. As the ruble strengthens, gold
purchases become cheaper to the Central Bank. As yet more gold
accumulates in the Central Bank the amount of gold underpinning the
ruble becomes larger. The ruble strengthens...making gold purchases
cheaper. In reality, the domestic physical gold price has decoupled
from the international price. The price of government gold in Russia
is what the Central Bank says it is, and so, to an extent, the value
of the domestic ruble is also set by the Central Bank.
Importantly, the Central Bank can allow gold sales, either
domestically or for export, if it so wishes. Recently, the Central
Bank stopped buying Russian gold and allowed gold to be sold into
the hands of ordinary Russians - effectively at a discount price.
The uncertainty caused by the sanctions meant gold was more
attractive to Russian savers - there is an active and favorable
domestic market. Those who bought gold on the Russian domestic
market made money, and at the same time the rising value of the
ruble due to a tight international gold market made buying yet more
gold more desirable and easier...rinse and repeat.
The Western sanctions effectively helped underpin faith in the
resilience of the Russian savings system, whether in gold or
Loss of faith in overseas gold depositories, paper gold
Russian gold has been frozen by the West. The mere fact that a major
power has had it's overseas domiciled reserve assets seized by the
Western bloc has grabbed the attention of governments all over the
world. Who will be next? What can be done?
The first thing to do is to bring gold reserves back home. The
second is to end the practice of 'leasing out' gold to others. The
nett effect is high demand for physical gold, delivered to the
safety of a sovereign countries own reserve bank vaults. A shortage
of deliverable physical gold, plus the more stringent Basel 3
requirements will likely shrink the interest in 'paper gold'. Thus
creating an ever higher demand for physical gold, and driving up
Further strengthening the ruble, and without the ruble having to be
convertible to gold.
London is the most important gold market in the world. It has shown
itself to be unreliable. It must surely decline in importance in
future. The fact that London and New York have frozen other
countries gold (Venezuela, Russia) vaulted there is a red flag to
all. The fact that in a geopolitical crisis physical gold becomes in
short supply has meant that the paper gold businesses have
difficulty maintaining their gold to paper ratios. It is inevitable
that more reliable gold exchange and vaulting services will become
Gold as a 'floor' on currencies in the
Some have argued that the value of the Russian Central Banks gold
holding, when apportioned to the current conversion rate of rubles
(converted to USD), means that there are 5,000 rubles to the gram of
gold (at gold prices prevailing at the beginning of April 2022).
This Central Bank valuation was a supply/demand balancing measure,
and due to expire on June 30th 2022. (In effect, it discounted the
price of gold to domestic retail buyers, enabling them to convert
some of their rubles into physical gold.)
The thinking is that while the ruble is not officially convertible
into physical gold - and the Central Bank will certainly not sell
Russian gold on the international market (rather the opposite) - the
mere existence of a massive physical gold holding keeps a sort of
'floating connection' between the amount of gold and the price of
rubles. We have to say 'price' of rubles, because rubles are sold to
Germans and other people wanting to buy Russian gas, oil, wheat,
nickel and other commodities. And price, in turn, is dictated by
demand. And demand, in turn, is in tension both with available
supply and current relative 'value' of a ruble compared to another
currency. Thus the demand-price of rubles is connected to the global
supply and demand match for commodities, of which Russia has a large
supplies available for export.
If a country sells more goods (by value) overseas than it imports
from other countries, then it's currency will be in demand, and the
'price' of the currency will be bid up on the market. The currency
will be stronger relative to other currencies, imports will become
cheaper. But as the currency becomes stronger, the goods being so
successfully sold overseas become more expensive to the buyer.
Eventually, the overseas buyer finds a cheaper supplier, demand
drops off, there is less demand for the currency, it becomes weaker,
and therefore cheaper once again.
But gold and energy are relatively scarce, and in a well-managed
gold and energy rich country like Russia, there is a persisting
scarcity-value dampening the volatility and drop in value of the
ruble - almost no matter what.
Anyway, as economic conditions inside and outside Russia change (and
the gold price on world markets changes) the ruble value relative to
gold must change. And much depends on how many rubles are emitted by
the Russian money system (which underlines the importance of good
management). So the Russian domestic gold price in rubles will
constantly change - but will also be controlled to meet policy
On the 7th of April, according to its press service, the Russian
Reserve bank changed
its policy in relation to buying gold in the domestic market:
'Due to a significant change
in market conditions, the Bank of Russia
is adjusting its pricing policy when buying gold
from credit institutions. From 8 April 2022,
the Bank of Russia will buy gold
at a negotiated price.'
According to Russian
Federal banking law 395-1, a 'credit institution' is, in
effect, a bank:
'A credit institution shall mean a legal entity which is
entitled to perform banking operations stipulated by this Federal
Law to generate profit as the main goal of its activity on the
basis of a special permit (licence) of the Central Bank of the
Russian Federation (Bank of Russia). A credit institution shall be
established based on any form of ownership as a business entity.'
Gold miners in Russia presumably sell to refineries, who then
on-sell to the Central Bank. Most likely domestic banks act as
intermediaries in the process. If there is to be any linkage between
ruble emission and gold price, then domestically, at least, Russia
controls both sides of the equation. This is interesting, because
Russian gold is excluded from trade in the West, but not in the
friendly Asia Pacific region (excluding the hostile New Zealand and
Australia, of course).
In a parallel manner, the ruble is almost completely unused in the
West, but as bilateral trade increases in the Asia Pacific - and
probably the Middle East - it will likely become a trading
currency there, perhaps valued for its stability (but again, only if
the Russians manage the ruble well).
At April 9 2022, the ruble has strengthened to 76, from around 120
when the sanctions were first imposed. At an equivalence of 5,000
rubles to a gram of gold, that implies over USD 2,000 a troy ounce
of gold. But the flip side of ruble emission is dollar emission. If
the dollar weakens - and inflation guarantees this - then the price
of gold rises anyway, regardless of the ruble.
Those Asia Pacific and Middle East countries that 'have a foot in
both camps' will likely devise many cunning schemes to arbitrage the
difference in currency prices and gold prices between the hostile
camp and the friendly camp
ruble (Russian domestic vs external exchange rates)
Before the sanctions, the ruble was traded freely in the interbank
market. The Moscow exchange deals with large volumes of rubles, and
prices on the Moscow market typically set the interbank exchange
rate internationally. Not all currency exchange went through
exchanges. Very large commercial banks likely bought and sold large
quantities of rubles 'over the counter', outside the market. The
exchange rate in such 'off market' deals is not disclosed. No doubt
some sizeable chunks of change were frozen at foreign bank treasury
accounts when the West sanctions came in.
Russia ended this practice when the West imposed bank restrictions.
Or rather, ended it for the West. Friendly countries are unaffected.
More importantly, in early April, as an emergency measure, the
Russian government introduced capital controls, prohibiting the
export of rubles. In addition, 80% of money earned from exports had
to be held in rubles. Interest payments on dollar denominated bonds
held by foreigners would normally be paid by selling rubles for
dollars, such selling tending to weaken the ruble. The government
changed the law, requiring all such payments to be made in rubles,
not dollars or euros. The Russian Central Bank sets the exchange
rate. For now, the government heavily influences ruble valuation.
In addition, large companies in which the Russian government holds
the controlling shareholding have been ordered to reduce their ratio
of debt to earnings in their accounts, with future debt issuances to
be in the currency of friendly countries. On September
15 2022 Rosneft debuted its first ever issue of
Under capital controls, the market for rubles shrank severely.
Rubles could flow into Russia, but not out. As a result, there was
almost no trading, and the strength of the ruble inside Russia was
greater than out. The price differential of rubles outside Russia
depended on who needs how many rubles and how badly, at any given
point in time. For example
AliExpress converted the ruble at 117 to the dollar, while it sold
on the Turkish Exchange at around 200. But these are extraordinary
times. The internal and external pricing is likely to converge as
time goes by.
The Russian Federal budget was based
on an exchange rate of 72 rubles to the dollar. And as at beginning
of May 2022, this is where it is at. The government can largely
dictate the internal exchange rate to achieve it's own objectives.
The Russian government is directly or indirectly the majority owner
of key strategic industries. Therefore, it seems to me, Russia can:
- control the capital of export-earning industries
- control the reserves of currencies held at the Russian Central
- control the amount of rubles emitted into the economy
- control domestic bank interest rates, and, through government
- control domestic economic development pace at a prudent
and fiscally conservative level
And the Russian Central Bank is one of the major shareholders of the
Moscow Exchange. No doubt their views are kept in mind as exchange
rates are set on the bourse.
At this point, the external exchange rate for rubles doesn't matter
that much. The Russian foreign currency exchange has become fairly
well hardened against outside manipulation. The exchange rate of the
ruble is largely invulnerable, at least under current government
policy and economic circumstances.
On the other side of the coin, those unfriendly countries wishing to
convert their currency to rubles in order to buy Russian gas
probably have to buy at the exchange rate offered by, in effect, the
Russian government. Sucks to be them.
The natural gas-ruble-gold connection
The demand-price of rubles when used in payment for natural gas is a
bit of a puzzle. The mechanism of payment put in place by the
Russian government opens interesting questions. The new system
imposed by the Russian government fully safeguards payments to
Russian businesses from Western banking restrictions. Basically,
European gas importers must 'commission' Gazprom bank in Russia to
buy rubles on the Moscow exchange on their behalf, as only rubles
will be allowed to be used in payment for natural gas. In other
words payments will always be made in advance, and within Russia's
As more rubles flow into Russia, and as natural gas prices increase
and contracts are renewed at higher price points, the ratio of
gold-value to the ruble will fall. Either the Russian reserve bank
will have to buy more domestic gold - and there may be investment
funding and development limits - or, more likely, Russia may have to
buy more gold from friendly countries. This will drive up the price
of gold, re-balancing the gold-to-ruble ratio. In effect, higher
natural gas prices push Russian Central Bank gold reserves higher
and increase faith in the ruble for domestic and regional use. So
far so good.
But huge sums of money are involved, and the parties are not just
the Central Bank, but also public-private partnership companies,
with responsibility to pay shareholders. Income can't just be turned
into gold. Income must be converted into rubles to pay shareholders
their annual dividend. Well, vasts sums in rubles are being
accumulated from gas sales every day. The rubles come from euros
converted on the Moscow currency exchange by Gazprombank on behalf
of the German importers. But this raises a very important
question: when euros or dollars or złotys or whatever are offered on
the Russian exchange for rubles, who has these large sums of rubles
available? China? The Russian Central Bank?
China is the largest importer of Russian goods, around 54 billion
dollars worth a year. Most, I guess is oil and gas. Trade in other
goods is fairly modest, and much of the lower level trade is heavily
imbalanced in China's favor. And done in euros, not rubles or yuan.
Payment for big government-to-government contracts, could be
denominated in other currencies, but given the trade imbalance with
China, it may be done in rubles. China might therefore be a large
source of ruble sales on the Moscow exchange, perhaps receiving
euros in exchange. Perhaps the sale price is one that suits both
parties. (The Russian Central Bank could of course do a currency
swap with China, and while historically this hasn't worked out that
well due to lack of Chinese exports to Russia, that is now changing
as more and more Chinese products go to Russia.)
Perhaps the Russian Central Bank is the major seller (at a nice
margin) of all the rubles the Europeans need to buy gas . Perhaps,
when necessary, the Russian Central Bank also sells rubles (at an
even nicer margin) to unfriendly countries on European exchanges. A
notional gold peg to the ruble might be used as a benchmark. In this
way, the purchase price of rubles determines how much buying power
the euro, or dollar, or whatever, has within Russia. It may well be
different in the rest of the world, but, if you need rubles, you are
a price taker. If the Russian Central Bank sells rubles on the
Moscow exchange so that Europe can have rubles to buy gas, what
would the Central Bank then do with the dollars and euros it
accumulates from ruble sales? Perhaps sell them for rubles to
friendly countries, but at the higher 'external' exchange rate.
Perhaps use them to buy gold in China?
If the Central Bank creates (emits) the rubles needed for currency
exchange, and if ever larger swathes of export goods are sold,
wouldn't that inflate the money supply in Russia and reduce
purchasing power (inflation)? I can think of at least three reasons
why inflation wouldn't take off (experts in this area may think of
First, the ruble is backed by gold. As the Central bank creates
rubles, it accumulates euros at the same time. It will likely sell
these euros to China in payment for physical gold on the Shanghai
gold market. The ruble retains value as the Russian people expand
their income while retaining their purchasing power.
Second, the Russian government can increase the 'social
contributions' that large state owned oil and gas companies must
make to the government for development programs. As long as the
government spends cautiously and conservatively, a large ruble
'float' will build up with the Central Bank, some of which can be
used in currency conversion operations.
Third, as the Central Bank sells rubles for euro, it can sell euros
at a concessional rate to friendly countries in exchange for their
rubles. This offsets the increased price of rubles if the friendly
countries are buying rubles to pay for Russian wheat, or oil, for
example. Friendly countries will probably have 'favorable trading
nation' status with Russia, which, I am guessing, will mean they
will be exempt any duties, taxes or whatever they Russia will invent
(I am guessing again) for 'unfriendly' nations.
It must be obvious to China that it needs to sell its US treasuries
before the Chinese are sanctioned from the SWIFT system and their
money frozen. Assuming this is even possible, where will they invest
their US dollars? Assets held in Western countries are likely to be
at risk. Investment in viable businesses in the friendly world may
be the best strategy. Gold retains value, but doesn't provide
an income flow, so while it has its uses, it has limitations as
It is all very murky. How all this might work is somewhat
mysterious. Once again, time will tell.
The long road ahead
Russia is certainly leading the work to form a framework of a new
socio-economic structure within Russia - it has been forced to,
although, to be fair, it has been slowly progressed ever since the
current President was first elected in the 1990's. Sanctions simply
massively accelerated it. Whether or not other countries pick up
some of the elements - majority state control of strategic assets,
open trade relations, multiple trade settlement systems, government
spending disciplined tied to income, and so forth - is a fascinating
question to be answered by time. Some questions are more urgent than
others - at least, the popular sentiment makes it seem so.
"The outline of the new type of socio-economic structure will, of
course, be determined to a very large extent by the Russian
Federation, and there is no doubt about that"
Aleksey Miller, Chairman of the Gazprom Management Committee, at
the St. Petersburg Economic Forum, June
The media promote the idea that there are cataclysmic changes in the
international financial system due to the 'the gold ruble'. Unless
the US dollar collapses in runaway loss of purchasing power, I doubt
it. I think Russia's road to an enduringly stable currency is a
fairly long one, and it will be a bumpy journey. We have almost no
hard information on the shape of the broad scale
economic-trade-system changes Russia's government hints at.
As for stabilising the purchasing power of the US dollar, the euro,
and other less traded currencies, well, all I will say is 'let's
hope people's wealth increases enough to make up for the eroding
value of those currencies'. Frankly, there are major changes coming
due to climate change forcing disruptive and unpopular policy
change. These unwelcome changes are likely to trigger social fear
and uncertainty. Purchasing power erosion already means peoples
incomes can't match price increases for basic living expenses.
Increasing levels of social unrest seems inevitable. But not in
a financial system from 'external shocks'
1. 'The balance of payments structure' simply means that Russia pays
cash (so to speak) for what it needs, and runs up minimal debt.
Mechanisms likely include:
'Russian President Vladimir Putin has instructed that an
interagency working group be formed in order to draw up new
mechanisms in the field of FX regulation and international
...Furthermore, the working group will draw up state policy
measures aimed at "reduction of risks, connected with the
suspension of operations with Russian foreign assets, to
provide conformity of the balance of payments structure to the
aims of stable economic development"
Interfax, 11 May
- limits on the amount of Russian capital that can be exported
- limits on loans raised overseas
- Ilimits on government spending (so that resources are
allocated primarily to economic development projects within
Russia and friendly countries that trade in rubles, such as CSTO
2. An intriguing possible mechanism for controlling foreign exchange
- and this is entirely my speculation at this point - is the
possibility of restricting 'betting' on the movement of the ruble
against other currencies on the Russian foreign exchange market,
applying, presumably to Russians as well as 'friendly country'
participants in the market. There was a cryptic report that "short
selling' on the Russian exchange would be prohibited. Does this also
apply to other manouvers that cause volatility, such as 'leveraged'
forward bets on currency movements?
3. The Russian government's risk-reducing 'alternative monetary
system' doesn't depend on the constantly devaluing dollar and euro -
but certainly doesn't exclude them. A major feature is the 2
track system, where 'unfriendly' countries must pay in rubles,
whereas 'friendly countries' can pay in the major trading
currencies, as normal. Alternatively, some friendly countries may
pay in their own currency, bilaterally with the ruble. All these
features prevent major capital outflow.
Russia has stepped around the currency conversion issue (in the case
of interest payments on debt) by the simple expedient of issuing an
executive direction saying that all debt will be paid in rubles, and
once placed in the intermediating repository awaiting collection by
the overseas entity to which the money is owed, then it is
considered paid. The money is there and waiting, and if the Western
banking system declines to pick it up, that is their problem.
But the whole issue has been made moot. Russia is investigating the
formalisation that requires all payments to be made within Russian
borders in the case of hostile countries. This, I believe, will be
part of the '2 loop' system.
4. Reserve Assets. Russia's reserves in its official bank accounts
held with commercial banks in the West are frozen. Central Banks use
the facilities of the Bank of International Settlements (the Central
Banker's Bank) for temporary funding in times of external shocks
that might cause a temporary lack of liquidity or depletion of
overseas reserves. These loans are available only to Central Banks,
not governments. These are now the only reserves the Russian Central
Bank can access. Russia's access to foreign exchange assets has been
a key part of buffering the regular Russian government domestic
5. Special Drawing Rights. These are available from the Bank of
Russia's Reserve Assets
"This is a tool by which the central bank can protect
the economy from external crises. In dire situations, they ensure
the payment of foreign currency debt, critical imports, and
stabilize the foreign exchange market. Keeping reserves inside the
country or spending them inside the country is like having no
reserves, no protection at all from external crises. This is how
our country lived in 1992-1999" - Russian Central Bank, Interfax
26 March 2022
The Russian Central Bank holds the foreign currencies of its major
trading partners - mainly euros and dollars - as insurance against
financial crisis. According to the Central Bank. "Non-cash
currency is always reflected in correspondent accounts in foreign
banks and therefore can be frozen". But, as the Russian Central Bank
points out, holding the reserves inside Russian banks is pointless,
because the money has to exist on the books of the corresponding
overseas bank to be drawn against in payment of Russian debt.
'Correspondent banking is an arrangement whereby one
bank (correspondent) holds deposits owned by other banks
(respondents) and provides those banks with payment and other
services. Correspondent banking networks are critical for firms
and households that conduct business or send payments
internationally. The arrangement requires that respondents open
accounts in the correspondent's books and are able to exchange
messages to settle obligations by crediting and debiting those
Most cross-border payments flow through a correspondent banking
network, and the overwhelming majority use the SWIFT financial
messaging service...Those payments includes remittances and trade
finance, but also wholesale payments related to financial market
'On the Global Retreat of Correspondent
Banks' BIS Quarterly Review 01 March 2020
The West simply froze Russia's bank accounts in Western banks. The
only foreign reserves untouched was the money in the banks of
The bulk of the foreign exchange reserves available in January 2021
(USD 468.07 billion) were held as foreign currency. Around USD300
billion of this is held in foreign bank accounts based in 'hostile'
countries, mainly the EU, UK and USA. It is not clear to me what
proportion is held in accounts at correspondent banks in 'hostile'
countries, and what proportion is held Russia's account with the
Bank of International Settlements (BIS).
Russia's foreign exchange reserve assets are derived from the
Russian government's tax income. The government's use of their
reserves is regulated by what is known as the 'fiscal rule'.
The 'fiscal rule' was introduced in 2015 to reduce Russia's
dependence on the price of natural resources (such as gas and oil)
dictating the exchange rate of the ruble. A policy on financial
stability was developed at the same time, as were Treasury and
Central Bank 'instruments' to implement the policy. Reserve assets
were key to the system working.
The fiscal rule limits the extent to which government spending
relies on tax revenue from companies involved in natural resources
(many of the largest are government majority controlled) to meet
budgetary spending. Why? Because commodity prices are volatile,
and if a budget commits to spend based on assumed tax
income, but there is an economic downturn and the prices fall (as
they have in the past - oil prices have crashed, as have gas
prices, gazprom has lost money), the government books will end up
in the red.
The forex reserves fulfill two extremely important functions :
- They act as a carefully regulated savings account that is
added to and withdrawn from to stabilize Russian domestic
budgetary spending. As a result Russia does not need to raise
much capital from debt instruments such as government bonds.
- The ruble is a 'floating' currency whose value is determined
by the foreign exchange market. The reserve assets are used to
'automatically' keep the value of the ruble relatively stable by
selling rubles from taxation on windfall profits from
oil, gas, and wheat (and other) commodities for foreign currency
denominated assets, and buying rubles when the price of
exports goods are low. The rubles are bought from the sale of
some of the foreign assets previously bought in the 'good times'
of high prices and high tax income. The profits are used to
flesh out the domestic budget in times of low tax intake (due to
low commodity prices).
So there is a balanced flow of foreign currency, buying and
selling, depending on (mainly) oil, gas, minerals, and wheat price
peaks and troughs. The Federal Treasury controls these money
flows, whether buying or selling foreign assets, not the Central
Bank. There can be no speculation on currency, as the value of the
foreign exchange purchases is capped at the ruble value of
accumulated windfall tax from high export prices, and sales of
foreign currency are capped by the amount of foreign currency
denominated assets purchased in earlier periods of abundance
The Central Bank has a limited role as a buffer in times of
emergencies to keep the ruble exchange rate within bounds (and
thus dampen inflation), which the bank can now only implement
through the unsanctioned component of the Central Banks foreign
exchange reserve holdings, that is, holdings of foreign currency
assets of friendly countries.
"These restrictions mean that these FX operations under the
fiscal rule cannot be considered as setting or managing the
rouble exchange rate policy. The rouble exchange rate continues
to be free-floating, and the Federal Treasury is a large FX
market participant that cannot and does not aim at a
particular rouble exchange rate.
All purchases and sales of foreign currency are sterilised via
the central bank’s monetary policy operations. The Central Bank
of the Russian Federation administers the FX purchase and sale
operations under the fiscal rule and may stop them if it
determines that they are a threat to the financial stability. The
foreign currency accumulated by the Federal Treasury’s
purchases under the fiscal rule has the effect of increasing
Russia’s FX reserves.
However, sales of this foreign currency are limited by the
overall amount and schedule of budget spending.
From an FX reserves management perspective, any spending
(portfolio outflow) of foreign currency under the fiscal rule
is relatively predictable in terms of amounts flowing out
during the next few months.
This relatively new type of financial policy has two sets of
implications for financial stability:
(i) issues that are commonly experienced worldwide; and
(ii) country-specific issues.
The commonly experienced financial stability issues arose mainly
during and after the 2007–09 global financial crisis. Among
these, free-floating exchange rates proved to be a generally
better shock-absorbing policy than FX intervention-based
policy. The trivial conclusion is that, during the crisis,
more FX reserves were better than less. Further, excess debt
creation in an economy should be more closely monitored and
addressed in good time etc.
The country-specific financial stability implications for
Russia arise mostly from the industrial structure of the
economy, its emerging market economy characteristics, and the
sanctions regime that restricts the access of Russian
corporations and government to the global capital market.
financial stability policy assumes the possibility of FX
intervention, including outright sale of foreign currency and
foreign currency lending (FX swaps, FX repo and FX lending).
Outright foreign currency sales are decided on an ad hoc
basis; the timing and amounts are not precisely predictable,
and any intervention would require sterilisation via monetary
The central bank provides FX lending through overnight swaps
available daily on standby terms. Other types of FX lending
(repo and loans) may be quickly activated if needed. But the
unpredictability as to the timing and amount of any intervention
creates a challenge for FX reserves management and, as a result,
a strong FX liquidity preference is applied when the
FX reserves asset allocation is decided.
Asset allocation decisions (on currencies, asset classes
etc) reflect to the extent possible the estimated amounts,
currencies and timing of potential reserves usage."
Papers No 104
"Beginning in 2015, a mechanism was established that made it
possible to ensure a fairly stable exchange rate amid conditions
of a floating ruble, although the ruble's volatility did
increase after the transition to a floating exchange rate, he
"The key element of this mechanism was, as you know, the
fiscal rule, which thanks to simply automatic procedures
established at the regulatory level made it possible to
balance the ruble's exchange rate within certain ranges. And not by means of [money] issuance - this
is very important.
The Bank of Russia's options for managing issuance expanded and,
accordingly, this was one of the cornerstones of inflation
targeting, to which the Bank of Russia transitioned in the past
seven years. Now this mechanism has virtually evaporated,
stopped working. This is due to the blocking of the Bank of
Russia's reserves and the automatic suspension or
cancellation of the fiscal rule because of this," Belousov said,
explaining the need to discuss a new mechanism."
First Deputy Prime Minister of the Russian Federation 20
The flaw in this mechanism is now obvious. All this buying and
selling of foreign assets has been crippled by the West banking
restrictions. Not only is part of the existing government savings
locked up, the very mechanism of buying foreign currency
denominated assets is frozen for Russia. And there you have
it. The West has interfered in the deepest working of the entire
Russian domestic economy. You have to give them credit for their
malicious audacity. The West does not seem to understand that
there will be a commensurately big price to pay, and the only
questions are: how much? When?
In the meantime, the ruble has been somewhat destabilised. By mid
May 2022 the Russian currency briefly hit 55.63 rubles to the
US dollar - the strongest since February 2018. In June 2022
the First Deputy Prime Minister of the Russian Federation said
"As concerns the optimal exchange rate, the more or less
consensus opinion is that this is a rate in the range of 70-80
rubles per dollar." In other words, the ruble needs to be at the
balance point where Russian exports are not too expensive for
overseas customers, and the ruble not so weak that vital imports
become too expensive for domestic consumers. But the mechanism for
keeping balance is no longer fully working.
The 'sanctions' have to a great extent stopped Russia from buying
and selling foreign currency denominated assets, and to that extent
totally stopped the 'buffering' of the value of the ruble.
The 'tool' Russia has to regulate the exchange rate and provide a
hedge against income fluctuations is now only half a tool - it
will only work with unrestricted buying and selling of the
currencies of 'friendly' countries.
What solutions to this dilemma are possible? One partial answer
would be to junk the commodity indices whose 'spot market'
speculations heavily influence the stability of the price of
commodities, and therefore the stability of the ruble exchange
rate. Indices based on long term contracts for Russian commodities
would be favorable for everyone. I suspect Russia will move in
It will be fascinating to see what the Russians come up with to
amend or replace the foreign currency balancing system that has
worked well for them so far. Especially as the system has put a rein
on both government spending, and exchange rate volatility.
Special drawing Rights
drawing rights are a type of very liquid reserve asset held as
an 'artificial currency' (for purposes of internal accounting
between member countries) that was created by
the International Monetary Fund (IMF) in 1969. They are meant to
supplement the normal currency reserves held by the member countries
of the IMF.
Bank of International Settlements (BIS), 'the Central Bankers
Bank', deals with members borrowing and repayment of this special
class of currency, amongst other things. The valuation (exchange
rate) of the foreign currencies that makes up the basket major
trading currencies set the value of the SDR's at the time a reserve
bank borrows them. The SDR's borrowed have to be paid back in time,
and interest is charged. Special drawing rights might be
needed by a Central Bank if, for example, an 'external shock'
exceeds a Central Bank's ability to meet debt repayments from the
bank's normal 'liquid' monetary reserves on hand (these would
usually be stocks of foreign currency or gold). Most countries,
including Russia, are members of the BIS.
by Edward Slavsquat has a chart from the Central Bank of the Russian
Federation that shows that the foreign exchange reserves on January
01 2022 (USD 497.56 billion) were little different from the foreign
exchange reserves a year ago in January 01 2021 (USD 457.02
billion). But what was very different was one of the two components
of foreign exchange reserves - the special drawing rights. On
January 01 2022 Russia's special drawing rights were USD 6.99
billion, but by January 01 2022 they had jumped to USD 24.2 billion
- an over threefold increase.
This money in the BIS account is not frozen.
The 'special drawing rights' held by the BIS are likely to be
available until the Governing body of the BIS changes the rules.
The Board shall be composed as follows:
(1) The Governors for the time being of the central banks of
Belgium, France, Germany, Great Britain, Italy and the United
States of America (hereinafter referred to as ex-officio
(2) One person jointly appointed by the Governors of the central
banks mentioned in clause (1), and being of the nationality of
one of their central banks.
(3) Not more than 11 persons to be elected by the Board by a
two-thirds majority from among the Governors of the central
banks of countries in which shares have been subscribed but of
which the central bank does not delegate ex-officio Directors to
The Governing body of the BIS can for a vote on a rule change, and
the USA and its proxies will always have the final say, especially
as no two thirds majority decision will carry unless there is a
simple majority from the dominant 6 (Article 27 (5)).
The Bank for International Settlements, known as the
central bank for central banks, has suspended Russia from
using its services following Western sanctions.
The move will prevent Russia’s central bank from accessing
banking services at the Basel, Switzerland-based
institution. Following Russia’s invasion of Ukraine, the
U.S. and European Union blocked
Russia’s central bank from utilizing about 40% of its
$630 billion reserves.
Foreign reserves are by their nature held abroad, often in
government bonds of other nations as well as at accounts
with commercial banks and other nations’ central banks. The
countries imposed sweeping sanctions on Russia in response
to its invasion of Ukraine. Those strictures bar Russia’s
central bank from conducting transactions with domestic
banks in those countries, removing its ability to procure
dollars and euros through selling its reserves.
Prior to the announcement by the BIS, economists said it
was unclear whether the sanctions would prevent Russia’s
central bank from accessing accounts and other services at
“The Bank for International Settlements is following
international sanctions against the central bank of Russia,
as applicable, and will not be an avenue for sanctions to be
circumvented,” a BIS spokeswoman said. “The access of the
central bank of Russia to all BIS services, meetings and
other BIS activities, has been suspended.”
(3) All deposits entrusted to the Bank all claims against the
Bank and the shares issued by the Bank shall, without the
express prior agreement of the Bank, wherever located and
by whomsoever held, be immune from any measure of execution
(including seizure, attachment, freeze or any other measure of
execution, enforcement or sequestration).
Russia's money deposited with the BIS seems to be protected by
Article 55. It says wherever the BIS mediated deposits are,
regardless of who holds them, they are immune from being frozen or
seized or any other enforcement of sequestration measure. The weasel
words are "without the express prior agreement of the Bank".
Who would deposit money through the BIS and sign a contract agreeing
to forego their right to immunity under Article 55? I can't imagine
Russia would have.
"We welcome progress on voluntary channeling
of Special Drawing Rights (SDRs) from countries with strong
external positions to support countries most in need,
as well as the IMF’s decision to establish
the Resilience and Sustainability Trust (RST). We look
forward to early operationalization of the RST"
14th BRICS Summit Beijing Declaration, 23
In fact Russia and China see the value of using SDR to help a
country subject to a temporary 'external shock', especially where
the shock has been arrogantly engineered by those who control the
Bank of International Settlements itself.
On June 25 2022, China brought to light
a renminbi liquidity arrangement with the Bank of
International Settlements. This would have been some time in the
making. The stated objective is to "provide liquidity support for
participating central banks during future periods of market
volatility by creating a reserve pool". The initial participants
include "central banks in Asia and the Pacific, including Bank
Indonesia, the Central Bank of Malaysia, the Hong Kong Monetary
Authority, the Monetary Authority of Singapore and the Central Bank
of Chile." Note the word 'initial'. I suspect China helped Russia
out by lending Russia some of its special drawing rights at the time
of the start of the Wests 'mega sanctions' and theft of a chunk of
Russia's central bank foreign reserves.The favor will be returned.
But what 'external shock' might befall China? C'mon man! A replay of
the US project
to back Russia into intervening in Ukraine to keep NATO nuclear
capable missiles off Russia's immediate border, of course.
But here's the twist. Currently China parks it's excess US dollars
in US treasuries (although this has trended down of late). When the
US pulls the tripwire by establishing a potential missile threat to
mainland China from it's rebel province China will respond
militarily, and the US will freeze all Chinese assets touching the
West's financial system. China knows this. So where will US dollars
go now? Into the Renminbi liquidity arrangement with the BIS. Where
they cannot be frozen.
'We acknowledge the importance of strengthening
the Contingent Reserve Arrangement (CRA) mechanism, which
contributes to strengthening the global financial safety
net and complements existing international monetary
and financial arrangements. We support the amendments
to the CRA Treaty, and welcome the progress
in amending other relevant CRA documents.
We look forward to the finalization
of the amendments which would enhance
the flexibility and responsiveness
of the CRA mechanism. We look forward
to the successful completion of the fifth CRA
test run later in 2022. We support the work
to improve the framework for coordination between
the CRA and the IMF.'
XIV BRICS Summit Beijing Declaration 23 June 2022
BRICS Contingent Reserve Arrangement (CRA) allows member countries
Central Banks to borrow money from a reserve pool ($100 billion) in
times of temporary loss of liquidity due international financial
'pressure' causing short-term balance of payments problems. This is
insurance, in other words.
Some see the mechanism as a 'competitor'
to the International Monetary Fund. In reality, it is 'in addition
to'. It is far from being a 'gift'. A member country in strife can
access 70% of its CRA entitlement if it is also
being helped out by the IMF, but not meeting all IMF conditions (my
reading of what it means - may be wrong). The other 30% is an
unconditional entitlement. Even if the IMF refuses to 'rescue' a
country, there will be at least some funds available. But these are
loans, not gifts. If a country has already accessed IMF funds, and
is fully compliant with IMF conditions (usually involving austerity
and proper financial management), then the member country can access
100% of its CRA entitlement. These loans can only be 'rolled over' a
few times. There are strong safeguards and penalties to prevent
abuse of the facility.
The treaty was signed in Brazil on 15 July 2014 and entered into
force in July 2015. Member states can borrow half (China) to two
times the amount of capital contributed. China provided two times
the amount of initial capital than the other member countries.
Each party provides a governor to the governing council, either
Finance Minister, Central Bank Governor, or equivalent. All
governing council decisions are by consensus, no party can dominate.
A standing committee acts as executive, and 'strives for consensus'
treaty states that funds are provided by means of a currency
swap. According to the treaty "...the Requesting Party's central
bank purchases US dollars (USD) from the Providing Party's central
bank in exchange for the Requesting Party Currency, and repurchases
on a later date the Requesting Party Currency in exchange for USD".
This central bank to central bank arrangement eliminates any
possibility of Western interference. Note the buying of USD, later
followed by selling the USD back to the providing central bank.
Equivalent to the neighbour borrowing a cup of sugar, and repaying
As the timing shows, Russia and BRICS members were aware of just
what the US was doing, and the dangers if the US interfered with the
global financial trade system. Their fears were justified, as recent
the thinking that might shape an Inherently Adaptable
There probably won't will be a 'universal', stateless 'esperanto'
currency, but I must admit that the language does point to a
euro-like currency. Only time will tell.
"Russia and its partners
in the Eurasian Economic Union seek to make it
a globally competitive integration group. The EAEU’s
agenda includes building a common market
for electricity, oil, petroleum products and gas,
harmonising financial markets, and linking our customs
authorities. We will also continue to work
on a greater Eurasian partnership. Colleagues,
this is a turning period
for the entire world and those who are
willing and able to change, those who
are taking action and moving forward will take
the lead. Russia and its people have expressed this
will at every defining moment in our history.
In just 30 years, we have undergone changes that took
centuries in other countries."
Vladimir Putin, President of the Russian Federation, March 1,
YEREVAN, March 14 - Sputnik. "The member states of the Eurasian
Economic Union (EAEU) and China will develop a project for an
independent international monetary and financial system. This
was agreed upon by the participants in the economic dialogue "A
New Stage of Monetary, Financial and Economic Cooperation
between the EAEU and the PRC. Global Transformations: Challenges
and Solutions", which was held on March 11 via videoconference.
It is envisaged that the system will be based on a new
international currency, which will be calculated as an index
of the national currencies of the participating countries and
commodity prices. The first draft will be submitted for
discussion by the end of March. As Sergei Glazyev, Minister for
Integration and Macroeconomics of the EEC, emphasized, China was
the first in the world to move to the stage of national economic
- Translated by Andrei Martyanov in 'This-is-important'
March 15 2022
My current thinking is that a new regional system to establish an
agreed basket-based currency peg, or reference point is being worked
on, not a 'new currency' as such. Most likely the peg will be a
floating peg, rather than being periodically reset by committee. I
think the most important component of these newly 'revalued'
currencies will be gold backing in a constant relationship to the
amount of currency in circulation. No regional currencies bank
'notes' will be redeemable for physical gold. That mistake won't be
A financial 'system' is different from the currencies used in it.
"The illegitimate freezing of some
of the currency reserves of the Bank
of Russia marks the end of the reliability
of so-called first-class assets.
In fact, the US and the EU have defaulted
on their obligations to Russia. Now everybody knows that
financial reserves can simply be stolen.
And many countries in the immediate future may
begin – I am sure this is what will happen –
to convert their paper and digital assets into real
reserves of raw materials, land, food, gold and other
real assets which will only result in more shortages
in these markets."
Vladimir Putin 16
In late April 2022, the Russian Secretary of the Security Council,
Nikolay Patrushev, said
Russian experts were working on a "2 - loop financial and monetary
system". The ruble would be 'provided' with a currency value with
gold and a 'range of goods' (unspecified). This would mean the ruble
exchange rate would 'correspond' to its purchasing power parity.
This implies, of course, that Russia would set the exchange rate,
not other countries.
is the '2 loop' financial and monetary system?
On April 9 2022, the Russian Finance Minister Anatoly Siluanov
blamed Western sanctions for "destroying the foundation of the
existing international monetary and financial system based on the US
dollar”. The foundations he was referring to are the mechanisms for
reliable and trustworthy flow of money across national boundaries.
These mechanisms include:
Speaking at a ministerial meeting of BRICS countries, Mr. Siluanov
called for work to create an alternative to the SWIFT system.
- the messaging system (SWIFT)
- international credit card payment systems
- independent rating of countries and banks credit risk.
Loop 1 - Friendly Countries
'Loop' 1 has two components.
First, an alternative paying system that can't be sanctioned.
Such systems have one simple principle: keep the payment loop
totally outside the West payment system. This system will be between
Russia and 'friendly' countries. This includes direct payment
between correspondent banks, maybe use of blockchain technology, use
of China's Cross-Border Interbank Payment System, the Russian 'Mir'
bankcard, and so on. These are discussed below.
Second, an alternative monetary system that doesn't depend on
the constantly devaluing dollar and euro and that includes a
'reserve' mechanism for Central Bank loans to the Central Banks of
friendly countries that find themselves in an emergency situation
that has temporarily depleted their overseas reserves. Of course,
the existing Special Drawing Rights system can remain in place, as,
at this date, it cannot be 'sanctioned'. Until the West changes the
rules in order to use it as a weapon against Russia (and later
China), that is. An alternative completely outside the hands of the
West has to be in place just as a precaution.
The BRICS 'bloc' (Brazil, Russia, India, China, and South Africa -
Iran and Argentina have also applied
to join) is not a treaty organisation, which means it is much freer
to develop innovative solutions to trade and other problems. And
much quicker to respond to changing circumstances. The Iranian
Foreign Ministry spokesman Saeed Khatibzadeh described
it as a “very creative mechanism with broad aspects”.
BRICS countries cover a very big chunk of global economic activity
- 40% of the world's population, with an increasing share of
global GDP (around 29% or so at the moment). The BRICS countries
discuss and coordinate a wide range of policies and practical
initiatives, from promoting peaceful development, overcoming the
'digital divide', strengthening the global financial safety net,
promoting private-public partnerships, to establishing a new
development bank and a 'think
tank' on international finances, among other
The BRICS countries are already testing a banking mechanism for
BRICS countries to pool 'alternative assets' to act as a buffer for
BRICS economies exposed to 'external shocks'. For which you can read
Western sanctions. What are the 'alternative assets' ? Gold, for
one, would be an obvious guess. So would silver, and probably oil.
Gold, silver, and platinum would probably be regarded as 'class 1
assets' - quickly and easily traded (amongst friendly countries),
used as a Central Bank asset to be named as collateral to be
borrowed against in times of a Central Bank 'shock'. Other
commodities would be doubtless be included as assets, whether
mineral or agricultural.
'Russian President Vladimir Putin has instructed that an
interagency working group be formed in order to draw up new
mechanisms in the field of FX regulation and international
One of the group's tasks will be "to develop a plan for the
formation of the infrastructure of international settlements with
trading partners from friendly foreign countries and friendly
territories, including in Russian rubles or national currencies of
such states and territories, and control over the implementation
of this plan."'
Interfax 11 May
Russian Finance Minister Anatoly Siluanov called for work to
increase the use of national currencies in foreign trade (rather
than the dollar), and to integrate payment systems.
"In order to mitigate sanctions risks to trade and
economic cooperation between Russia and Latin America, we are
consistently working to introduce alternative financial mechanisms
to Western ones, and that includes non-cash payment and direct
correspondent relations between banks. We are also taking a
number of other steps towards this goal"
Foreign Ministry Spokeswoman Maria Zakharov, June
That means keeping any alternative out of the West's SWIFT system.
It doesn't mean SWIFT won't be used, just that if the SWIFT 'loop'
is closed there are other loops available that can't be interfered
with by the West
Loop 2 - Unfriendly Countries
'... the group will develop a second plan for
the formation of of international settlements infrastructure,
including in Russian rubles, with trading partners from countries
that commit unfriendly acts against Russia.'
Interfax 11 May
The second 'loop' is a payment system solely for unfriendly
countries. Both payment by Russia (for example payment of interest
to foreign holders of Russian bonds) and payment to Russia (for
example payment for gas exported to Germany). It is fairly obvious
it will be the existing system where Russia will demand payment in
ruble (in advance) for exports, forcing customers to open two
accounts with the Russian Central bank, one for the foreign currency
(euros or dollars or whatever), and one to receive the rubles once
conversion is done. (The conversion is done via the customer's a
nominated Russian 'agent bank' buying rubles in Russia at the
The Russian payments for inward goods will be the reverse of this.
Paid in rubles into one account at the Russian National Depository
(clearinghouse), and the unfriendly foreigner can then open an
account at the depository in order to receive the rubles, which can
be then brought back to the West and the conversion to local
currency done. The problem for the 'unfriendly foreigner' is that
the Western bank doing all this work has to have a corresponding
current account with a Russian bank, and the account has to have
sufficient funds in it to cover the transaction. They probably have
a correspondent account in the relevant Russian bank, maybe with
sufficient money in it, but only a few Russian banks are not
'sanctioned'. Sanctioned banks cannot be interacted with. Worse, the
Russian government has mandated in June 2022 that only officially
'listed' banks may be used in payments to unfriendly countries. It
is a fair bet these will all be Western 'sanctioned' banks...
'Russian President Vladimir Putin has instructed that
an interagency working group be formed in order to draw up
new mechanisms in the field of FX regulation and international
settlements. the interagency group is to be headed by
presidential aide Maxim Oreshkin and will include Central Bank
of Russia (CBR) Governor Elvira Nabiullina (by agreement),
Finance Minister Anton Siluanov, Economic Development Minister
Maxim Reshetnikov, as well as the heads of the Federal Tax
Service, Federal Customs Service, Rosfinmonitoring, deputy
ministers of Agriculture, Industry and Trade, Foreign Affairs,
Energy, and representatives from several other agencies.
...the interagency working group will be "a coordinating body
established to ensure effective cooperation between federal
authorities, the Central Bank of Russia, authorities of Russian
constituent subjects, other state bodies and organizations in
the implementation of state policy on currency regulation and
One of the group's tasks will be "to develop a plan for
the formation of the infrastructure of international
settlements with trading partners from friendly foreign
countries and friendly territories, including in Russian rubles
or national currencies of such states and territories, and control
over the implementation of this plan."
...the group will develop a second plan for the
formation of of international settlements infrastructure,
including in Russian rubles, with trading partners from
countries that commit unfriendly acts against Russia.
The working group will have to draw up procedures for each of
these two plans for settling payments with trading partners,
including dealing with trade financing transactions.
Another task for the group will be "to develop measures of
currency regulation in order to ensure the balance of supply
and demand for transactions in the foreign exchange market."
'Russian President Vladimir Putin has instructed that an
interagency working group be formed in order to draw up new
mechanisms in the field of FX regulation and international
Furthermore, the working group will draw up state policy
measures aimed at "reduction of risks, connected with the
suspension of operations with Russian foreign assets, to
provide conformity of the balance of payments structure to the
aims of stable economic development"
Interfax, 11 May
Alternative bank payment systems
The bank payment notification systems are still in their infancy.
Russia has a domestic 'Faster Payments System' jointly developed
by the Bank of Russia and the National
Payment Card System, which has been in use 2019. This allows instant
payments and money transfers via cellphone, tablet or PC. In
principle, it could be extended to overseas transactions, but it
would then compete with Mir card.
VISA credit cards issued by Russian banks have been blocked from
buying goods from overseas. Russia already has a domestic credit
card, the Mir card. The Mir card has now been linked to to China's
UnionPay payment card. Unionpay International is very widely used
across Asia, and a cellphone can be used for payment. The Mir
payment card may well expand in Eurasia as well as other 'friendly'
in South America and the Middle East.
Turkey has enabled the use of MIR cards, and as a result, is one of
the few overseas destinations that Russian tourists can visit.
Turkey's move illustrates the economic advantage of refusing to be
forced by the West into going along with their economic blockade on
Russia. They have the best of both words, where VISA, Mastercard and
MIR card are accepted, and therefore profit from a wider
tourist-customer base. Not so for other european countries on the
Mediterranean. Greece loses out, Italy loses out (Cyprus accepts MIR
cards, but has signed up to 'sanctions').
In mid September 2022 the Americans made thinly
veiled threats that any country that joins direct
nation-to-nation payment with MIR cards may be 'sanctioned'. Several
Turkish banks crumbled,
as did banks in Uzbekistan, Vietnam and Khazakstan, and then
November kyrgyzstan crumbled.
"Last week, the US Treasury's Office of Foreign Assets
Control (OFAC) announced that it was ready to impose sanctions on
any institution outside Russia using the country’s [MIR] payment
system. Later, sources told the Financial Times of the US and EU’s
intention of putting pressure on Turkish banks...Turkey’s Isbank
and Denizbank announced on Monday that they have halted the use of
Russia’s Mir payment system following a warning from Washington
that financial institutions risk secondary sanctions if they help
Moscow bypass US penalties...[MIR cards] are currently accepted in
Turkey, Vietnam, Armenia, South Korea, Uzbekistan, Belarus,
Kazakhstan, Kyrgyzstan, Tajikistan, South Ossetia, and Abkhazia"
"Cutting off Mir is one of the best ways to protect a bank from
the sanctions risk that comes from doing business with Russia. We
expect more banks to cut off Mir because they don’t want to risk
being on the wrong side of the coalition’s sanctions"
Anonymous USA government official as quoted by US government
MIR card payments are nothing to do with the Americans or the
Western financial system, they touch no American or other Western
banks, so this is, in principle, a crude threat to anyone buying or
selling anything to Russia - starting with MIR card payments.
Probably later by any money transfer system. Possibly, American
arrogance combined with overconfidence in the potential of their
'punitive' power, disabling their ability to think rationally. We
"As for SWIFT, for many years, as I said, when the
nature of our Western partners, who are entirely unreliable,
became more and more obvious and known, we started developing
national payment systems. In Russia, the Central Bank several
years ago established a system of communication of financial
information. India has a similar system which is called RuPay. And
it is absolutely clear that more and more transactions would be
done through these systems using national currencies, bypassing
the dollar, euro and other currencies, which proved totally
As for a replacement for the SWIFT system, that seems more
problematic. Russia is still a member of SWIFT. Nevertheless, the
SWIFT organisation has blocked Russian banks from access. Not all
Russian banks are blocked from SWIFT - those dealing in energy have
been allowed continuing access. I suspect that, in time, Russia will
regain full access. But SWIFT is obviously untrustworthy.
Alternative systems are being found.
Foreign Minister Sergey Lavrov, 1 April 2022
Russia's SPFS messaging system
Russia has an analogue of SWIFT called the 'System for Transfer of
Financial Messages' SPFS.The Russian
Central Bank set this up in 2014 when the first sanctions were
By the end of 2020, 23 foreign banks connected to the SPFS. The
countries involved were Armenia, Belarus, Germany, Kazakhstan,
Kyrgyzstan and Switzerland. By late April 2022, 52
'foreign organisations' across 12 countries were connected to the
In March 2022, India came on board, setting up a system to transfer
the ruble via the SPFS. It would be operated between the Reserve
Bank of India and Russia's Vnesheconombank.
Direct Bank to Bank payment
"In order to mitigate sanctions risks to trade and
economic cooperation between Russia and Latin America, we are
consistently working to introduce alternative financial mechanisms
to Western ones, and that includes [...] direct
correspondent relations between banks. We are also taking a
number of other steps towards this goal"
Foreign Ministry Spokeswoman Maria Zakharov, June
There is nothing difficult about this. Two banks open corresponding
accounts with each other, and notify each other when money needs to
be transferred out of the accounts. Notification could simply be
done by email.
In July 2022 the Iranian Central Bank confirmed that Iran and Russia
have signed a memorandum on interbank cooperation.
Russia's system to guarantee payment for goods
The money that Western countries 'paid' for Russian gas and oil was
frozen by the West inside the Western banks. The payment is 'there',
but can't be forwarded. I am guessing that the West's sanctions were
likely timed to monthly payment dates for gas contracts. In any
event, so far the West is enjoying 'free' gas from Russia.
Russia requires payment for gas to be made only after a
Russian domiciled bank has acted as agent for the purchaser. The
purchaser has to open two accounts with the Russian 'agent' bank.
Dollars or euros or whatever are placed in their agent-bank account,
with instructions to the agent-bank to sell the required sum on the
Moscow currency exchange for rubles. The agent-bank sells the
currency as instructed, and credits the rubles to the purchasers
ruble account in Russia. The purchaser then instructs the agent-bank
to transfer the required amount to the bank account of the Russian
company supplying the gas. This move removes all risk of money being
frozen in foreign bank accounts. It removes almost all involvement
of Western banks in foreigners payments for Russian exports.
The scheme only applies to gas at the moment (early June 2022), but
in principal it could be applied to all Russian exports to
unfriendly countries. But could it work for goods that Russia
imports? There is no necessity for that for friendly countries, of
course. Russia imports mainly from Belarus and China - friendly
countries - and Germany, which is an unfriendly country. Given the
unreliability of Germany, it is fair to assume that Russia would
rather not import anything at all from that country. Therefore, any
imports from Germany are, by definition, necessary. The power is in
Germany's hands. So Russia will have to take the risk of paying for
goods and not receiving them.
India's United Payment Interface
Besides being a trading nation, India has a large population of
expats working in the Middle East and beyond. There are 3.4 million
Indians diaspora working in the UAE. and they remit $15 billion back
home every year. India is negotiating with UAE to link India's
instant payment platform, the 'United Payment Interface' to UAE
systems to provide very quick and cheap currency remittances.
These instant peer to peer systems are likely to spread in the
future in the Asia and Southeast Asia. They are immune to US and EU
interference. Logically, similar systems will eventually emerge in
Mexico, Central and South America, and Africa.
A word about 'clearinghouses'
"We have several international depository locations. At Russian
brokers, they keep securities in our settlement depository. Our
settlement depository is already in international
depositories...As for European stocks, settlements in euros are
difficult now. European banks have tough restrictions on
transactions in euros, so this is now temporarily suspended...The
opportunities for transactions on the accounts of Russian
companies in Euroclear are limited, so, when you sell something,
these securities need to be transferred to other depositories.
These transactions are temporarily not being carried out. "
Roman Goryunov, head of SPB Exchange, March 25
Clearinghouse act as a kind of 'trusted referee' standing between a
buyer and seller. They make sure buyers funds are released to the
seller. They hold
securities such as bonds on behalf of the purchaser, and are
trusted to transfer ownership in those instruments when they are
sold. An important function is to receive interest on bonds, and
forward it to the investor. Naturally, banks, including Russian
banks, have accounts at the major clearinghouses, and in the case of
European and American clearing houses, those accounts are now
blocked, as they won't accept rubles in settlement for anything,
including interest payment. Russia has several clearinghouses of its
own, dealing in Russian issued bonds, among other securities. The
Moscow Exchange runs Russia's largest clearinghouse.
Russian digital ruble and the blockchain
“We are now testing the digital ruble with fifteen
banks, this is really a test mode on how to open wallets on the
digital ruble platform, how to make transfers between customers,
how to pay for goods and services, including via QR codes..it is
very important for us that there is trust in this new form of
digital ruble, all cybersecurity issues have been resolved so that
it is seamless, convenient for people and comfortable.”
Central Bank of Russia Governor Elvira Nabiullina 16
Russia's Central Bank is developing 'the digital ruble' for use
domestically while sanctions are in place. It's not clear what part
a digital ruble might play. But it is discussed in the context of
"in conditions of sanctions". It implies it might be a means of
creating money outside the commercial banking system, for emergency
use. This is my speculation, but it would make sense. It would, I
guess be used to settle contract payments and the like. According to
the head of the Central Bank, eventually it might be used across
Blockchains will be used to transfer funds in payment for goods. The
Chairman of the State Duma Committee on the Financial Market
announced in March 2022 that work would commence on using
blockchains and a digital ruble and digital yuan within an
integrated China - Russia messaging system.
China already has a well developed cross-border message system.
Plugging Russia into it is a no-brainer. Means will be found. It is
a Western conceit that Russia could not invent a replacement for a
conceptually simple messaging system. A country that excels in
applied physics. Russia put the first human in space, built and
deployed the first unstoppable hypersonic missiles, and yet it is
incapable of creating a software program that shares messages
regarding bank account transactions? Really?
Cross-Border Interbank Payment System (CIPS)
China's CIPS only came into being in 2015. It allows to
participating banks to clear cross-border yuan transactions directly
with each other. As of january 2022 January, around 1,280 financial
institutions in 103 countries or regions are members. So far direct
bank to bank transfers are fairly regional - Japan, Russia, Laos,
and Africa. The CIPS can be used with banks in other countries, but
part of the messaging still has to go through SWIFT.
The yuan (renminbi) is not a freely floating international currency
(it is pegged to the US dollar), and is subject to capital controls
by the Chinese government. This means it cannot be a reserve
currency (I am sure the Chinese don't mind). While China exports to
a huge numbers of countries, the yuan is only used for 3.2% of
global payments (according to SWIFT's renmimbi tracker), whereas the
dollar, at the moment regarded as the only reserve currency, is very
widely used - about 40% of global payments. The euro is not far
behind, at 36.5%.
Trade using CIPS is increasing, and I suspect China's system will
become more widely used in bilateral 'China to import-country'
trade. Saudi Arabia, for example has expressed interest in taking
yuan in payment for the oil it sells to China. In 2021 China
exported $2.43 billion of goods and services to Saudi Arabia and
imported $5.8 billion from Saudi Arabia (mainly oil). It would be in
both countries interests to to settle at least half of Saudi oil
exports to China using yuan. This is bilateral trade - and within a
large and enduring trading partnership. CIPS is well suited to
bilateral trade, so for precautionary reasons, Saudi may start using
it to some extent.
It seems to me that CIPS will be increasingly used in bilateral
trade where it is mutually advantageous. And the Russia-China
bilateral trade dynamic is increasingly mutually advantageous. Will
CIPS become an 'all singing, all dancing' messaging application that
also tracks users money flows and so forth (as SWIFT does)? I doubt
it. It may simply become one of multiple bilateral interbank systems
in the world.
The continuous linked settlement initiative
In essence this is a 'central'
clearing bank where members place money on deposit with the
bank and transactions between member banks (usually very large
trading banks) are instantly executed. The idea is said to be to
eliminate time lag risk when clearing funds across several
time zones. It is said to be fully compatible with Swift 'at
the front end'. As the members include US and EU banks it is useless
as an independent, unsanctionable settlement system for truly
“The key driver for the growth of bilateral trade and
investment is the increase of demand for commodities and
investment assets, unfortunately, China’s demand for Russian goods
and assets stays quite weak. The only Russian commodity China is
really interested in is oil, but there is no reason to expect a
sharp increase in supply. China is not interested in the ruble, so
de facto, payments can only be performed in yuan.
On the other hand, considering the fact that yuan is not a freely
convertible currency, Russia can only use it in transactions with
Carnegie Endowment for International Peace April
Long term, currency swaps might be needed by businesses in China and
Russia as the ruble is becoming a very stable currency and mutual
trade is increasing. A UUSD 24.5 billion currency swap between the
People's Bank of China and the Central Bank of Russia was tried
in 2014, but the volatility of the ruble and the trade
imbalance made it of limited use. A further swap line was opened
in 2020. Bilateral trade between Russia and China surged by
36% in 2021. However, it is unclear just how much it is used. In
late 2020, about 83% of
Russia-China bilateral trade was denominated in euros. This will, I
believe incrementally change.
The volume of Chinese goods being imported into Russia is
increasing. Russian energy exports are re-orienting away from Europe
to the East, and especially to China. These trends are political as
well as economic forces. They are unlikely to reverse, especially
considering the sunk costs in pipelines and rail infrastructure, not
to forget China's energy dependency and Russia's market dependency.
Russia and China have instituted direct payment in respective
national currencies, which can encounter imbalances in the flow of
currencies (where the availability of one of the partner countries
currency is at a temporary low point in the bank reserve system.) As
a result, on 19
January 2023, the Bank of Russia launched a Ruble/Yuan
currency swap arrangement to tide over the temporary mismatch. And
by the way, this mechanism is in line with Russia's
financial stability policy.
"On 19 January 2023, the Bank of Russia
launches a new standing facility to provide
yuan — overnight CNY/RUB sell/ buy FX swaps with
the settlements of the first and second legs
to take place on the transaction date
and the next business day,
respectively...The new instrument is intended
to limit the volatility of money market rates
in the event of temporary imbalances.
The daily maximum limit for this instrument will
be ten billion yuan with an effect from
19 January 2023. The Bank of Russia will adjust
the limit, if necessary...The transactions will
be made in on-exchange trading of the Moscow
Exchange as open-trading transactions.
The swap points will be calculated using O/N SHIBOR
(Overnight Shanghai Interbank Offered Rate) plus 2.5 percentage
points as the interest rate for yuan,
and the Bank of Russia key rate minus
1 percentage point as that for rubles."
Bank of Russia press release 17
Bank to Bank Loans
China invests in large strategic projects in Russia using the yuan.
Although the messaging system is unknown, it is not really
important. The money flows. And from China's point of view, using
yuan for 'big money' deals reduces the risk of US interference. In
addition, big deals with 'highly sanctionable' Russian businesses,
such as the strategic Novatek Yamal LNG project, are made to happen
with very high level support in both countries.
Alternative monetary system
The second 'loop', an alternative monetary system, is perhaps mainly
to do with Central Banks supporting each other in conditions of an
'external shock' In the current monetary system, this function is
carried out by the Bank for International Settlements. (see 'Special
Drawing Rights', above.)
A common Eurasian market
There is a big difference between trading 'blocks' where rules are
harmonized to make cross border trade easier, and agreeing on
currency relative values. There is already an organisation for
Eurasian cooperation in harmonizing trade, in the Eurasian Economic
Union (EAEU), an organisastion born out of the Soviet era Comcon
The Soviet Union headed a trading system (The Council for Mutual
Economic Assistance) amongst the countries of the 'Eastern bloc' and
some of the other socialist states (Cuba and Vietnam) of the time. A
number of states from South East Asia, Africa, Latin America and the
Middle East had observer status. Notably, China had observer status,
but left in 1961. There were 10 different currencies in use in Comecon. The
Comecon trade group created a parallel boc to Europe's Organisation
for European Economic Co-operation (OEEC) which was
Europes trade bloc .
Both blocs, Comecon and OEEC, aimed to ease trade within member
countries. Comecon had numerous controls on currency flows. In
difference the OECD rules promotes freely convertible currencies and
'market economies' - that is, without state control of the market.
Control and 'influence' are different. There are no capital controls
in the market economies of the West - except where it comes to
Russia, Belarus, Iran, Venezuela etc.
The levers of influence are interest rates, influenced by Central
Bank interest rates, Central Bank purchase of government debt (debt
financing), and supporting banking business by buying bad bank debt.
USA uses both influences constantly.
EAEU countries do have capital controls. Russia, for example, used
them at the time of the first economic attack by the West.
The EAEU aims to "ensure maximum freedom
for the movement of goods, services, capital
and labour in order to form a truly full-fledged
and steady common market". It is open to free trade agreements
with anyone willing to harmonise trade rules.
Pulling together a trading group with harmonised rules and that
satisfies everyone is a huge ask - especially in countries where
there are high levels of corruption, such as former Soviet Union
countries. I suspect it will be like rounding up cats.
hyper-Eurasian open common market
"In 2013, the year before the new Maidan protests and
the coup, when Ukraine was bent on signing an Association
Agreement with the EU, the Ukrainian leadership headed by the
then President Viktor Yanukovich condescendingly informed us
about the gist of the matter at the November 2013 CIS summit, in
reply to our numerous requests. Before that they never told us
anything, although Ukraine was part of the CIS and its free
At that point, we took a look and said: dear friends, you know,
your commitments under the CIS free trade zone and our
commitments imply zero mutual tariffs for the overwhelming
majority of goods.
After 18-year talks with the EU on Russia’s accession to the
WTO, we obtained substantial 15-20 percent protectionist tariffs
for a rather long period and in many areas, including the
banking sector, insurance and agriculture. These tariffs were
stipulated for a preset period, and they still existed at that
Dear Ukrainian friends, you are stipulating zero tariffs with
the EU, just like in your relations with Russia. This will breed
economic anarchy, with European goods flowing freely to Russia
via Ukrainian customs territory. If you are willing to do this,
we will be forced to charge protective tariffs on the
Russian-Ukrainian border. We suggested promptly holding
trilateral talks that would involve Russia, Ukraine and the
European Commission. Jose Manuel Barroso, the then Head of the
European Commission, said this was none of our business, and
that they did not meddle in our trade relations with China or
Canada. This is what was said."
Foreign Minister Sergey Lavrov’s interview with RBC TV channel,
Moscow 16 March 2022
"The successful performance of the Eurasian Economic Union, the
fast growth of the authority and prestige of the Shanghai
Cooperation Organisation, the large-scale One Belt, One Road
initiatives, plans for multilateral cooperation in building the
North-South transport corridor and many other projects, are
the beginning of a new era, new stage in the development of
...Europe, the Western extremity of the
Greater Eurasia could also become its natural part. But many
of its leaders are hampered by the conviction that the
Europeans are superior to others, that it is
beneath them to take part as equals in undertakings with others.
This arrogance prevents them from seeing
that they have themselves become a foreign periphery
and actually turned into vassals..."
Vladimir Putin 27
Today's members of the Eurasian Economic Union (Russia and
Kazakhstan are the heavyweights), in conjunction with India,
Pakistan, many of the Central Asian countries, probably Brazil, Iran
and some Middle East, countries might ultimately form a single
hyper-Eurasian "common market" using agreed upon harmonised rules
and payment systems. As this trade union bring in more South
America, and Middle East countries it will not really be just a
China is in the Shanghai Cooperation Organization (SCO), and has a
free trade agreement with the EAEU, so it doesn't need to become an
EAEU member. Iran is expected to join the SCO later 2022, thus also
plugging into the EAEU. I doubt the EAEU will exclude anyone,
including 'friendly' Western countries (with a few exceptions,
Western countries will come to their senses in a process that
similar to how Ernest Hemingway described it "gradually, then
suddenly"). I don't know where all this is going - who buys into
what. However it shakes out, I am fairly certain the EAEU will not
be able to be intimidated or subverted by anyone.
On the other hand, even if these countries don't formally enter the
EAEU, there can be large degrees of bilateral and multilateral trade
harmonisation and facilitation amongst many different regional
organisations. Such a web of agreements between regional
organisations would form a sort of 'EAEU lite'. There would be many
advantages to a more informal web over one umbrella body. The
biggest advantage is great flexibility, with harmonisation
'personalised' to the differing political, geographic, and economic
situation in each country. The EAEU may simply be one regional
organisation among many within a network of friendly country trade.
The biggest disadvantage would be the need for endless talks and
meetings within the large numbers of countries and organisations
involved. Maybe this is not a bad thing - after all, increased
respectful contacts helps countries understand each others economic
and other interests.
"Recently, the EAEU member states have made
significant progress in unifying regulations governing retail
trade in goods. A process for harmonising
national consumer protection regulations has been launched,
and general principles and approaches
to ensuring food security have been approved.
A resolution on starting the second phase
of forming common EAEU markets for oil
and petroleum products was submitted for our
Our proposal is that acting within the EAEU we should
start unifying carbon reporting standards, implement
mutually beneficial climate projects, and jointly create our
own technologies based on the use of carbon-free
energy sources including, of course, nuclear energy
A flexible system of relations between the EAEU and other
states, as well as integration entities such as the SCO
or ASEAN, is being effectively implemented in practice.
In July, a free trade agreement with Serbia came into
force, and similar agreements are being negotiated with Egypt and
Iran. Talks with India have been given the green light. Research
groups are studying the feasibility of creating free trade areas
with Indonesia and Mongolia.
All of that is very useful from the point of view of the potential
expansion of Eurasian integration and the implementation of the
initiative to create a Greater Eurasian Partnership."
- Vladimir Putin October 14, 2021
"I would like to note again that we have every
opportunity to build up practical cooperation between
the BRICS countries and its partners,
the countries represented here...
is equally important for BRICS to expand cooperation
with regional associations like ASEAN,
the African Union, the Association of Caribbean
States, the Gulf Cooperation Council
and the Indian Ocean Rim Association.
serious potential is opening up for cooperation between our
states in the context of working
in the integration processes between
the Eurasian Economic Union and China’s huge One
Belt One Road infrastructure and trade project.
we are convinced that many serious problems
on the global agenda can and must be resolved
only by pooling efforts"
- Vladimir Putin June
'ADMITTING that the Interim Agreement leading
to formation of a free trade area between the EAEU and its
Member States, of the one part, and the Islamic Republic of
Iran, of the other part (hereinafter referred to as “the
Agreement”) will become a first step towards further trade and
economic integration between the EAEU and its Member States
and the I.R. Iran;
SETTING the goal to form a full-scale free trade area
between the EAEU and its Member States and the I.R. Iran as a core
EMPHASIZING the need for further promotion of mutual
relations between the Parties on the basis of mutual trust,
transparency and trade facilitation;
EXPRESSING their support to the earliest accession to
the World Trade Organization and recognizing that World Trade
Organization’s membership of the EAEU and its Member State (that
is not yet World Trade Organization’s member) and of the I.R.
Iran will create favourable conditions for the deepening of
their integration into the multilateral trading system and
will enhance cooperation between the Parties to this Agreement...'
Interim Agreement leading to a free trade agreement between the
Eurasian Economic Union and Member States and the Islamic Republic
of Iran. May
We can see from the above that Russia is promoting exactly such a
flexible grouping of trading bloc of 'friendly countries' that have
their own trade rules for trade within this 'trade loop'.
'Sanctioned' countries (Russia, Iran, Venezuela, Cuba, Syria) can
trade freely within this bloc, but have either no trade, or limited
trade in the West's bloc. It is closed to them. But friendly
countries can trade in both 'blocs' (or loops, or systems, call it
what you want). So the West's trading system excludes some countries
for ideological and political reasons, and in contrast, the EAEU
plus other friendly countries doesn't exclude anyone. It is correct
to say the West runs a closed system, and the majority of the world
is working towards an open system, including membership of the World
Various Russian Statements clearly show that the open system will
have the common features that lubricate trade, whether in the West's
closed system, or in the emerging global open system and protected
by the rules of the World Trade Organisation (should the day come
when USA stops jamming it). Bear in mind that all the 'friendly'
countries in the world will use both systems, depending on where
they are shipping their goods to, or importing from. In fact, in
some cases, they could chose the trade rules of the system that
gives them the greatest advantage. Countries with Western-imposed
trade restrictions, of course can't do this.
Some of the lubricants to trade mentioned by Russian officials are:
Unified carbon reporting standards. This will be 'big'.
Russia will take forests into account in nett carbon and carbon tax
calculations, other countries won't. The West will regard natural
gas stripped of carbon as 'not green enough', other countries will
fully accept it as carbon neutral. These are just two examples.
Harmonised consumer regulations. These will probably be
written as an antidote to non-trade barriers. Generally, they tend
to go in the direction of weaker regulation and lower standards.
This may be a price that less developed countries are willing to
live with. We will have to wait for how this turns out.
Principles of food security. Russia has already said it will
prioritise less well developed countries for fertiliser exports. I
guess this is aimed at helping African countries, in
particular. Presumably there will be measures to ensure the
open trade bloc can obtain preferential grain security, but at the
same time prevent middlemen from trading open-trade country grain
being sold into the closed-trade bloc.
Common markets for energy products. This would open free
flow of these products with the open trade countries, possibly using
national currencies bilaterally in some trade-pairs. But once again
it might prevent the on-sale of energy products to the closed-trade
countries at time of energy scarcity. Members of Hyper-Eurasia may
negotiate long term stably-priced contract gas arrangements,
somewhat like OPEC, but gas, not oil, and with nett import customers
included, as well as nett exporters. An important future 'energy
product' will be hydrogen. Joint 'common market' contracts for this
would be a natural fit. In principle, the same could apply to nett
electric energy exporters, whether excess nuclear electricity from
Russian nuclear plants, or excess electricity from Saudi solar
The large oil trading companies that acted as middlemen between
Russian oil and oil product producers and importers were based in
Switzerland. But now that Switzerland has abandoned its neutral
status and applied trade restrictions on Russia, the big commodity
traders are looking for a base in a friendly country, unshackled by
the West. As at mid June 2022, that base is looking like it may be
the United Arab Emirates. Gazprom, Rosneft and Lukoil look like they
move, not only for the open trading environment, but also for
low taxes, proximity to Middle-east oil markets, and UAE's
business-favorable free trade zones. Whether this morphs into a
common market for oil products is a different question - but the
potential is there.
Flexible relations. Again,
belonging to the open-trade expanded EAEU system in no way prevents
countries from trading in the closed Western system. The same
principle applies to the economic cooperation organisations. You
don't have to leave ASEAN to participate in the
SCO. (ASEAN is comprised of Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, the Philippines, Singapore, Thailand and
Vietnam). ASEAN and the regulatory body of the EAEU, the 'Eurasian
Economic Commission' (EEC), signed a memorandum
on economic cooperation back in 2018, but it is based on mutual
agreement and cooperation and is open ended and not prescriptive. It
is not an International Treaty. The key here is cooperation, but
only to the extent it meets each countries unique interests - as they
see them. It might mean compromise, it might not. Agreement may be
reached on some elements of trade, but agreement on other areas may
simply be impossible. And that's fine. Coercion has no place.
know the sentiment of many of our friends in Asia, and they
do not want to join any blocs against anyone. They
want to create a network of cooperation in various
areas, as I said today, in order to, move forward together
taking into account each other's interests and seeking and
finding compromises. They do not want to be involved in
confrontation between any states, and even more so they do not
want to be part of any blocs..."
- Vladimir Putin 3
"We will rely on our Vietnamese friends as well as all other
ASEAN states to further promote this mutually beneficial
cooperation....As one possibility of this kind, let me mention
the fact that Vietnam was the first ASEAN country to sign a
free-trade agreement with the Eurasian Economic Union (EAEU).
Following in Vietnam’s footsteps, some other ASEAN countries,
including Singapore, started relevant negotiations. ASEAN as a
whole...is keen on exploring the possibility of launching a
dialogue on trade liberalisation with the EAEU.
- Sergey Lavrov 17
India's External Affairs Minister, S. Jaishankar, addressed an
event on 3 June 2022. While speaking on the US-led
axis and China-led axis as another potential axis in the world,
he said, "This is the construct you are trying to impose on
India. I don't think it is necessary for India to join any
axis. India is entitled to make its own choices which will
be a balance of its values and interests"
ThePrint 3 June 2022
like to note again that we have every opportunity
to build up practical cooperation between
the BRICS countries and its partners,
the countries represented here......It is equally
important for BRICS to expand cooperation with
regional associations like ASEAN, the African Union,
the Association of Caribbean States, the Gulf
Cooperation Council and the Indian Ocean Rim
Vladimir Putin June
Free trade. The open-trade system cuts across large numbers
of economies, with all sorts of views on trade. Sometimes bilateral
or multilateral trade agreements between countries benefits all
parties. The open system is flexible - it doesn't restrict these
arrangements at all. The only requirement, I suspect, will be that
goods imported into a country via a highly beneficial bilateral
trade agreement not be re-exported to a third country to the
detriment of the third countries producers of that good.
Reduced tariffs. Where tariffs exist as an interim measure to
protect viability of local industries, they are often reduced
heavily, generally as a transition measure. For example, the interim
free trade agreement between the EAEU (signed 2018, effective
October 27, 2019) and Iran, the EAEU has agreed on tariff reductions
on Iranian fruit and vegetable ranging from 25% to 50%, and some
some fruit (such as oranges) the tariffs are removed entirely.
The challenge of harmonizing trade in the hyper-Eurasian
All countries seek to maximise their advantage in trade. It is
difficult even to draw up an agreement to harmonise trade between
two countries that have long-standing and important trade between
each other. Adding more and more countries to negotiations on an
agreement and the chances of failure increase. And yet bilateral and
multilateral trade agreements are the trends of the time, especially
as the World Trade Organisation has been sabotaged by America. Both
Russia and China support reform of the World Trade Organisation, and
seem to still regard it as an important instrument. I don't think
so-called 'sanctions' would be possible under its rules.
11. "We reaffirm our support for an open,
transparent, inclusive, non-discriminatory and rules-based
multilateral trading system, as embodied
in the World Trade Organization(WTO). We will engage
constructively to pursue the necessary WTO reform
to build an open world economy that supports trade
and development, preserve the pre-eminent role
of the WTO for setting global trade rules
and governance, supporting inclusive development
and promoting the rights and interests of its
members, including developing members and LDCs.
We recognize that special and differential treatment
as established in WTO rules is a tool
to facilitate the achievement of WTO objectives
with respect to economic growth and development.
We call upon all WTO members to avoid unilateral
and protectionist measures that run counter
to the spirit and rules of the WTO.
We emphasize the top priority and urgency
of launching the selection process
of the Appellate Body members to restore
the binding two-tier multilateral dispute settlement
mechanism. We agree that the Appellate Body crisis
should be resolved without further delay and should not be
linked with other issues.
We endorse BRICS Statement on Strengthening
the Multilateral Trading System and Reforming
14th BRICS Summit Beijing Declaration, 23
Trade agreements and harmonisation of trade rules can be done very
quickly where both partners are willing. On May
1 2022 a trade agreement between the United Arab Emirates and
India came into force. It took only 88 days to develop, which must
be a record for trade agreements. In contrast, India's attempt to
reach a trade
agreement with the EU started in 2007, dragged on for 6 years
before finally being abandoned in 2013, and have only re-started in
The agreement between India and the UAE, the Comprehensive Economic
Partnership Agreement (CEPA), will reduce tariffs, remove trade
barriers, boost mutual investment, streamline Customs procedures,
reduce or eliminate Customs duty, establish norms for e-commerce and
the trade in services, and harmonise rules on certifying origin of
traded goods, amongst other mutual benefits. The agreement also
includes the provision for bilateral trade using the rupee and the
dirham. In the period 2020 - 2021 bilateral trade between India and
UAE was about $43 billion. Trade between the countries continues to
increase (The UAE is India’s third-largest
trading partner. UAE's largest trade partner is US and China
is second largest.)
One of the reasons it increases is because the UAE is a trade hub,
importing goods from one country and re-exporting
to another, including Russia. The UAE acts variously as
merchant importing goods for re-sale, agent forwarding goods to the
end-buyer, or trader buying in-demand goods for steady customers.
With customers and clients in the Middle East, Africa, South East
Asia and Eurasia, and the ability to use many different currencies
in trade (as well as gold), it is ideally place to facilitate trade
with Russia. This trade is in the open trade system, and using the
UAE dirham (in conjunction with the renminbi, rupee,etc) means trade
never interacts with the West's closed system. It is a clear example
of the shape of things to come. But systematic change takes time.
As at June 2022, the Russian Government is working hard to discuss
and formulate the large number of changes necessary to bring the
open trading system into being.
"The President of Russia is holding several meetings
every day concerning the adaptation of the economic, social,
banking and financial sphere to the realities that are now
emerging as a result of the West’s aggressive and egotistical
...all countries experiencing the negative influence of
the egotistical policies of the United States and its satellites
have an objective need to "reconfigure" their economic ties in
such a way as not to depend on the whims and vagaries of our
All these issues are on the daily agenda of Russian President
Vladimir Putin’s work. The 25th St Petersburg International
Economic Forum, which ended last week, was largely devoted to
Sergei Lavrov 22
A Trading Currency
The idea of a 'trading currency' used solely in trade between
certain groups of countries emerged in early 2023. A proposed
pan-Latin American currency, the ‘Sur’, would replace the US dollar
in trade settlements, presumably within Latin America.
Brazilian President da Silva & Argentine President Fernandez are
in a dialogue "a common South American currency" for both trade and
financial interrelations. The immediate exploration of ideas is on
how to develop an agreed and shared unit of value for bilateral
trade to reduce reliance on the U.S. dollar. This is a bilateral
project, but once in place, would be offered to other Latin American
countries. Argentina defaulted on its debt in 2020, and not only can
it no longer access debt-market credit (unsurprisingly), it still
owes over $40bn to the IMF from a bailout in 2018. There is robustly
growing trade between Argentina and Brazil (over $26.4 billion in
2022) which would seem to justify someone extending regional banks
credit for bilateral export trade, specifically. It would be harder
to justify extending to other Lation American countries, let alone
regional groups such as BRICS. But bilateral parity trade using an
agreed 'unit of account' might work. This train is mostly whistle,
and no engine.
January 25 2023 Oleg Ozerov, ambassador at large of the
Russian Ministry of Foreign Affairs and head of the Secretariat of
the Russia-Africa Partnership Forum, mentioned the "the currency
that is being discussed in BRICS". This trading currency, if it ever
comes into existence, is a long way off, according to Mr Ozerov, who
noted that "The creation of a common currency for BRICS is a
long-term project that will probably not be implemented
"The BRICS countries have proposed the idea of creating
a common monetary unit. The reason for this is simple: we cannot
rely on the mechanisms that are operated by those who can deceive
you at any moment, going back on their obligations for attaining
short-term political goals, both in foreign policy and in domestic
Sergey Lavrov, 23
"Serious countries that have respect for themselves are well aware
of what is at stake and clearly see the inability of the “owners”
of the current international monetary and financial system to
negotiate and want to create their own mechanisms for ensuring
sustainable development that is protected against outside dictate.
The initiatives that have been voiced recently, literally just the
other day, focus on the need to think about creating separate
currencies within BRICS and the countries of Latin America and
Without a doubt, this issue will be discussed at the BRICS summit
to be held in South
Africa in late August 2023. A
group of African countries, including President of Angola Joao
Lourenco, are invited to take part in this"
Sergey Lavrov 25
Foreign Minister Lavrov supposedly suggested 2023 for the launch of
a gold-backed BRICS currency for use in trade settlements (only). Mr
Ozerov, about the same date, remarked that Russia should promote
bilateral trade in local currencies, saying
"We need to work with more conviction on the use of the ruble [...]
and consider the rand, which is the national currency not only of
South Africa, but of all the countries of the Southern African
Bilateral trade using domestic and friendly nation currencies
the UAE, whose currency is pegged to the US dollar, and India, which
uses a basket of currencies to value the rupee, signed a currency
swap agreement. This allows both countries to pay directly with
their own currencies (the dirham and the rupee) when buying goods
and services from each other. In 2022 India and the UAE agreed to
use rupee and dirham in bilateral trade.
In July 2022 the Reserve Bank of India undertook to facilitate trade
settlement in rupees (the RBI has large foreign exchange reserves to
facilitate trade and meet external shocks -$ 600 billion, held in
USD, euros, pounds, and gold). India has a 'managed'
floating exchange rate, where the RBI may intervene to prevent
the rupee from appreciating in value too much. India's long
term aim is to have the rupee included in the basket of
currencies used in setting international trade exchange rates. India
has significant and expanding trade in many countries in the
services sector and in pharmaceuticals, amongst other things, and
has a significant presence in foreign exchange markets. Bilateral
trade with Russia and with other countries (India pays for oil from
Iran in rupees) is also a defensive move that helps protect India
from any future 'sanctions' by the US, as well as easing the
downward pressure on the rupee due to India's import levels being
significantly higher than exports. It is possible that bilateral
trade will be restricted to parity (see below), which helps
stabilise currency values.
In June 2022, Russia sold oil to India, and agreed to accept rupees
and dirhams in payment. Both UAE and India hold stock in profitable
Russian oil companies, the UAE in West Siberia, India in East
Siberia. Bilateral currency arrangements make dividend payments
2020 Russia exported $2.59 Billion worth of goods to United
Arab Emirates. The major exports were Diamonds ($793 million),
Refined Petroleum ($463 million), and Coal Tar Oil ($317 million).
Russian exports to UAE increased at an annualized rate of 21.2% over
the last 24 years. In 2020 the UAE exported $561M of
various goods to Russia, mainly tobacco ($75.8M), Broadcasting
Equipment ($57.5 million), and Aircraft Parts ($39.8 million).
“In 2013, we formed a very good partnership with
Mubadala, the sovereign wealth fund of the UAE, and we jointly
invested in 45 businesses in Russia. Businesses are absolutely
critical for the growth of the Russian economy. Mubadala invested
at a critical time for the Russian economy but they got very good
returns, probably higher than from any other country.."
Kirill Dmitriev, CEO of the Russian sovereign wealth fund RDIF 15
The UAE Mubadala sovereign wealth fund has invested $3
billion in Russia, in the energy, banking, logistics, and
technology sectors, as well as in Russian real estate and
infrastructure. These investments are said to produce 'strong
financial returns'. Some of the returns may be paid out to the UAE
in dirhams and rupees ( although I have to wonder if some of the
dividend from the UAE's Russian oil investments might not be paid in
oil, rather than rubles, given the value of the Russian oil exported
to the UAE). The UAE has been an important tourist destination for
Russians, with 1.8 million visitors in 2018. Around 3,000
Russian businesses are located in UAE.
In June 2022 India's Ultra Tech Cement bought
$25 million of Russian coal, and paid for it in yuan. India has a
very large trade imbalance with China, so Yuan is a very useful
currency for India. A Singaporean currency trader commented
"This move is significant. I have never heard any Indian entity
paying in yuan for international trade in the last 25 years of my
career." Several Indian pharmaceutical companies have also signed
contracts to export to Russia using yuan as the payment currency.
According to the head of India's Roerich Healthcare, there is no
problem selling to Russia and receiving
payment in rupees, US dollars, or euros.
On July 17th 2022, Iran's Bank Melli and Russia's Sberbank signed
cooperation agreements aimed at facilitating trade. Then on the 19th
July, Iran's foreign currency exchange launched trading in the
ruble/rial currency pair. These were particularly important moves,
because Russia is investing tens of billions in helping Iran develop
the North Pars gas field plus ancillary LNG facilities, not to
mention develop 6 oil fields, and a $15 billion project to
re-pressurise south pars gas field. In addition, as of 18
October 2020, Iran is allowed to import conventional arms. We
can be sure that it will buy Russia's world-beating air defense
systems, such as the S-400. A very large amount of money will be
flowing between the two countries. Russia has said it will gradually
using the US dollar in trade between itself and Iran.
In early August 2022, Russia and Türkiye agreed that payment for
Russian gas would partially use rubles, as the first step in using
national currencies in bilateral trade. Inflation is very high in
Turkey, and the ruble will probably help to (to a small extent) to
stabilise the Turkish currency - as well as help conserve Türkiye's
supply of US dollars. Russians can use their Mir cards in Türkiye.
As 4.7 million Russians holidayed in Türkiye in 2021, this is quite
an inflow of rubles.
On the 19th of November 2022 Deputy Prime Minister Alexander Novak
said, in relation to trade with China :
"We are transferring to mutual settlements in national currencies in
both rubles and in yuan. As an example, gas supplies today between
Gazprom and China are conducted on a parity basis. Oil and petroleum
products are also transferring to national currencies..."
if this is an exchange of a defined quantity of goods and services
(balancing trade) could mean an agreed value of two components:
1. The currency - the market value of the yuan and the ruble at the
time of the parties signing a contract.
2. The price of the goods or services - the market price of the
goods or services being exchanged.
The first concept of parity involving exchange of goods and services
of equal value seems messy, as it involves 2 agreed valuations. The
ruble is traded on the Moscow Currency Exchange when countries buy
Russian oil and gas, and the ruble is also used in some Eurasian
countries. But both the ruble and the yuan have limited trade
internationally, making them harder to value. Perhaps that doesn't
matter that much. What does matter is that the respective currencies
are stable, and that bilateral trade is balanced.
If the exchange rate for these two currencies are recognised by the
trade partners as being realistic, and if bilateral trade is likely
to continue (and it is), then reserves of the partners currencies
can be held with limited risk of the reserves being devalued by
So, in principle, it shouldn't matter if 'parity' simply means
agreeing on a value for value number for the exchange rate, or if it
also means bilateral sale of a volume of goods of agreed equivalent
value. But including a parity requirement involving exchange rate
and goods 'up to the value of' does have limitations. What if you
want more of a partners goods (discounted Russian oil to China, for
example) when demand for that partners goods on your own market is
limited and of low value (cheap Chinese consumer goods to Russia)?
I suspect the answer is very particular 'trades' of great value to
both sides. In the case of Russia selling oil to China, the
reciprocal may not necessarily be physical goods, it may be valuable
services to the oil sector. Re-insurance of tankers carrying Russian
oil, for example. But trades would probably still not balance. A
further 'leveling" mechanism to reach parity may be needed.
Use of gold in parity trade
Any 'excess' demand by one partner over and above reciprocal trade
at parity could be paid for as 'normal', using a reserve currency
such as the euro or the dollar. While I am loath to use the 'G'
word, gold is a great value-conserving fly-wheel, and I feel
confident that all these nations would gladly accept payment in
physical gold. (Russia and China are both significant gold
producers, and there has long been speculation that the officially
announced reserves are eclipsed by further reserves that have not
Use of other trading currencies in parity trade
Other emerging 'trading currencies' may be preferred. If Middle East
interests (especially the UAE) provide funding for re-insurance of
oil tankers, then dirham will be in demand by Russia. China, India,
and the UAE are great trading nations. All manner of parts, raw
materials, and services from third countries could flow through
their hands and into Russia. An intermediary business would be
needed to turn the flow of miscellaneous goods from all around the
world into a single lump of cash to pay Gazprom or Rosneft.
Trading houses, backed by the oil and gas majors would be a natural
solution. Shipping services, banking and insurance often travel with
global trading houses. It seems to me that the US sanctions on
Russia may ultimately cause a strong stimulus to trade of all sizes
amongst independent countries. And Russia, China - and soon Turkiye
and Iran (amongst others) will be major beneficiaries.
Economic Partnership Agreement (CEPA)
India and the UAE'S
Comprehensive Economic Partnership Agreement (CEPA)
No EAEU currency
It does not mean, in my opinion, that there will be a centralised
EAEU authority deciding on the value of each countries currency,
based on all the factors mentioned above. It is more likely that
each EAEU member will work out out their own valuations in 'over the
counter' direct arrangements, or simply in open market trading on
their own currency exchanges, or on Russia's.
But as currencies intersect, the valuations of the larger and more
reliable currencies will probably act as de facto pegs.
Because many of these are probably bilateral arrangements, and
because these Eurasian currencies are thinly traded (except for the
yuan), there will be no foreign exchange trading, or rather,
speculation, affecting the price. Or at least the speculation will
be confined to local exchanges. Perhaps, as the EAEU countries have
capital flow controls, they will regulate speculation in their
Will there be
a new Reserve currency?
To launch a new reserve currency, it is necessary to
build a joint financial architecture, “increase the share of
settlements in national currencies, reach a certain level of
de-dollarization, something that is happening already in the
BRICS countries,” Nikita Kondratyev, of the Department of
Multilateral Economic Cooperation and Special Projects of the
Ministry of Economic Development, told RBC.
RT News 27
A reserve currency used by a group of countries because it is widely
accepted in trade is a possibility. But it won't 'belong' to any one
country (unlike the US dollar). There are many problems associated
with being the owner of a reserve currency, and one big advantage -
the country that prints the reserve currency is free to print vast
piles of it because it is in demand gloablly. If a reserve currency
is created by a group of countries, then this problem may not be so
severe. The difficulties will be in the details.
"The best protection against the rotting euro will be
the transition to new payment methods in trade with our reliable
partners, including through the use of national currencies - the
Russian ruble, the Chinese yuan, the Indian rupee, etc. In the
future, the creation of a new reserve currency of BRICS
countries is also possible. The dollar, euro and pound
sterling are clearly not enough for the modern world," Medvedev wrote
on his Telegram page on Tuesday, commenting on the parity reached between the euro and dollar
Dmitry Medvedev deputy chairman of Russia's Security Council 12
The Russian's seem to be confident a new reserve currency will
eventually emerge, but once again, it is hard to get an agreement
when relatively large numbers of countries are involved. But the
existence of the Bank of International Settlements (for example),
run by the major Western countries, shows that it is, at least in
Let's wait and see what (if anything) happens.
The problem of valuing
currencies in trade between nations
...the strengthening of the ruble is due to the fact that it is
now based purely on exports and imports, and its value is
determined by its purchasing power parity (PPP). The International
Monetary Fund (IMF) estimated the Russian currency’s PPP at the
end of 2021 at 29.127 rubles per one dollar. According to the Big
Mac Index, that rate stood at 23.24 rubles to the dollar.
Sergey Kopylov, Plekhanov Russian University of Economics 7
Future prospects for a Eurasian Economic Union - 'The Greater
The West has closed off a major european economy from the rest of
the EU region. It has attempted to destroy the value of Russia's
currency, while at the same time ignoring EU dependence on Russian
commodities. I cannot imagine that these sorts of self-defeating
impulsive moves will be allowed in a greater Eurasian trading
organisation like the EAEU. Unlike the OECD, there is no one to
dictate how states 'must' behave in relation to each other. States
in the EAEU can no doubt have fights with each and refuse to trade
and so forth, but it will not drag in the rest of the EAEU. This is
an important contrast.
In spite of its many shortcomings, the EAEU may become an attractive
proposal. The EAEU does not present an 'either with us or against
us' false dichotomy. Countries can join EAEU and still be OECD
members. Same with the increasingly important SCO, and perhaps
ASEAN. Vladimir Putin referes to this project to create a
pan-Eurasian (and beyond) economic trading area "the Greater
Eurasian Partnership". It is based on mutually beneficial trade,
without leaders and followers, without compulsion to choose to
belong to only one grouping.
And the same applies to the choice to either trade in national
currencies bilaterally, or trade in national currencies with gold,
the dollar or euro as an intermediary. One is not exclusive of the
other. (Except when sanctions exclude one of the choices, of
This false choice applies also to other countries. India, for
example, has an independent foreign
policy, (External Affairs Minister Jaishankar - youtube clip)
and won't be dragged into anyone else's self-made quagmire.
all together - one world, two systems
"...much of the Global South has sided with
Russia throughout the Ukraine war hopefully to speed up the
multipolar transition. Multipolar transition...means many things,
among which birth of new polarities, end of dollarocracy,
redistribution of power, and rise of a region-based and
Two trading zones with differing rules. Two currency valuation and
foreign exchange systems.
One system is not connected to the other. The other system, in
contrast, can use one or both, depending on circumstances.
One system is brittle. The other is flexible.
One system relies on constant expansion of government debt. In the
other system, Russia, at least, emits no debt beyond a percentage of
The currency in one system is linked only to 'faith'. Russia, and
(in future) perhaps other members of the adaptable system link
currency to hard assets of value.
Due to its mineral resources and grain production capacity, Russia
is uniquely able to run a sovereign currency that is indexed to the
value of these commodities. The fact that the central bank of Russia
has first call on the purchase of domestically produced gold means
that both the supply and value of the ruble can be regulated. The
fact that the ruble is relatively illiquid means that foreign
speculators cannot influence its value very much. Russia doesn't
import that much from the West. Import substitution by new domestic
producers, or from suppliers in friendly countries means Russia will
import fewer and fewer goods from the West. Therefore Western
commercial bank treasuries will only be able to hold limited ruble
reserves. They will have to come to Russia if they want more.
"With regard to the Iron Curtain, it is already on
its way down. They should make sure they don’t get anything
caught in it as it goes down.
In all other matters, we have a straightforward position: we are
for things being fair."
Sergey Lavrov 30
Just a joke, or a hint of things to come?
Friendly countries will likely export more goods to Russia, and have
better access to ruble reserves. If a Eurasian Monetary Fund is
created, friendly country currencies will gain some resilience, and
to the extent they are able and willing to copy some version of the
Russian fiscal discipline, their currency will not lose purchasing
power as rapidly as it once did.
Russia seems headed towards creating a very stable currency, with
low loss of purchasing power, but a currency that has only domestic
and regional practical use. And they are likely very happy about
Whether the West is happy about it or not is simply of no interest
These ideas may be flat wrong. It will be very interesting - and to
a greater or lesser degree consequential for all of us - to
see what changes emerge, and when. These changes, whatever they turn
out to be, will be relatively slow and incremental.
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