Beware the Ides of March

by Laurie Meadows
15 March 2022 2230 NZST (0930 UTC)
Revised and updated 25 September 2022 (0330 UTC)

Trade restrictions on Russia are a war of aggression    The US corners Russia     Sanctions don't work    Sanction are an arms control bargaining tool

The current financial system
   Changes in use of the Dollar in International Trade   The 2 loop international financial and monetary system     Dollar not backed by gold    The petroruble    Dollar backed by US resources    An axis of gold   hybrid ruble - internal vs external value     Clearinghouses     Digital ruble and blockchain contracts     Bilateral trade using domestic & friendly nation currencies    commodity swaps    Russia protects itself from external financial shocks    Special drawing rights    Russia's Reserve Assets     BRICS Contingent Reserve Arrangement

The Hyper-Eurasian common market     ASEAN    Will there be a new Reserve currency?  

Note: the first version was done in a bit of a rush in order to put it up on the actual Ides of March, 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 financial system".
The page has been extensively expanded, edited, and corrected since. Further revisions will appear as the situation and my thinking changes.

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, when the dollar may slip from it's current status of unipolar global reserve currency. Other trading currencies (yuan, ruble, rupee, for example) may rise alongside the dollar. A 'euro-like' trading currency may arise in Eurasia (and beyond), pegged or valued against 'baskets' of other currencies and commodities.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 currencies. These may or may not be intermediated by commercial banks.

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. A default, in other words.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 themselves.

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 world."

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 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.

Sell 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.

"Together, the three massive US multinational corporations ("Cargill", "DuPont" and "Monsanto") own over 17 million hectares of Ukraine's arable land.

In comparison, the whole of Italy has 16.7 million hectares of agricultural land.

In short, the three American corporations own more usable agricultural land in Ukraine than what the whole country of Italy has. The entire area of Ukraine is approximately 600,000 square km. Out of that land area, 170,000 square km have been acquired by foreign corporations, the vast majority Western, particularly those based in or financed by the US.

Since the new law on the sale of agricultural land passed by the Kiev regime entered into full force approximately one year ago, to this day, the three large multinational consortia financed with US capital have acquired well over a quarter of Ukrainian arable land. A report by the Australian National Review states that the three US corporations managed to acquire 17 out of the 62 million hectares of agricultural land in less than a year. This made it possible for them to control 28% of the total arable land in Ukraine."

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. In Russia's case, for example, the Government retains an ownership interest 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.

Even if the current 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 may 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.

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.

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 security).

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. It was an agreement for peace. Ukraine signed up to it.

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 missiles.

"I remember very well President Petr Poroshenko at these talks.

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 June 2022

By late February 2022 Ukraine was poised to attack the Russian-speaking breakaway republics with overwhelming force.

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 even bigger and more entrenched Ukranian-NATO armies. An army with US 'first strike' battlefield nuclear missiles.

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 work

“I must say this very clearly: The sanctions we have imposed so far don’t work. The best evidence is the ruble exchange rate”
 - 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.

However, 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 before?

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 peace.."
John F Kennedy 14 June 1960

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 moves."
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 system

What is the Bretton Woods System anyway? Here is a short outline.

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 system.

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"
- Barry Eichengreen (American economist)

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.

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 wane.

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 up.

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 borrowing policy.

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 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.

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 world

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 reliable currency.

Changes 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 dramatically."
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 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."
RT 24 July 2022

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.

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. 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.

The 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.

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 markets.

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 committees.

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 payment..."
Foreign Ministry Spokeswoman Maria Zakharov, June 8, 2022.

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 nothing.

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 different story.

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 fertiliser.

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.

The petroruble

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 domestic market.

Long term, I see the ruble as uniquely stable, but 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 currently discounted Russian oil with gold, 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, I don't see it as important.

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.

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. No central bank using gold as a floor under a given quantum of money is going to 'sell out' its 'good money'. 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. 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 the West. 

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 higher taxes, dramatically reduced government spending, or government control of money creation and means of emission (such as a digital currency).
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 gold-pegged currency.

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 gold prices.

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 more popular.

Gold as a 'floor' on currencies in the IAFS

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 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 (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 objectives.

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

The hybrid 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 yuan-denominated bonds.

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:

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 borders.

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, but historically this hasn't worked out that well.)

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 more).

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 well.

It is all very murky. How all this might work is somewhat mysterious. Once again, time will tell.

The long road ahead

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 Russia.

Protecting a financial system from 'external shocks'

'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...

...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 2022

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:

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 inside its own 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 budget.

5. Special Drawing Rights. These are available from the Bank of International Settlements.

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 an external 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 accounts

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 activity.'
'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 'friendly countries'.

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 natural resources 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), the government books will end up in the red.

The forex reserves fulfill two extremely important functions :

  1. 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.
  2. The ruble is a 'floating' currency whose value is determined by the foreign exchange market. The reserve assets are used to keep the value of the ruble remains relatively stable 'automatically' by selling rubles from taxation on windfall 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 limited to the ruble value of accumulated windfall tax from high export prices, and sales of foreign currency are limited to 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.

Russia’s 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 policy operations.

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."
BIS 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 said.

"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 June 2022

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. There will be a commensurately big price to pay, and the only question is how much?

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 this direction.

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

Special 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.

The 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.

An article 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.
Article 27
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 Directors).
(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 Board

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 U.S. and European 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 BIS.

“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.”

Article 55
(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 June 2022

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.

BRICS Contingent Reserve Arrangement

'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' decisions.

The original 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 it later.

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 history shows.

Hints of the thinking that might shape an
Inherently Adaptable Financial System

"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, 2018

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 recovery."
- Translated by Andrei Martyanov in 'This-is-important' March 15 2022

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.

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 repeated.

A financial 'system' is different from the currencies used in it.

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.

What 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.

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 things.

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 settlements.
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 2022

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 8, 2022.

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 2022

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 Russian Exchange).

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 international settlements."

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 settlements

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 2022

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.

"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"
RT 19 September 2022

"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 'news' site

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 await developments.

"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 unreliable."
Foreign Minister Sergey Lavrov, 1 April 2022

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.

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 imposed.

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 SPFS.

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 8, 2022.

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.

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 2022

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 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 September 2022

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 borders.

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?

The Chinese 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.

Currency Swaps

“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 China"
Carnegie Endowment for International Peace April 25, 2017

Long term, currency swaps might become attractive to 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 China 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.

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', and alternative monetary system, is 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 organisation. 

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.

"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 trade zone.
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 time.
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 hyper-Eurasian open common market

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 'Eurasian' project.

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 approval today...

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 and hydropower...
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...

...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 Association.

Of course, 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.

In general, we are convinced that many serious problems on the global agenda can and must be resolved only by pooling efforts"
- Vladimir Putin June 24, 2022

'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 objective;
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 17 2018

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 Trade Organisation.

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 installations.

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 will 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.

 "...I 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 October 2019

"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 keen on exploring the possibility of launching a dialogue on trade liberalisation with the EAEU.
- Sergey Lavrov 17 June 2020

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

"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......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 Association."
- Vladimir Putin June 24, 2022

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 trading zone

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 the WTO..."
14th BRICS Summit Beijing Declaration, 23 June 2022

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 June 2022. 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.

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 policy.

...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 Western partners.

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 this."
Sergei Lavrov 22 June 2022

Bilateral trade using domestic and friendly nation currencies

In 2018 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.

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 easier. In 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).

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).

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 stop 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.
Comprehensive Economic Partnership Agreement (CEPA)

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India and the UAE'S Comprehensive Economic Partnership Agreement (CEPA)

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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 currencies.

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 June 2022

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 country, 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 exchange rate"
Dmitry Medvedev deputy chairman of Russia's Security Council 12 July 2022

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 possible.

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 May 2022

Future prospects for a Eurasian Economic Union - 'The Greater Eurasian Partnership'

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 course.)

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.

Putting it 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 multi-speed globalization. "

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 its assets.
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 June 2022

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 that.

Whether the west is happy about it or not is simply of no interest to Russia.

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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