Beware the Ides of March

by Laurie Meadows
15 March 2022 2230 NZST (0930 UTC)
Last updated 11 April 2022 1130 NZST (2330 UTC)

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 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)  maybe pegged or valued against  'Baskets' of other currencies and commodities  may rise alongside the dollar, and gold 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. 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 trading 'bloc' under USA domination. Step two (China) can wait.

The US and Europe Introduce almost complete trade restrictions on Russia - a war of aggression using deprivation and degradation of civilian life-systems

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.

The USA and EU plan

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
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 the Russian Government is 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 objective is a change of legislation to enable the sale of government shares in major income-earning businesses when the value of those assets hit rock bottom due to sanctions crippling 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 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.

A useful model for a future western influenced Russsia 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.

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.

Partial sale of national resources is not always a bad thing, as all countries need capital to develop. 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.

 I seriously doubt that the US and EU will be able to use white supremacist groups in Russia to control a post - insurgency Russia. But 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 missiles capable of hitting Moscow within just minutes. 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 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 made plans to take the Eastern regions (and Crimea) by force. It'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.

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 just an excuse 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

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, and 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.

Unfortunately, USA has this bizarrre 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 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.

Whatever the motive, the 'sanctions' will fail. But what the sanctions will achieve is a much more flexible and self-stabilising global 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 both agriculture 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 the interference-free flow of currencies. 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 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 observed the US slipping productivity and unbalanced trade (the cost of imports significantly exceeded the money coming in from American exports). It redeemed 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 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 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.

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 savings they may have allocated it to an interest-bearing time deposit with a bank or other financial institution. 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. '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. 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.
"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 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 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.

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.

It seems to me that Russia and China are starting the first faltering steps to a flexible cross-border payment system based on currencies that are under-pinned by gold reserves. This is not a new 'reserve currency', it is simply an agreed currency valuation used exclusively for bilateral trade between the partners. Agreement on what the currencies are 'worth' can be direct between the two partners, with agreement soley by consensus. Neither partner can dominate.

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.

The petroruble

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 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, 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 value than other minerals such as nickel or lithium, important in manufacture though they be.

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). 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 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).

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 5000 rubles to a gram of gold, that implies over USD 2000 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.

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 (temporary in the case of copper) 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. Only these currencies don't have capital controls and only these currencies are very widely traded.

Of course, a notional allotment of '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.

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 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 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 to buy US treasuries. Therefore fully 'replacing' the US dollar 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 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 rubles from the Central Bank to fund domestic projects. But 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 purchase price is lower than the world market price because the gold miners have a weak hand - they are price takers, and carry debt. As the ruble strengthens, gold purchases become cheaper to the Central Bank. The amount of gold underpinning the ruble becomes larger.

The Russian domestic-gold-ruble ratchet

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 sanctions meant gold was more attractive to Russian savers - there is an active and favorable domestic market - and the Western sanctions effectively helped underpin faith in the economy.

Russian gold has been frozen by the West, and Russian bullion banks shut out of gold trading. 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 all without the ruble having to be convertible to gold.

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 long road ahead

The media promote the idea that there are cataclysmic changes in the international financial system due to the 'the gold ruble'. I think the road ahead is a long one, and it will be a bump journey. We have almost no hard information on the shape of the changes hinted at.

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
I suspect that a new regional system to establish an agreed currency peg, or reference point is being worked on, not a 'new currency' as such. There will be no 'universal', stateless 'esperanto' currency. Most likely the peg will be a floating peg. I think the defining feature of these stable currencies will be gold backing in a constant relationship to the amount of currency in circulation. The currency bank 'notes' will certainly not be redeemable for physical gold. That mistake won't be repeated.

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

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 the messaging system (SWIFT), international credit card payment systems, and independent rating of countries and banks credit risk. It also includes a mechanism for emergency loans to countries that find themselves in an emergency situation that temporarily depletes their overseas reserves.

Speaking at a ministerial meeting of BRICS countries, Mr. Siluanov called for work to create an alternative to the SWIFT system, increase the use of national currencies in foreign trade (rather than the dollar), and integrate payment systems. The BRICS countries are already testing a banking mechanism for BRIC countries to pool 'alternative assets' to act as a buffer for B RICS 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.

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.
"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 Sergei Lavrov, 1 April 2022
As for a replacement for the SWIFT system, that seems more problematic. Russia is 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. An alternative system must be found. Maybe China has the answer.

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.

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, is using them at the time of writing as an emergency measure while it is under attack from 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

Today's members of the Eurasian Economic Union (Russia is the heavyweight), in conjunction with India, Pakistan, many of the Central Asian countries, and probably Iran and some Middle East countries might ultimately form a single hyper-Eurasian "common market". China is in the SCO, and has a free trade agreement with the EAEU, so it doesn't need to become an EAEU member. I doubt the EAEU will exclude anyone, including western countries. But  I am certain the EAEU will not be able to be intimidated or subverted by anyone.

"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...
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
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. But as currencies intersect, the valuations of the larger and more reliable currencies will probably act as de facto pegs. Because these are 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.

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.What 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.

And the same applies to the choice to either trade in national currencies bilaterally, or trade in national currencies with the dollar or euro as an intermediary. One is not exclusive of the other. Except when sanctions exclude one of the choices, of course.

Two trading zones with differing rules. Two currency valuation and interchange systems. Both sometimes connected, sometimes not. As a result, currency valuations in the two zones may diverge to a slight extent. That will be interesting.

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.