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?
Introduction
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.