by Alasdair Macleod, GoldMoney:
The consequences of Russia and her Asian allies embracing gold backing for their currencies are poorly understood in western capital markets. This move could lead to the destruction of the global fiat currency system.
According to evidence which is widely ignored in western capital markets, a move by Russia to put a new trade settlement currency and possibly the rouble as well onto a new gold standard is becoming a certainty. As a weapon of mass fiat currency destruction, the timing is probably bound up in on-the-ground military considerations, which are already showing signs of escalating in Eastern Ukraine.
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As well as using gold to undermine the western currency system, a return to a credible gold standard has significant advantages for Russia and for her allies in the Shanghai Cooperation Organisation, the Eurasian Economic Union, BRICS+, and all their commodity suppliers beyond Asia. At the same time, it would destroy the west’s fiat currencies and financial system.
This article explains how one part of the global economy can thrive while the other collapses.
Introduction
Recently, I have written about the signals emanating from Russia that President Putin is minded to re-adopt sound money by returning to some sort of gold standard. We do not yet know the details, but consider what he said at the St Petersburg International Economic Forum in June last year:
“Caught in the inflationary storm, many nations are asking, why bother exchanging goods for dollars and euros when they are losing value right before our eyes? Indeed, the economy of imaginary wealth is being inevitably replaced by the economy of real valuables and hard assets.
“According to the IMF, today’s global foreign currency reserves contain 7.1 trillion dollars and 2.5 trillion euros. And this money is depreciating at an annual rate of about 8%. Moreover, it can be confiscated or stolen at the whim of the US if it disapproves of something in a country’s policy.
I think this has become a very real threat for many countries that keep their gold and foreign exchange reserves in these currencies. According to objective expert analysis, in the coming years a conversion process of global reserves will get under way. Reserves will be converted from weakening currencies into tangible resources like food, energy, commodities, and other raw materials. Clearly, this process will further fuel global dollar inflation.”
This message was delivered to 81 official delegations, and 14,000 delegates from a further 49 countries, including heads of state and government attending unofficially. Putin’s message was that central banks will be dumping dollars and euros and accumulating gold reserves instead — the only “tangible resources” they can own, not stored in western vaults where they can be impounded as has happened to Venezuela. And government agencies will stockpile essential commodities, raw materials, and food instead.
The statement on gold reserves was not so specific, but by disposing of dollars and euros, trade and foreign exchange liquidity is bound to swing in favour of gold. With central banks reported to have accumulated record quantities of bullion last year, they appear to agree with President Putin.
In effect, delegates at the St Petersburg Forum were put on notice that the dollar will be attacked by Putin’s mobilisation of foreign liquidation of currency reserves in favour of tangible commodities and gold. For many central banks, the logic of maintaining official currency reserves will no longer apply, while increasing physical gold holdings under their direct control is the new priority.
The timing of the dollar’s demise will in large part be set by Putin’s geopolitical timing, because he can almost certainly trigger foreign liquidation simply by passing the word.
Separately, Putin’s senior economic adviser, Sergey Glazyev, has been working officially on a new trade settlement currency for use between members of the Eurasia Economic Union (EAEU), with an ambition to extend the settlement facility to all members of the Shanghai Cooperation Organisation (SCO) and BRICS+ (a rapidly expanding club of nations including non-Asian nations) who wish to use it. These groupings represent well over half the world’s population.
From the few statements on his thinking, it has become clear that having considered the options Glazyev now favours a currency solution based on gold alone.
We should also note that the proposal for an expanded Moscow gold exchange is being headed up by Glazyev himself. And in a move which appears to front-run developments, Sber — Russia’s largest bank — announced the introduction of a gold-backed digital financial fund.
On 27 December, the same day that Sber announced its new digital gold fund, in an article entitled “Golden rouble 3.0: How Russia can change foreign trade infrastructure”[i] written for Vedomosti, a Moscow-based Russian business newspaper, Glazyev laid out his latest thoughts. It was co-authored by Dmitry Mityaev, who is Assistant Member of the Board for Integration and Macroeconomics of the Eurasian Economic Commission — so this article is not just Glazyev’s musings, and it can be assumed to carry official weight.
From this article, the EAEU currency commission now appears to have dropped earlier proposals for a new currency entirely, using gold instead as the principal means of settling trade imbalances. It is likely to wrapped up as a digital representation of physical gold. If it copies the Bretton Woods model, perhaps only participating central banks will be permitted to demand physical delivery, but the digital currency would be more widely available as credit for trade settlement.
Presumably, the requirement to be prepared to settle national payment imbalances in gold bullion could be then minimised if one or more national currencies went onto a credible gold standard either by linking their currencies to the new trade settlement currency in an Asian version of Bretton Woods, or by going onto individual gold standards. The implication is that the rouble, and probably China’s yuan might do just that to produce a seamless gold-linked pan-Asian settlement system.
Whatever the detail, this is not a step to be taken lightly. China is highly dependent on exports to America and NATO members. But she appears to be refocusing on Asia and has the personal savings available to back the necessary capital investment, which in some cases will offset her imported energy costs. Both Russia and the Saudis heading up OPEC+ will be fully aware of the impact on the fiat petrodollar regime of switching payments to yuan, roubles, or other Asian national currencies for their primary export product — crude oil. Reserves of western alliance fiat currencies not sold might have to be written off. Consequently, the Saudis and other Gulf energy exporters are sure to have sought assurances about the stability of yuan and possibly roubles relative to the dollar.
Therefore, we have three elements pointing to an emerging gold standard in Asia, and for the nations that are associated with it. Firstly, President Putin made it clear that he sees a transition to sound currency values based on commodities (i.e. represented by gold), away from the dollars and euros which can be weaponised by America and alliance nations in its sphere of influence. Secondly, Putin’s view is being echoed by his senior economic adviser, Sergey Glazyev, who is the central figure formulating trade settlement arrangements. And thirdly, it is impossible to imagine that Middle Eastern energy exporters would accept payment in currencies other than dollars unless they were given sufficient reassurances about their future payment values relative to the petrodollar.
Until last year, the Russian and Chinese long-term policy of doing away with dollars for pricing commodities, settling cross-border trade, and intermediating in virtually all foreign exchange transactions has been defensive, letting America make the geopolitical running. Sanctions against Russia changed all that. Backed into a corner, Putin has no option but to seek to destabilise the western financial system deliberately. He quickly moved to protect the rouble. Now he is taking the initiative, and as part of his effort to remove the American threat from Eastern Europe entirely his strategy is both military and financial.
Pricing Russian commodities
As the world’s largest exporter of energy as well as of a wide range of industrial commodities and raw materials, the Russian economy stands to benefit enormously from a shift in global currencies away from the fiat dollar and associated western currencies to the currencies whose economic backing is commodity related. And when we think of the Russian economy, we think primarily in terms of oil. There is a further relevance to energy because it is a topic Putin thoroughly understands, his post-graduate qualification being in energy economics. He has always had a firm grip on the global energy scene, including gas and nuclear, fully understanding the western alliance’s pressure points. And on the evidence, with his close advisers he also appears to have a better grasp of monetary theory than his opposite numbers in the western alliance.
