Sow sanctions, reap gas and oil for rubles
The Russian special operation in Donbass leads to changes in the political, economic and financial organization of the world.
The United States decided to "cut" the chicken carrying golden eggs, putting an end to the right of a sovereign state to dispose of its property in the form of gold and foreign exchange reserves. As a result, more countries are wondering whether the dollar and America can be trusted? The international columnist for The Moscow Post understood the situation.
Remember the scenes from the films in which the hero "in white" and the hero "in black" fight, they have swords in their hands, but the second duelist takes out a dagger that gives an advantage in the fight? All this resembles a duel that the United States started with Russia over the expansion of NATO eastward, a special military operation in the Donbass, and new sanctions.
America's euro seconds also took part in the fight. Europe took out its knives from the NATO boot, and also blocked the foreign exchange savings of the Russian Federation. The availability of Russian reserves and the possibility of their use to protect the ruble were undermined. But the challenge is accepted, the fight continues according to the new rules dictated by Moscow. Gas to Europe will now be supplied in exchange for rubles.
The meaning of central banks' gold and foreign exchange reserves is that they are a safe repository of financial resources for the state that owns them. The rightful owner may use the COR at his discretion. The West, under the leadership of the White House, not only destroyed its confidence in itself, but forgot that Russia is not Afghanistan.
Sow sanctions, reap the yuan
The countries that imposed anti-Russian sanctions probably did not think about the reaction of other states to the arrest of the ZVR. These actions have sent many into shock, may encourage other exporters to accelerate the diversification of their savings. By the beginning of 2022, Russian ZVRs were diversified. The Bank of Russia has strengthened its positions in euros (32.3%), gold (21.7%) and yuan (16.8%). In addition, 16.4% were in dollars and 6.5% in pounds. But it did not help, Europe could not resist or could not resist.
The power of sanctions stems from the dominant position of the dollar, as the most used currency in trade, financial transactions and reserves of central banks. In 1971, the U.S. abandoned the gold standard, ending the Bretton Woods system. But the dollar continued to be used as the main currency, began to play a central role in the trade in oil, gas, and other commodities.
By deciding to weaponize the dollar and the euro, the United States and its NATO allies have provoked a reaction that could decentralize the global financial system in the future. In any case, this is stated in the numerous responses that followed from America, Europe, China and the Middle East.
First, ideas are being expressed about the future of the global financial system. Former Bank of China Vice President Zhang Yanling said that as Western sanctions "lead to a loss of confidence in the United States and undermine the hegemony of the dollar in the long term," China could help "rid the world of dollar hegemony."
"The era when the US could dictate how to conduct global affairs has come to an end. Various institutional mechanisms dominated by the States, including the hegemony of the dollar, inevitably decline, "the author's article of the Chinese newspaper Global Times says.
Neil Kimberley, SCMP columnist on macroeconomics and financial markets, believes that anti-Russian sanctions will change the hierarchy of reserve currencies and affect the value of commodities. China will be a key player. Readers supported him noting that sanctions send a signal to the world about the unreliability of the dollar.
Larry Fink, CEO of the largest asset management company BlackRock, remarked in an annual letter to shareholders that "the Russian invasion of Ukraine has ended the globalization of the past three decades."
Zoltan Pozar, head of short-term interest rate strategy at Credit Suisse Group, in an interview with Bloomberg, noted: "Globalization, as we know it, is probably over," adding that the West is losing financial dominance, bringing the transition closer to the Bretton Woods III era.
Secondly, the sanctions which are cutting off Moscow from her currency reserves give a reason to think to China. Perhaps, Beijing will revise structure of the reserves making about 3.2 trillion dollars, especially that their part that is in the USA.
Russia already looks for ways to bypass the financial system based on dollar and intends to tie ruble to commodities, gold, rare metals. Communication between raw material prices and gold remained for decades. So, for example, the oil cost estimated in gold decreased since the 1960s only by 30% that can reflect influence of the new technologies of production leading to decrease in costs.
But the oil price in dollars and other fiat currencies (poor physical goods) sharply grew. It is considered that the authority of the government is a key condition of reliability of fiat currency. The trust of Russia to the West is lost and the first steps to refusal of dollar are already taken. Moscow suggested the unfriendly countries to pay supply of pipeline gas in rubles. Hungary and Serbia agreed with these requirements.
Russia also agreed to conduct mutual settlements with in national currencies with China and India. Saudi Arabia plans to sell oil for yuans too. The Chinese Foreign Ministry confirmed a possibility of transition at bilateral calculations in trade with Russia in energy carriers for rubles or yuans. Beijing noted that the Chinese companies are ready to use actively rubles and yuans taking into account change of a situation in the market.
Thirdly, Moscow and Beijing went for creation of own systems of interbank payments which provide independence of SWIFT. China spent years for development of the system of cross-border interbank payments in yuans of CIPS competing with the SWIFT system.
The Ministry of Finance of the Russian Federation and the Bank of Russia announced creation of own financial telecommunication system – "System of Transfer of Financial Messages (STFM) of the Bank of Russia" in August, 2014. By the beginning of 2019, practically all commercial banks and large state and private credit institutions became its participants.
BRICS countries (Russia, Brazil, India, China, the Republic of South Africa) against the background of sanctions agreed to accelerate work on creation of a system of exchange of financial messages and integration of payment service providers. It was said by the Russian Finance Minister Anton Siluanov during the first meeting of Ministers of Finance and BRICS countries operating the central banks under the chairmanship of China.
The central banks of the countries of BRICS will also carry out the fifth round of testing of a pool of conditional currency reserves of BRICS with use of alternative currencies. New "currency corridors" will appear and extend as the countries look for replacements to dollar.
As a result, the world financial system can stop being uniform. The base Bretton-Woods-II collapsed few weeks ago when the countries of the G7 took currency reserves of Russia which could only reach...
Forward, to provided currencies?
The analyst of Credit Suisse Zoltan Pozar started the idea of transition to payments in the currencies provided with goods in a turn. In his report "Bretton Woods III" is claimed that there is a formation of a new system of calculations and the currency relations. "We are witnesses of the birth of the Bretton Woods system III - the new world order based on the currencies provided with goods", - Pozar writes.
According to the IMF, published in December, to group of the chosen currencies with which the central banks operate as reserve, the US dollar (59.1% of world reserves), euro (20.5%), the Japanese yen (5.8%), the British pound sterling (4.8%) belongs. The provision of the Chinese yuan occupying only 2.7% in world reserves doesn't correspond to economic power of the People's Republic of China. Experts find an explanation for it in a variety of reasons.
First, the provision of dollar is connected with volumes and liquidity of the market of treasury bonds. Secondly, the main part of world trade is done in dollars or other currencies, to him attached. Thirdly, the dollar as key reserve currency is supported by trade in oil in dollars.
After cancellation of the gold standard of the USA agreed with Saudi Arabia that prices of oil will be established in dollars, as led to emergence of petrodollar. Since then the country buying oil from Saudi Arabia had to exchange the currency for dollars for transaction. The countries of OPEC followed this example and began to quote price of oil, in the American currency too.
Also grain can be other example. China accumulates grain reserves therefore controls 70% of world reserves of corn, 60% of stocks of rice, 50% of wheat and 35% of stocks of soybeans. China, thus, partially tied the currency to commodities, reacting to loss by dollar of purchasing power.
Yuan exchange rate since May, 2020 rose against dollar more than for 11%. By the way, since November, 2021 Mexican peso I became stronger in relation to dollar for 9.7%. The Brazilian real rose in a year 21%. The South African rand for the last five months rose 11%.
Bretton Woods III?
Reserves of hydrocarbons, metals, raw materials and long-term storage goods can partially compete with financial assets, sometimes replace them. It can be assumed that Russia is already embarking on the path of linking the ruble exchange rate to prices for raw materials, energy resources, gold, rare and non-ferrous metals, fertilizers, food. Recently, the Bank of Russia resumed gold purchases. The regulator has been buying gold since 2014.
On March 31, Russian President Vladimir Putin signed a decree on a special procedure for foreign buyers to fulfill their obligations to Russian natural gas suppliers. According to the document, from April 1, Gazprom will receive payments from "unfriendly" states in rubles. However, buyers will be able to continue to pay in the currency that will settle on Gazprombank's accounts.
After Russia forces "unfriendly countries" to open ruble accounts in Russian banks, the ruble will become a currency secured by strategic goods and gold reserves of the Central Bank, writes French economist Alexander del Vall. The Bank of Russia in the report for 2021, which is posted on the regulator's website, disclosed the distribution of its international reserves - currency, gold and securities.
The total amount of assets as of the end of 2021 in foreign currencies and gold amounted to $612.9 billion, of which: $481.4 billion are foreign exchange assets, $131.5 billion is gold, which is located in the Central Bank's storage. Gold reserves in the Russian Federation decreased over the year compared to January 2021 by almost 2 percentage points or 7 tons, to 2248 tons. The reason is the sale in the form of coins, indicated in the report.
Abroad, the main "keeper" of the assets of the Bank of Russia is China - 16.8%. Over the year, the share of the Central Bank's assets in China increased by 2.6 percentage points. Germany is in second place (15.7%), France is in third (9.9%). The Ministry of Finance said in March that Russia cannot dispose of about half of its reserves.
The head of EU diplomacy, Josep Borrell, said with clear regret then that Russia had "prepared" for the sanctions and transferred part of the funds to countries where they could not be blocked. These are Russia's "friendly" partners in Europe!
Who knows, there may be a Bretton Woods II system, at the heart of which the dollar will continue to degrade. America could lose its appeal to foreign investors. The United States will be more difficult to provide capital inflows, which allowed decades to finance double deficits - budget and foreign trade. The consequences can be unpredictable for the entire system, financial assets and "unsecured" currencies, for which the collateral is paper assets.