Gold Ruble 3.0

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Published : January 29th, 2023
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Pepe Escobar is an experienced observer of geopolitics, who is not the type to say something is happening when it is not really happening. So, it is particularly noteworthy when he says: “Gold-backed currencies to replace the US Dollar,” in January 2023.

Of course he is talking about the steady development of an alternative financial infrastructure, centered around Russia and China and expanding to the “BRICs,” which is really most of the world once you go beyond a few close US allies in Europe or Asia. This group was, for a long time, happy to exist as satellites around a basically US/UK/European financial and currency system. But, that ended when, as a consequences of the recent hostilities in Ukraine, Russia was essentially banned from participation in the USD/EUR payments system, with US/European governments going so far as “seizing” (now close to “confiscating”) Central Bank of Russia reserve assets in the form of USD and EUR government bonds. Obviously, nobody is going to trust those clowns ever again — including China, who also have a lot of US/EUR government bonds as part of their decades of participation in that system. They are eager to set up something new.

According to Escobar, they are still talking about some “central reserve currency,” likely a sort of currency basket of major BRICs countries. I do not like this idea much, since if you take a bunch of low-quality currencies and put them in a basket, you end up with a basket of low-quality currencies. China is the only one of the BRICs (that is, not Brazil, Russia or India) that has had a currency of some reliability; and that has only been because it was tightly, and then loosely, linked to the USD, with the help of currency controls. China’s monetary link with the “dollar” actually predates the United States, going back to the sixteenth century, when China adopted the Spanish Silver Dollar coin, minted in Mexico City, as its primary silver coinage. The only time in the last 450 years when China “went it alone” (1937-1949) it quickly turned into a hyperinflationary disaster.

But, there is a good reason why there is this perceived need for a “reserve currency.” First, foreign exchange (the other side of every foreign trade shipment), is basically done today in USD. For example, if someone in Paraguay wants to buy some smartphones from South Korea, they exchange Paraguayan guarani for USD; and then, USD for KRW. Otherwise, you would have hundreds of cross-exchanges, the currency equivalent of barter. There are a few active cross-markets for currencies today, such as RUB/CNY, but only a few as it quickly becomes cumbersome. Thus, this currency basket would serve as this currency-of-currencies. Also, there are already large existing bond markets denominated in these main BRICs currencies, or there could be soon (governments could issue local-currency bonds), which would serve as the assets for some central bank-like currency issuer. From a day-to-day standpoint, it makes sense. If you just need a mechanism to get from PYG to KRW, to facilitate trade, a currency basket doesn’t have to be all that reliable. But, if you are looking for a stable foundation for long-term investment, or basically contracts and projects measured in years, I don’t think it would work well.

Glazyev has apparently made friends with Zoltan Pozsar. Both share a sort of “smartest kid in class” enthusiasm, saying a bunch of stuff that is often rather stupid, but skilled at implying that “it’s complicated and you just don’t understand it.” I actually understand it, which is why I say it’s mostly a little dumb, but nevertheless they are getting at something in their clumsy, throw-it-at-the-wall-and-see-what-sticks methods. At least they are thinking about it creatively. It is much better than most economists, who persist in repeating the same old tired dogma for decades, as a substitute for any actual thought.

When you think about it creatively, you eventually conclude that there is a reason why gold served as the basis for the world’s monetary system for literally millennia, and if you want to be a little more particular, the last 500 years since the revival of trade and finance during the Renaissance. Anyway, here’s Glazyev’s latest: “Golden ruble 3.0” – How Russia can change the infrastructure of foreign trade

Of course, the way that international trade and finance was done pre-1914 was through the Bank of England, with the British pound based on gold. Basically, if a bank in Germany wanted to pay a bank in Argentina, in 1892, the German bank and the Argentine bank would both have an account at the BOE. The German bank would pay the Argentine bank through its BOE deposit account. No gold needed to be shipped. (In practice, probably a number of such means were used, including the Reichsbank or Bank of France.)

Here’s the entire paper, with my comments in italics.

The tough sanctions blockade created the necessary prerequisites for a 180-degree turn in Russian foreign trade. The main foreign economic partners are the EAEU member countries, China, India, Iran, Turkey, the United Arab Emirates, etc. And with each of these countries, the Russian Federation has a trade surplus. According to preliminary estimates of the Bank of Russia, in January-September 2022, it strengthened to $198.4 billion, which is $123.1 billion more than in the same period last year. This surplus was taken out of the country (at the same time, half went to pay off the external debts of Russian companies with their replacement by domestic ruble lending) and is reflected in the balance of payments item “net capital outflow”.

In friendly countries, the process of de-dollarization is underway, the share of settlements in “soft” currencies is growing. In September, Russia became the third country in the world in terms of the use of the yuan in international payments. According to the Central Bank, in recent months, yuan trading accounts for up to 26% of foreign exchange transactions in the Russian Federation. The yuan/ruble pair on the Moscow Exchange has more than once overtaken the dollar and the euro in terms of daily trading volume. When using yuan, rupee, rial, etc. in foreign trade settlements of the Russian Federation and the presence of a trade surplus, the result is the accumulation of multibillion-dollar cash balances on the accounts of Russian exporters in “soft” currencies in the banks of the above partner countries.

Here we see some of the difficulties in trying to conduct trade in dozens of independent floating currencies.

The accumulation of funds in “soft” currencies will increase in the future. But since this money is also subject to exchange rate and possible sanctions risks, it becomes necessary to sterilize their excess mass. The best way is to buy non-sanctioned gold in China, UAE, Turkey, possibly Iran and other countries for local currencies. The “foreign” gold purchased by the Russian Central Bank can be stored in gold and foreign exchange reserves (GFR), within certain limits being in the central banks of friendly countries, can be used for cross-country settlements, currency swaps and clearing operations. Part of the gold may be repatriated to Russia.

Russia’s transition in relations with friendly countries to trade in national currencies is the right tactical decision, but not a strategic one. If pricing continues in dollars on Western exchanges, trade flows are insured by British companies, then there is no real decoupling from the Western “distorting mirror”—derivative pricing systems.

In the face of unprecedented sanctions pressure, Russia’s task is not to learn to play by the “crooked rules” of the West, but to build transparent and mutually beneficial rules of the game with friendly countries, to create their own pricing systems, exchange trading, and investment. And gold can be a unique tool in the fight against Western sanctions, if you count in it the prices of all major international commodities (oil and gas, food and fertilizer, metals and solid minerals). Fixing the price of oil in gold at the level of 2 barrels. for 1 g will increase the price of gold in dollars by 2 times, calculated the strategist of Credit Suisse Zoltan Pozhar. This would be an adequate response to the “price ceilings” introduced by the West—a kind of “floor”, a solid foundation. And India and China could take the place of global commodity traders instead of Glencore or Trafigura.

This is one of those “dumb ideas” I was talking about, from Pozsar. Pricing oil in gold, at some arbitrary price, will not have any particular effect on the USD. How about letting the market find a price for oil? Maybe, a market in Russia (for Russian oil and gas), that is not influenced by Western derivatives or big banks?

Gold (along with silver) has been the core of the global financial system for millennia, an equivalent, an honest measure of the value of paper money and assets. Now the gold standard is considered “anachronistic”. It was canceled in its final form half a century ago (the United States announced the “temporary” closure of the “golden window” adopted in 1944 at Bretton Woods), re-pegging the dollar to oil. But the era of the petrodollar is coming to an end: now they are already talking about the petroyuan and other mechanisms to limit the abuse of the status of the world reserve currency issuer. Russia, together with its eastern and southern partners, has a unique chance to “jump off” the sinking ship of the dollar-centric debt economy, ensuring its own development and mutual trade in the accumulated and extracted strategic resources.

I like how he talks about gold (along with silver), understanding the bimetallic nature of the “gold/silver complex” before 1870. The dollar was never pegged to oil. I think the infamous “petrodollar” agreement of 1973 was basically an attempt to block Saudi Arabia, and other major oil exporters, from demanding basically gold for their oil. Before 1971, when the USD was “as good as gold,” (at $35/oz.) this was basically what they had. This would have possibly led to more international trade on a gold basis, and maybe the establishment of an international gold standard system that excluded the US. So, it may have been an important part of the process of separating the whole world — not just the US — from its golden anchors beginning in 1971.

This is not the first possible attempt by Russia to introduce a hard ruble based on a gold peg. Gold standard in the 19th century Rothschild lobbied in Europe—this gave him (and Britain) the opportunity, through gold loans, to subordinate continental Europe to the British financial system. Russia joined the “club” under Count Witte. “Golden ruble 1.0” ensured the process of capitalist accumulation, while tying domestic bankers and industrialists to sources of Western capital. There was no large-scale gold mining in Russia at that time—the industry appeared already under Stalin.

Glazyev is talking about Russia’s adoption of a gold standard system in 1885, “Gold Ruble 1.0,” following Western European models. Before then, Russia had a rather checkered history of silver coinage of dubious quality (regularly debased), and a variety of failed experiments in paper currencies. Big banks — including those influenced by the Rothschilds — wanted to keep the gold standard in the late 19th century. But, this was just a maintenance of the status quo that had worked for centuries previous. It was a response to the historically unprecedented deviation of silver from gold in the 1870s, followed by various silver-standard devaluation arguments such as the “free coinage of silver” movement in the United States in the 1890s, which destabilized world finance as people worried that the US dollar (and thus all loans and bonds in USD) would be basically devalued by 50%. Can you guess why European bankers didn’t like that much? There was nothing particularly sinister about it.

Gold played an important role both in industrialization and in the post-war refusal of the USSR to join the dollar standard (at that time the country accumulated record gold reserves). Having signed the Bretton Woods agreements, the USSR did not ratify them, defining the peg of the ruble not to the dollar (which was a condition for participation in the Marshall plan), but to gold and to “the entire wealth of the country.” “Golden Ruble 2.0” ensured the rapid recovery of the economy after the war, made it possible to implement nuclear and missile projects. The reformer Khrushchev abolished the ruble’s peg to gold, having carried out a monetary reform in 1961 with the actual devaluation of the ruble by 2.5 times and its peg to the dollar, creating the conditions for the subsequent transformation of the country into a “raw material appendage” of the Western financial system.

This is some interesting color on the “Soviet gold standard” of the post-WWII period. Both China and the USSR were also gold standard countries during the 1950s and 1960s. In 1961, the ruble was devalued from 4 rubles/USD (and thus 4*35=140 rubles per oz. of gold) to 9 rubles, or 0.9 rubles after a 10:1 revaluation. But, it was still officially linked to gold afterwards.

Now the conditions for the “Golden Ruble 3.0” have objectively developed.

The sanctions imposed against Russia have boomeranged the Western economy. The geopolitical instability provoked by them, rising prices for energy carriers and other resources, inflation and other negative factors put strong pressure on the global economy, in particular the global financial market. In 2023, all these circumstances will objectively affect the change in the stereotypes of investment policy in the world—from risky investments in complex financial instruments to investing in traditional assets, primarily gold. According to Saxo Bank analysts, in 2023, increased demand for this metal will lead to the fact that its price will rise from the current $1,800 per ounce to $3,000. As a result, there is a real opportunity in the very near future to significantly increase gold reserves—both by increasing the physical volumes of gold and by revaluing its value.

Please please please stay away from “revaluing gold” stuff! This is toxic nonsense. The very special characteristic of gold is that it is stable in value. In other words, you can’t “revalue” it. Nobody ever has, in thousands of years. You can only “revalue” the currencies that you are comparing to gold. Basically, this means a devaluation. Along with this “demand and supply” for gold doesn’t matter much, because gold’s value doesn’t change much. However, it is true that a new wave of interest in physical gold bullion could blow up the existing “paper gold” markets in New York and London, which would be fine with me.

Large gold reserves allow the country to pursue a sovereign financial policy and minimize dependence on external creditors. The amount of reserves affects the country’s reputation, its credit rating and investment attractiveness. Large reserves make it possible to plan the state budget for a long time, stopping many economic and political risks. In 1998, the lack of sufficient international reserves became one of the causes of the crisis, which ended in default for Russia. Now our country already has large gold and foreign exchange reserves, having the fifth index in the world (after China, Japan, Switzerland and India) and ahead of the United States, but this is not enough.

Russia’s central bank already has enough gold to cover most of its outstanding monetary liabilities (base money).

How Russia Can Go To A Gold Ruble series

The volume of annual gold production is estimated at only (at current prices) at $200 billion, the volume of accumulated reserves—at $7 trillion, of which the central banks have no more than a fifth, and in the III quarter they bought a record 400 tons of gold. The People’s Bank of China announced for the first time in many years that it was building up its gold reserves. But the Bank of Russia publicly told the market that buying gold is a bad idea, as it leads to excessive monetization of the economy, and set a discount to the world price of 15%. As a result, gold miners are experiencing double stress: the West has outlawed Russian gold, banning any transactions with it, and the Central Bank of the Russian Federation is pushing gold (as well as currency) abroad, giving companies the right to export everything through intermediaries with remelting or rebranding of the metal in “good jurisdictions” .

In China, which ranks first in the production of gold, there is a legal ban on the export of all mined gold. According to the Shanghai Gold Exchange, over the past 15 years, customers have seized (received in physical form) 23,000 tons of this metal. India is considered the world champion in gold accumulation—more than 50,000 tons (the Reserve Bank of India has almost 2 orders of magnitude less). For the last quarter of a century, there has been a flow of gold from West to East through the main hubs (London, Switzerland, Turkey, UAE, etc.) with a capacity of 2000—3000 tons per year. Has the “despicable metal” remained in the vaults of Western Central Banks, or is it all “demonetized” through swaps and leasing? The West will never say that, and there will be no audit of Fort Knox.

Over the past 20 years, the volume of gold mining in Russia has almost doubled, while in the United States it has almost halved. It’s like with the uranium deal (HEU-LEU): by demonetizing real wealth, the United States has lost competence and interest in the production and processing of these strategic resources (both gold, and uranium, etc.)—the printing press will ensure the purchase of everything we want. The same thing happened, for example, with the extraction of rare earth metals—it almost entirely went to China. It’s time to reap the rewards: the States are frantically buying in Russia (as their customs statistics for recent quarters show) palladium, uranium, and other resources.

Gold mining, which today barely occupies 1% of GDP, may well grow (due to the growth of both production and relative oil prices) to 2-3% of GDP and become the basis for the rapid growth of the entire commodity sector (30% of GDP) and the balancing of foreign trade , which is still based on the tyranny of the issuers of “hard” currencies and the risks of devaluation and insufficient convertibility of “soft” currencies. In this case, Russia, due to a well-organized global “gold rush” (and the population of Russia, following the world central banks, has already increased investment in gold by 4 times compared to last year) will be able to increase gold production (only due to three large, already commissioned deposits ) from 330 tons by 1.5 times to 500 tons, becoming the world leader in this strategic industry as well. As a “bonus” we will get: a strong ruble, a strong budget and—in the implementation of the accelerated development strategy—a strong economy.

Unfortunately a lot of fantasy here. This is a lot of wordage to spend on the topic of gold mining, which is almost irrelevant. As I mentioned, Russia’s central bank already has impressive gold reserve coverage, so you certainly don’t have to multiply the size of Russia’s gold mining industry to 3% of GDP. It has nothing to do with “balancing foreign trade,” etc. Britain, which was the premier international gold standard financial center of the 19th century, has no significant gold mines! Nor did they have “balanced trade.” Of course they had gold, which they bought from places like South Africa. Russia can just buy its gold from South Africa too, if for some reason domestic production was not enough. Even better, have your Indian friends buy a whole bunch of “paper gold” on the LBMA and Comex, and then take physical delivery. Har! Having a bunch of gold in a vault does not, in itself, give you a “strong ruble.” Russia’s central bank already has a lot of gold in a vault, and it didn’t help much, although things are looking up recently. Nor does it create a “strong budget,” which, as you may have heard, has something to do with tax revenue and spending — not gold!

But, if we look beyond this impressive list of stupid things in a row, we nevertheless sense the underlying conviction that a reliable gold-based ruble would be very good for Russia; and also, very good for the entirety of the BRICs world which would either use the gold ruble itself in trade and finance (as the gold pound and the gold dollar were used in the past), or imitate its example in creating their own gold-based currencies.

As it turns out, my first book was published in Russian, so you can just learn from that, instead of trying to reinvent the wheel.

This presentation, at the Cato Institute in 2014, goes into many of these topics.

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Nathan Lewis was formerly the chief international economist of a firm that provided investment research for institutions. He now works for an asset management company based in New York. Lewis has written for the Financial Times, Asian Wall Street Journal, Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.
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