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Post Is the Dollar Doomed as a Reserve Currency? Thoughts on the Strong Ruble
Created by John Eipper on 06/23/22 3:19 AM

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Is the Dollar Doomed as a Reserve Currency? Thoughts on the Strong Ruble (Cameron Sawyer, USA, 06/23/22 3:19 am)

We have had a few discussions about how the Ukraine War sanctions are affecting the future of the US dollar as a reserve currency. There is an excellent article on this very subject in the Geopolitical Monitor: https://www.geopoliticalmonitor.com/ukraine-war-a-reshuffling-of-the-global-monetary-order/

As I wrote last month, the weaponization of national reserves accelerates de-dollarization not only of national reserves but of trade (the two anyway go hand in hand), leading to a profound restructuring of the global monetary order. De-dollarization of international trade is proceeding apace; see: https://asia.nikkei.com/Politics/International-relations/China-and-Russia-ditch-dollar-in-move-toward-financial-alliance . I spoke on a panel at a conference a couple of weeks ago with the head of the Shanghai Institute of Security Policy, a well-known Chinese liberal. The discussion was about the effect of the Ukraine War on the European Economy. This guy said some things which surprised me. Not only that the Chinese are watching all this in horror, but that they are galvanized now by American aggression (to which they assign ultimate blame for the Ukraine War, although they condemn Putin's invasion) to get out from under the dollar as quickly as reasonably possible, bearing in mind that China holds more than $1 trillion of US debt instruments and so doesn't want the value of the dollar to collapse. He said further--and I had not heard this before--that Russia, China and several other countries are working on the creation of a new commodities-backed currency for international trade, with guarantees to never be manipulated or used for political purposes, which they expect will eventually eclipse the US dollar. I have written to him to ask for more information about this.

Desire to get out from under the US dollar and hence out from under the US economic strong-arm is not limited to the Russians and Chinese. The conference I was speaking at was attended by a number of very important European bankers (some of the very people Eugenio Battaglia would call "banksters") and investors, a Deputy Minister of Defence of Spain, and others. The moderator of my panel was the head of real estate of Bank of America. Widespread hostility to US policy, in Ukraine, and elsewhere, was expressed. Achieving "strategic autonomy" for Europe was widely discussed, as was further strengthening of euro-denominated trade and currency reserves. The risk of nuclear war between the US and China was discussed. Someone described the Ukraine War, not without bitterness, as a clash between two rogue powers, the US and Russia, with Europe caught in the middle. No one in the audience spoke up to disagree. It was somewhat hair-raising, particularly the talk about nuclear war. What times we live in.

JE has several times speculated that the ruble is being "propped up artificially," and has asked whether Russian citizens have the right to buy and sell foreign currency. I regret that I have been too busy with my work lately to participate in WAIS or answer these questions, but I'll try to briefly respond here.

I'm not sure why anyone thinks that a strong currency is a good thing. For an export-oriented economy like Russia's, or China's, a strong currency is very, very bad, making their export goods uncompetitive (has everyone forgotten how bitterly we criticized China for keeping their currency low?), making their foreign reserves worth less. All countries need stability of their national currencies--volatility increases perceived FX risks which have to be, unprofitably, priced into contracts, making international trade less efficient. So naturally Russia fought (successfully) against the sharp reflexive drop in the ruble which occurred immediately after sanctions were announced. But that does not mean that the Russians want the ruble to stay high.

Wanting the ruble to be stable, and wanting it to be high, are two different things. On the contrary, a too-strong ruble, a result of perennial budget and trade surpluses, has been a chronic problem for Russia for decades. Russian oil is quite expensive to extract, and the cost structure is denominated in rubles. A strong ruble reduces profits and reduces tax revenues. But besides that, Russia exports a lot more than just oil. Russia is one of the leading exporters of heavy industrial equipment, nuclear power plants, and military goods. An unstable, or too strong ruble, is very bad for Russian exports of all types and therefore for the Russian economy. So for some weeks now, the Russian central bank has been working to bring the ruble down. See: https://www.themoscowtimes.com/2022/05/24/russia-eases-capital-controls-to-hold-back-surging-ruble-a77778 . Alarm inside Russia over the strong ruble is widespread; see: "Russia Eases Capital Controls as Ruble's Strength Threatens the Economy", Wall Street Journal https://www.wsj.com/livecoverage/russia-ukraine-latest-news-2022-05-24/card/russia-eases-capital-controls-as-ruble-s-strength-threatens-economy-EkUBEKHFw3wWHAGHHOD8

In short, the ruble has never been "artificially propped up." Capital controls merely provided short-term stabilization in the immediate wake of the harshest sanctions imposed in human history. After the initial shocks were over, the ruble was driven up by natural economic forces--supply and demand. Imports from the West were radically reduced by sanctions, which greatly reduced the demand for Western currencies. The volume of exports has been little affected by sanctions, but the prices of those exports, at least the hydrocarbons, have soared, increasing export revenues. What do you get when you increase demand for the ruble and reduce demand for foreign currencies? For God's sake, this is Econ 101. Supply and demand. The increase in the value of the ruble was entirely predictable, so Biden's comment about "the ruble is rubble" seems strikingly ignorant.

JE asked about Russian capital controls. As an emergency measure after the announcement of sanctions, Russian exporters were required to convert 80% of their foreign currency earnings into rubles. But exporters were allowed to immediately reconvert them back if they wanted to. Russian companies and Russian private persons have never (since the end of the Soviet Union) been restricted in the purchase, sale, or ownership of foreign currency. Other capital controls imposed in February and March included temporary bans on transferring money into foreign banks, and on private citizens carrying more than $10 000 per month out of the country. The full text of the capital controls can be read in English here: https://www.dentons.com/en/insights/articles/2022/march/3/russia-sanctions-capital-controls-countermeasures . Some people have jumped to the conclusion that it's "back to the USSR" where currencies are concerned, complete with furtive black market exchanges in dark alleyways, and fixed exchange rates, like in Soviet times. Like the conclusion that Putin is trying to recreate the USSR--this is a fantasy. The Russians understand better than anyone that non-convertible currencies don't work.

The capital control measures are being gradually eliminated. Russia's powerful and very libertarian Central Bank head, Elvira Nabiullina, considered by many to be the chief architect of the Russian economy, is philosophically opposed to capital controls. See: https://www.yahoo.com/lifestyle/russia-rethink-export-policy-central-063953369.html . As an aside, Nabiullina, who is widely considered to be one of the world's best central bankers (and I've met her, and can confirm that she's brilliant)*, is said to have attempted to resign because of opposition to the Ukraine War, but was somehow persuaded to stay on. See: https://www.bloomberg.com/news/articles/2022-03-23/russia-central-banker-wanted-out-over-ukraine-but-putin-said-no . The government denies that there is any truth to this, but it rings true to me.

The Russian economy is suffering from inflation and is predicted to contract by 10% this year. These are by no means good economic times in Russia. And the worst economic problem in Russia, at least in the long term, is not the Western sanctions, but the profound brain drain occurring as young, educated people opposed to the war and sick of the regime flee the country. But Russia has been working for years to insulate itself from vulnerability to Western sanctions. There are no signs so far of impending economic collapse, and a lot of the slack created by Western sanctions is being eagerly taken up by China, India, and other large economies which are not part of the US bloc, as those countries work to protect themselves from the US dollar and potential US financial warfare.

*Nabiullina was named Central Banker of the Year in 2015 by Euromoney; and Central Banker of the Year (Europe) by The Banker in 2017. She is the first female central bank head in the G8, and regularly appears on lists of the world's most powerful women. See: https://en.wikipedia.org/wiki/Elvira_Nabiullina

JE comments:  Very informative.  We had not mentioned before on WAIS that Russian companies were required to convert 80% (now 50%) of their foreign earnings into rubles.  This alone goes far to explain the currency's surge.

The larger question is whether the dollar's reign as reserve currency is doomed to go the way of the Spanish Real de a Ocho or (later) the Pound Sterling.  If so, besides proving Tor Guimaraes correct, historians will look back at the "weaponization" of finance as the cause.  Yet what were/are the alternatives?  Neither of the two other choices is satisfactory:  real war, or doing nothing at all.

Our friend Eugenio Battaglia describes all sanctions as self-defeating.  The West is putting a great deal of economic hurt on Russia, but we are taking as much as we dish out.  A (financial) war of attrition?  As long as oil prices remain so high, Putin may be able to weather the storm.

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  • Further Thoughts on De-Dollarization (Tor Guimaraes, USA 06/28/22 4:24 AM)
    I was surprised by Cameron Sawyer's surprise at his encounter with a Chinese economist, who said that "Russia, China and several other countries are working on the creation of a new commodities-backed currency for international trade, with guarantees to never be manipulated or used for political purposes, which they expect will eventually eclipse the US dollar." (June 23rd)

    De-dollarization has been going on for a very long time, motivated de facto by our government's need to print money to keep up a massive Ponzi scheme where new generations pay for the earlier ones.  The Chinese government is smart enough to know what I have been posting for years about the financialization of our economy, the Fed's indulgence feeding the excesses of Wall Street at the expense of Main Street, but it is too late now. The US government/Fed/Treasury have no way out of the mess we are in.  The risk has turned into reality and the handwriting is everywhere: our infrastructure is in shambles, our currency is still viable because it is still used widely for now, poverty is increasing dramatically, while our government cheats with statistics, while the broadcast media entertains and misinforms the people. As Cameron said, the US government has helped destroy our currency by overprinting and weaponizing it, creating the need for currency alternatives.

    As I stated before, US Dollar hegemony has been lost over the years little by little starting in 1971, when Nixon could not keep the gold peg. The Saudis enhanced it by enabling the Petro Dollar, and the US consumer and business made the world addicted to it by buying. Today, after negligible efforts to dethrone the dollar, there are alternative systems that used in combination can seriously cut the percentage of worldwide business transactions being denominated in US dollars versus something else. That will hurt us badly financially and economically. It is widely known the Russians have their own system to de-dollarize, and it works. The Russians are increasingly working closely with the Chinese in everything, and there is nothing as potentially pervasive and in advanced state of implementation as the Chinese Crypto Yuan, backed by an enormous stash of gold.  People in the know believe it will surprise us as the Russians did. All the little islands in the world so far underserved by Western banks can and are making plans to go online.

    I look forward to any news Cameron's new Chinese acquaintance might contribute to this discussion.

    JE comments:  Tor, several times on WAIS you've lamented the US abandonment of the gold standard.  Can you elaborate?  No nation today has more than a symbolic connection to the precious metal, and there must be a reason for this:  it limits the money supply, which limits everything that money does.  Too bad William Jennings Bryan isn't around to comment.

    You say it's too late, but in an ideal world would you advocate shouldering the Cross of Gold?

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    • In Defense of Gold (Tor Guimaraes, USA 06/29/22 4:06 AM)
      John Eipper asked, "Tor, several times on WAIS you've lamented the US abandonment of the gold standard. Can you elaborate? No nation today has more than a symbolic connection to the precious metal, and there must be a reason for this: it limits the money supply, which limits everything that money does...In an ideal world would you advocate shouldering the Cross of Gold?"

      We have discussed the topic before numerous times, and it is very simple: over the centuries gold has become a symbol for something that is real in the fake world of fiat currencies. Today in some cases it has been replaced by a basket of "stable" fiat currencies (like the euro, US dollar, and a few others) which obviously should not be trusted either; have you looked at the yen and the British pound lately? Have you looked at the US dollar value vis-a-vis gold and other real things?

      One of the pillars of the ruble's ability to become today's strongest currency was its threatened connection to gold. Also, as I mentioned before, the Chinese have developed a potentially pervasive currency, in a relatively advanced state of implementation, the Crypto Yuan, backed by an enormous stash of gold and probably other commodities. People in the know believe it will surprise us how big their gold stash is. Thus, it is wrong to say "No nation today has more than a symbolic connection" to gold.

      Furthermore, there is no merit in the dramatic nonsense of climbing on or "shouldering the Cross of Gold." The point is that governments love the ability to do whatever they want and have us suckers pay for their adventures and the Ponzi scheme of having the new generations pay for making their real masters more wealthy. To stop the Ponzi, just peg the currencies to a basic basket of valuable commodities, including gold if you wish. That should do the trick.

      Such financial discipline would reduce the appetite of hegemonic governments to print money against their citizens' interests and indulge in military adventures all over the world and bailing out corrupted financial institutions. It will force our corrupt leaders into at least a modicum of interest in solving problems important to the citizenry. We should try it.

      JE comments: A gold standard does impose "discipline," but at what cost--what human cost?  For starters, what about the risk of massive deflation and the inability of governments to respond to crises of all types?  And don't overlook the obvious:  you can't eat gold or put it in your gas tank. It has value simply because everyone agrees it does.  Don't currencies work the same way?

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