We Boggart Bloggers have reported that although the battle lines in NATO's proxy war in Ukrained are drawn along the border between Ukraine's Russian speaking eastern provinces and the western part of the country there is another battle being fought on the economic front as Russia, China and their allies manoeuvre to replace the US$ as global reserve currency. American trade policy in banning of Chinese technology, notably of Huawei, the world leader in G5 mobile technology is n intended not just to suppress competition to American technology but also to discourage inward investment to China. And Russia's invasion of Ukraine (following extreme provocation by Ukraine with support from the NATO powers it must be said,) gave the US government an excuse to cut Russia out of global currency markets.
That action, along wityh other economic sanctions set in train a series of events and rebounded badly on the West, particularly EU member states as misguided 'green energy' policies imposed by Brussels had made the EU heavily dependent on inmported gas from Russia for domestic fuel and electricity generation. In the short term the rouble soared in value when Putin responded to western energy sanctions by setting his own payment terms. But since then, the rouble has declined as the US Federal Reserve has massively increased America's national debt in order to prop up the struggling dollar.
But Russia and China have not been standing still, Putin appointed one of his advisers, Sergei Glazyev, to design a trade settlement currency, initially for the Eurasian Economic Union. Simultaneously China was making deals with oil exporters and importers to use the Yuan as the default currency for settling oil contracts, thus beginning an assault on the 'Petrodollar, which has been the standard currency in which oil was traded since the early 1970s.
It is believed that the plan for a gold backed BRICS (Brazil, Russia,India, China, South Africa) international currency was extended at the recent BRICS summit last month. China’s yuan is a component in the IMF’s SDR, a hard-won privilege which might have been threatened if it backed gold as a trade settlement medium. India has a history of Keynesian monetary policies and is keen to develop trade links with the US and its allies, as demonstrated by its hosting of the G20 meeting last weekend and its prospective free trade agreement with the UK. These partners may fear that the consequences of implementing a gold standard might be destabilising for the global currency system before the BRICS alternative is ready to step up.
There is bound to be spreading dissent in NATO this winter as energy shortages begin to bite, in fact the process has already started in Germany where the domestic economy is in freefall without any help from the political incompetence of world leaders. The most recent salvo on the energy front in the war coincides with the onset of winter in the northern hemisphere. Russia and Saudi Arabia , the two biggest oil exporters, have jointly been squeezing oil supplies, pushing crude prices above the G7’s price caps as a means of giving the finger to Joe Biden's handlers who had given strict orders that oil supplies were not to be cut. One area where supply line shortages will hurt the Europeans more immediately is heating oil, which is also regarded as the proxy for diesel prices having increased in dollars by nearly 50% in the last quarter alone.
The importance of diesel is that logistics in Europe and America are almost entirely dependent upon it. No diesel and no freight can be moved by rail or road, not to mention by sea. On top of earlier OPEC+ cuts of 2 million barrels per day, the latest cuts of 1.3 million barrels per day cuts in oil output by Russia and Saudi Arabia are bringing pressure to bear on the supply of distillates (of which diesel is one) and Russia also plans to cut its diesel exports by a quarter, partly due to refinery maintenance (allegedly) and partly to divert supplies to its domestic economy. While the EU’s gas reserves are relatively full at 90% of capacity, it is not nearly enough to see the EU through the winter. From December onwards, there will be a scramble for more supplies. And the end of the agreement on Black Sea grain exports will put further pressure on food prices as well.
Russians are aware that effect of American monetary policy, whether intended or not, is undermining the true value of their oil, something they have been powerless to correct without binding the price of oil to gold. In spite of that it is a mistake to assume this bid to establish a gold standard is a result on the war. In our currency wars page Russia’s motivation to take control of energy values was behind its proposal for a new BRICS gold backed currency and that it was part of a two-step plan.
The first step was to send a signal to markets that the era of the fiat dollar was over, justifying the second step which was for Russia and China, followed by other nations in the BRICS camp to evolve their own currencies onto gold standards as a protective response to a declining dollar. But China was not going to take the offensive against the dollar, and the Keynesian Indians were not convinced.
Russia will take the BRICS presidency next year, so we can assume that the new BRICS currency has not gone away. Meanwhile, if Russia is to use the oil weapon against the West, then it must put the rouble onto a gold standard again as a matter of urgency (it was on a gold standard until Khrushchev devalued the rouble in 1961). If Russia prevaricates on this issue, then Putin’s legacy to be a latter-day Peter the Great will be destroyed by his own currency.
The possible consequences of a Russian gold standard
In the middle of a war, usually a government suspends its gold standard. This would suggest that Russia can only consider a gold standard after its special operation in Ukraine is over. But the modern equivalent of a gold standard, the currency board, has been successfully established in modern times in nations with far worse budget deficits than Russia. Russia was in the fortunate position of a budget deficit of only 2.3% of GDP last year, despite military spending. This year, military spending has soared, and at a guess the deficit will be about 5% of GDP this year, but government debt to GDP will still be about 20%.
Anything other than ball-park numbers for the Russian economy are difficult to come by, and the volatility of the rouble is a further analytical hazard. But some of these numbers are not substantially different from where Britain was economically in 1816, when a return to the gold standard was planned — the exception being her estimated debt to GDP number, which at nearly 200% was ten times that of Russia today. Therefore, there is no reason why Russia cannot put the rouble onto a gold standard immediately.
In doing so, the objective is simple: to ensure that the purchasing power of circulating credit retains its value in terms of goods and services with as little fluctuation as possible. It would allow savers to accumulate credit balances in their bank accounts, and for businessmen to calculate the profitability of their investments with greater certainty. With income tax currently at a flat 13% rate and corporation tax at 20%, in these conditions economic progress will advance surprisingly rapidly. And there is every reason to expect Russia would quickly become an economic counterweight to the sheer power of China, rather than living off the depletion of her natural resources. It is necessary not just for Russia to distance herself from the fate of the western fiat currency system, but also for President Putin’s legacy.
The method of ensuring monetary stability is equally simple: to bind credit denominated in roubles to gold, which both in law and naturally is the money of the people. It is the highest form of credit, there being no counterparty risk. It’s purchasing power in the general sense has held steady through millennia. Importantly, it removes the currency from political control and dollar influences. It allows for the creation and destruction of credit determined solely by the needs of the Russian people, both as businessmen and consumers.
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Meanwhile Putin is crippling the west economically, I'm not going to waste my time mentioning the fantastical reports from within Ukraine, too many contributors to mainstream media op - ed pages and comment threads only want to read jingoistic demands for escalation of conflict, so having returned not long ago from shopping I'll just mention the local ASDA had not one bottle of Rapeseed, Sunflower or Corn oil on the shelves and none of those rather dubious substances labelled vegetable oil or cooking oil. My helper, whose job includes shopping for other people too, tells me Tesco and Iceland are in the same position. Flour and bread will be the next product line to be hit by shortages.
OK I'm fortunate enough to be able to pay £7.20 for a litre of Extra Virgin Olive Oil but not everyone can, as I know from people involved with the local food bank.
It's easy to indulge in triumphalism about how we are 'crippling Putin,' (we're not BTW - as the world map above shows, counties containing 85% of the global population are not sanctioning Russia and are trading as normal,) but should we not spare a thought for the families and individuals in UK, Europe and America this war is crippling.