Beware the Coming Currency and Commodity Trade Wars

Featured Image – Don’t get caught looking down the barrel of a financial gun

COULD GOLD-BACKED RUBLE CHANGE the GLOBAL ECONOMY?

Written by Drago Bosnic, independent geopolitical and military analyst

…from Southfront

[ Editor’s Note: VT readers have been schooled here on the threat of geopolitical grifterism, where creating destabilizing chaos creates a ‘target rich environment’ for pocketing some huge increases in wealth while there is market movement.

This Southfront piece concentrates on the growing synergy of how currency evaluations with commodity prices give insiders who know how to play the swing games an advantage on fleecing the rest of us. And by that I mean not just individual portfolios, but countries, also.

All of us who have anything to lose have to be somewhat aware of what is going on to be able to protect our liquid and unliquid assets.

We need to stay abreast of the hustles the scammers are using that give them a huge advantage over us. The big surprise for me from this article was the trick that an oil tanker with a mix of Russian oil at below 50% gets a sanctions violation pass.

Imagine that, how some insiders got Congress to plant that little goody for those in the know to use. But Russia threw a curveball into the game with its backup plan to demand rubles in payment for its commodities, which boosted its value above what it was when the US hammered it down by the energy sanctions announcement.

While we may not be in a direct shooting war with Russia, the financial war is clearly engaged, which will be uncharted territory for the rest of us… Jim W. Dean ]

Jim's Editor’s Notes are solely crowdfunded via PayPal Jim's work includes research, field trips, Heritage TV Legacy archiving & more. Thanks for helping. Click to donate >>

First published … April 13, 2022

After Russia’s special military operation started on February 24, the United States of America and the European Union immediately imposed the most comprehensive sanctions in recorded history, making Russia the most sanctioned country on the planet by a wide margin, far overshadowing those imposed on Iran, Venezuela and even North Korea.

At first, the effect of these sanctions seemed catastrophic for the Russian economy. The ruble was almost turned into useless fiat money. Or so it seemed at least.

However, after losing over 50% of its value in barely 2 weeks, the embattled Russian currency didn’t just regain all of its value, but also gained momentum and reached values higher than those before the start of Russia’s special military operation in Ukraine.

Most people don’t really understand how the modern economy works, which is why we have decided to talk to Mathias, an economics and finance expert who is currently employed by a large Central European investment bank.

 – Thank You for taking the time to take part in this interview, Mathias. We would first like to start by asking how do You see the current crisis in Ukraine from an economic and financial standpoint and how is it affecting business dealings between Russia and the EU?

– Thank You for having me. It’s great to be here. First off, I would like to start by saying that despite what the media are saying, trade between Russia and the European Union hasn’t really stopped. When reading or watching most European media, there’s an impression that we now have a literal Iron Curtain or some kind of a physical wall separating us from Russia.

This is most certainly not the case. Doing something like that is nearly impossible without causing catastrophic damage to our economies here in Europe. The world has become so interconnected that the entire global economy is like a giant domino mosaic. It’s impossible to change one thing without causing a ripple effect of global proportions.

And this isn’t a new state of affairs. The economic crisis in 2008. started with a crash of the American automotive industry, which, in turn, was connected to insurance and investment giants in the US. Of course, the current situation is different. People seem to have forgotten about the devastating effect of the COVID-19 pandemic, which has been ravaging the markets for well over two years now.

The Ukrainian crisis was the last thing we needed, but the damage is already done. Even if the hostilities were to stop today, the negative effects would still be there for years to come.

 – What do You think about Russia’s request to use rubles for natural gas payments?

– From a political, or better said, geopolitical standpoint, this decision is hardly illogical. However, from a purely economic standpoint, it does create a lot of problems for the established economic ties between Russia and the EU.

Of course, our Russian business partners insist this is the result of freezing Russia’s foreign reserves, making it impossible for Russia to use this money, which left them with no choice but to request rubles for Russian natural gas. The decision to freeze Russian assets was a political one and while we understand the EU’s desire to help Ukraine, we still think economic ties could’ve been left out of geopolitics.

After all, this wouldn’t be the first time it happened. However, with the current situation escalating to levels we haven’t seen in a very long time, we need to find alternatives to keep doing business with Russia. And it should be noted that this isn’t a question of emotions, politics or anything of sorts.

It’s simply a question of common sense. While we do not agree, nor do we condone Russia’s actions in Ukraine, we still need to work with Russia, because it isn’t just a large country in our immediate neighborhood, but also a net exporter of natural gas, oil, electricity, various metals, including rare earth metals and nonmetals, fertilizer and food, among other things.

Most people don’t pay attention to these goods, but they are essential to the basic functioning of any economy. Without these, the whole system just crumbles and we already see that in a massive price hike of nearly all commodities, many of which might not seem connected to oil, natural gas or any of the aforementioned goods.

In this regard, we need to find mechanisms to continue trading with Russia, because the current price hikes will soon turn into shortages if we were to cut ties with Russia altogether. And if this means we will need to find ways to trade in Russian rubles, I believe we don’t have much of a choice.

– You’ve mentioned price hikes. It seems the officials in the United States have started using terms like “Putin’s price hikes” and “Putin’s inflation”. Do You think these are in any way connected to President Putin?

– I cannot comment on statements given by US or any other officials, for that matter, but what I can say is that connecting inflation and price hikes to one person, whoever that may be, is an oversimplification, to say the least.

As I’ve mentioned before, we’re still going through a pandemic, and only recently we’ve started relaxing the lockdown measures which have been in place for two years in virtually all of the world’s top economies and the US is no exception to this. As a result, normal economic activity wasn’t just disrupted, but it simply came to a halt.

This wiped out the demand in entire sectors of the global economy, slowing down or even shutting down supply lines. People were left without work, but they still had needs. In order to meet those needs, many countries printed excessive amounts of currency in order to finance the lockdown measures.

And despite the significance of the Internet for our economies, this pandemic taught us that we still can’t really run an economy which is completely online. This has become even more obvious during the current crisis in Ukraine, because both Russia and Ukraine export commodities of strategic value.

Due to hostilities and the subsequent sanctions, combined with excessive currency emissions, especially in the US and EU, we now have these price hikes which are affecting regular people, which again negatively affects demand, resulting in a very volatile mix of high inflation and stagnation, otherwise known as stagflation. It’s very much an economic catch-22. There’s no way to really stop it.

This is especially true for the US, EU, Japan and the UK. Our economies are more based on secondary and tertiary sectors of the economy, such as banking and finances, instead of production and commodities, which is the case in most developing economies, such as the BRICS countries, for instance.

 – Do You think there is a way to ameliorate the effects of sanctions, without getting caught in geopolitical circumstances of the opposing parties?

– That is the million-dollar question. Or should I say ruble. Jokes aside, we are working on mechanisms to do exactly that. Unfortunately, it is nearly impossible to affect geopolitical factors in a crisis of this magnitude.

What we can do is try to find alternatives. However, the problem with the alternatives is that they are all too expensive, prohibitively expensive even, which doesn’t make our position any easier.

We are also witnessing hypocrisy coming from some of the global players which are officially condemning Russia and imposing sanctions on anyone trying to do business with Russia, but at the same time, they are circumventing their own sanctions by importing oil, fertilizer and other commodities and even reselling these goods to EU countries.

– Are You referring to the US? How are they doing this?

– I would like to avoid making any direct references, but we are witnessing it as we speak. As for how this is done, it’s pretty simple. Let me give you an example. If an oil tanker has less than 50% of Russian oil in it, it doesn’t officially transport Russian oil.

So, if your tanker has 49% of Russian and 51% of Norwegian, Dutch or British oil, then it is officially transporting Norwegian, Dutch or British oil.

 – Is that legal?

– It’s not illegal, but it most certainly is immoral. Especially given the fact that sanctions are imposed on any party buying Russian oil or natural gas, resulting in untold damage to our economies. Countries which are overseas rely on tankers, so they can easily implement this strategy.

The EU, on the other hand, is connected to Russia via a series of pipelines. There’s no way for us to use “less than 50% of a pipeline”. Which is why cheap moralizing about the EU supposedly financing the war in Ukraine is dishonest, at best.

 – But even if the EU decides not to impose sanctions on Russia’s energy sector, how could it resolve the issue of rubles for gas, given the recent statements that it will not use rubles?

– I believe those are just political statements designed for domestic use. If the EU had any alternative to the Russian energy sector, it would’ve sanctioned it by now. This implies that we will need to find a way to pay for Russian natural gas and oil.

Whether EU officials will give in to Russia’s demands or maybe find a middle ground is irrelevant. What’s realistically possible and relevant is that our economy will be disrupted and damaged beyond repair for the foreseeable future if we fail to find some kind of arrangement with Russia.

Seizing Russia’s massive forex (foreign exchange) assets proved to be unwise in this regard, because it undermined the confidence in both our currency and our international financial obligations. In the world of finance and banking, this is the Holy Grail and it would’ve been much better had we left it alone.

 – You’ve mentioned the freezing of Russia’s assets. What happens if Russia defaults on its debt payment due to the seizure of these forex reserves?

– There is a 30-day grace period for most bond payments. We can only hope that the US Treasury will stop blocking Russia’s attempts to make the bond payment. However, if the US continues blocking Russian payments, in US dollars or any other currency, the Russian government can take legal action.

More specifically, it can cite external forces preventing the payment, which technically isn’t considered a default. While legal proceedings are underway, any bond payments are postponed for the duration of the legal process.

 – What do You think the usage of rubles in international trade can lead to?

– As we all know, the ruble isn’t a global reserve currency, unlike the US dollar, pound sterling, euro or the Japanese yen. We might add the Chinese yuan to this list, since it’s already effectively used in that capacity. However, the seizure of Russia’s forex assets and the sanctions imposed by the EU have pushed the ruble to a free fall.

In order to prevent hyperinflation, the Russian Central Bank pushed the interest rates to 20%, preventing further loss of value. However, this didn’t turn back the clock. It was simply damage control. What actually turned back the clock is Russia’s announcement it will only be taking rubles for natural gas and oil payments.

That was when the Russian currency regained not just all of its value, but also exceeded the pre-sanctions exchange rate. In addition to this, Russian Central Bank also announced it will be pegging the ruble to gold. More specifically, a gram of gold will be worth 5000 rubles.

This would make it the first gold-backed currency since US President Nixon abolished the gold standard in 1971. However, some analysts have stated that Russia will also be pegging the ruble to natural gas, oil and even diamonds and other commodities, making the demand for ruble even higher.

 – What do You think Russia’s end game with all this be?

– It’s very difficult to say, but I have a few ideas what Russia hopes to achieve with all this. The first consequence may very well have to do with the price of gold, more specifically the difference of the price of gold in rubles and US dollars, after Russia pegged a gram of gold to 5,000 rubles.

If the price of gold on the world market is over 1900 dollars per ounce (around 28 grams), when converted into rubles, an ounce can be bought for an equivalent of 1,500 dollars. In doing this, the Russian Central Bank artificially raises the value of the US dollar by around a quarter, which may seem like a good thing for the Americans, but it will actually lead to everyone rushing to buy these gold-backed rubles in Russia and then buy gold for a price which would effectively be 25% lower.

This could have a dramatic effect on the world financial market. The value of the ruble would begin to rise sharply due to high demand, because everyone would want to buy it with their stocks of US dollars and euros, while the value of US dollars and euros would go down in the process.

This would soon lead to other countries pegging their currency to gold, while looking to replace both US dollars and euros in order to make profit, but also to prevent a rapid devaluation of their currency due to the reliance on foreign exchange reserves. All of this would have a synergistic, almost cascading effect, an exponential growth, where one effect reinforces and pushes the other.

By doing this, Russia could cause sudden hyperinflation of the US dollar, which the US would be able to slow down only if it started buying rubles, but which would also lead to further skyrocketing demand for the Russian ruble. The same goes for the EU and its currency.

Again, this can lead to a very sharp increase in the value of the ruble to 50 rubles per dollar, then 45, 40, 35, etc. In other words, we might see the ruble going back to pre-2014 levels and even more. The price of gold would also increase sharply due to high demand, as well as the ruble which would now be pegged to gold.

Countries which have large gold reserves would have an interest in buying and selling gold only in rubles or any other currency firmly pegged to gold, because the price of gold in US dollars and euros would be very unstable.

All this would be such a shock to the global financial architecture, that I don’t see any other way to describe it, but to say it would be equivalent to Russia’s economic and financial nuclear strike on the US and EU. At the moment, these top countries of the global financial system can do very little to prevent or even mitigate the consequences of such a world-altering process.

 – But do You think this could potentially lead to a direct confrontation between Russia and the West, given how the political West reacted to similar attempts by Saddam Hussein or Muammar Gaddafi?

– I can’t really comment on something that extreme. What I can say is that I really hope it will never come to that, given the fact that Russia is one of the world’s premier powers. Such a conflict wouldn’t just be economically devastating. It would lead to physical annihilation of our civilization. I don’t even want to think about it. What I’m saying is that the economic and financial consequences would be unlike anything we’ve ever seen.

Of course, this doesn’t mean the West is completely incapable of answering economically. The current problem is that we have too much politics involved in the financial sector. Western countries need to focus on a wiser economic and financial response to this crisis. Ideology and geopolitics should be left out of this, because we need to defuse the situation, not make it worse.

– Let’s hope it doesn’t come to any escalation. Thank You for Your time, Mathias.

– Let’s hope it doesn’t. The pleasure was all mine.

Jim W. Dean

Jim W. Dean is VT Editor Emeritus.  He was an active editor on VT from 2010-2022.  He was involved in operations, development, and writing, plus an active schedule of TV and radio interviews.  He now writes and posts periodically for VT.

Read Full Complete Bio >>>
Jim W. Dean Archives 2009-2015