Russia’s move to gold could shock your company
by Eric Sherman
Russia, suffering US and EU sanctions, took a surprising step – its central bank fixed a price of 5,000 rubles for a gram of gold. Few Western investors or executives noticed.
After this Russia laid its net. Its finance ministry announced that it would require payment in rubles for oil, natural gas and its other important exports.
“What the Russians did was a genius, I hate to say it,” explains Jack Bouroudjian, former president of Commerce Bank in Chicago and now president of Global Smart Commodities Group. “It forces people to go to the Russian central bank and pay for gold to get the ruble to transact.” The ruble was trading in the range of 70 to 80 for one US dollar. After the sanctions, it fell to 120. “Now the ruble basically recovered, trading 80 rubles for the dollar. And it’s because of the way they linked the ruble to gold.”
US companies that have international suppliers or customers may be shocked by Russia’s golden move. Foreign trading partners may be required to exchange gold for rubles to pay for inputs such as energy, minerals, or fertilizers, and therefore demand that their American counterparts pay in rubles or bullion. Additionally, U.S. firms may need to obtain a plethora of rubles to pay for their own inputs for foreign-based factories, warehouses, or raw materials.
A Russian ruble coin is pictured alongside a US dollar bill and one dollar coin in Moscow on March 15… [+] 2022. – Russia has suspended the sale of foreign currencies until September 9, the central bank said in a statement, amid unprecedented economic sanctions on the country following its offensive in Ukraine. (Photo by AFP) (Photo by – / AFP via Getty Images)
AFP via Getty Images
By tying the ruble to gold, Russia insists on making its currency independent of the US dollar. The requirement of countries to buy their desired major exports with the ruble is an attempt to create an alternative global financial route and increase the amount of gold.
Overall, the move is shrewd geopolitical PR “showing that Russia is a major politic”. [Putin] can make Western leaders politically vulnerable,” said Andrei Korobkov, professor and director of Russian Studies in the Department of Political Science and International Relations at Middle Tennessee State University. “It’s sending [other countries] A signal that it is time to start destroying Western monopolies and the financial strength of the dollar.”
Russia’s move, like a forced error in baseball, was set in motion by the actions of the Biden administration and other Western powers in response to that country’s invasion of Ukraine. Even though Russia’s debt to GDP ratio is very low – around 18% according to analytics consultancy World Economics – the country is close to default on two different dollar-based bonds because the US blocked Russia’s access to US dollar holdings Is. Then, Russia tried to pay in rubles. No dice. So Russia needed to find another source of dollars to pay its bond holders. Getting gold for its ruble (which, in turn, would be used to purchase oil and other energy and fertilizer products), gives Moscow to trade for dollars in international markets and thereby pay its bond holders. does.
A view of the Russian Central Bank headquarters in the city of Moscow on February 28, 2022. – Russia’s … [+] The central bank announced on February 28, 2022 that it was raising its key interest rate from 9.5 percent to 20 percent as the West braced the country with sanctions over Moscow’s invasion of Ukraine. (Photo by Natalia Kolesnikova / AFP) (Photo by Natalia Kolesnikova / AFP via Getty Images)
AFP via Getty Images
Russia is not alone in its will. Mitchell said “China has been clear” in its desire to displace the dollar and make the yuan more central.
“The biggest takeaway for anyone trying to displace the dollar is that it is very convenient when everyone is using the same currency,” Mitchell said. “If you have people who want to pay or get this currency or that currency then it complicates things. The other issue with that is if you are going to be holding a currency that is your currency. If not, then you want a currency that is widely usable and that many people want. Because of capital controls in China, the yuan hasn’t satisfied that situation to the same extent.” Although China has reduced support for the yuan, Mitchell said, it still artificially suppresses the value of the currency relative to others so that the country can export more easily.
China is taking preliminary measures to protect its government assets from financial sanctions, as the US launched against Russia. Regulators of China’s central bank met with domestic and foreign banks to discuss how to protect their overseas against potential US-led sanctions that could be triggered by China to impose military force against Tawian. Maybe, a vulnerable island that China considers its territory.
Get ready for a new round of efforts by Russia and China to displace the US dollar as the world’s reserve currency – the credible default for financial transactions everywhere.
The desire to replace the US dollar as the world’s reserve currency is nothing new. “Historically the EU wanted to do this,” said Christopher Mitchell, assistant professor of politics and international relations at Mount Holyoke College. “I think there is a global feeling that the euro is not ready for that role unless the EU supports it with a financial and political union. As long as they have these existential questions, even if the Europeans are ready for it. Wanting to bid, there are a lot of questions about the EU and the Eurozone.
Today, almost all international transactions take place in US dollars – everything from agriculture and ammunition to credit cards and oil barrels. This gives the United States some unique advantages: its national debt is denominated in its own currency and it is usually cheaper to borrow in the greenback than in the ruble or yuan. If the dollar loses its special status as “the world’s reserve currency”, the price of its imports will rise and the price of its exports will fall. And Americans will be forced to export to earn foreign currency to pay off their national debt, which is already above $30 trillion.
A man waits at a bus stop that displays the United States national debt on June 19, 2020… [+] Washington DC. (Photo by Olivier Doliari/AFP) (Photo by Olivier Doliari/AFP via Getty Images)
AFP via Getty Images
“If you love fishing, if you like being on boats, you need that lighthouse, you need that safe harbor,” said Giacomo Santangelo, a senior lecturer in economics at Fordham University. Not only in case of danger, but for overall orientation and orderly operation. “Reserve money is that safe harbor” [providing] Stabilization of trade and money markets. ,
“The stronger a nation’s currency, the cheaper imports are going to be from other countries,” said Centangelo. “Their currency goes further into the world market.” Companies and individuals see their purchasing power moving further. The country can also borrow at low interest rates, which is important to the US for financing the national debt.
Neither Russia nor China nor the European Union is yet in a position to displace the supremacy of the dollar. Even so, a series of unfortunate events could quickly take away the king dollar.
“The dominant role of the global currency is on a tipping point model,” says Mitchell, pointing to the time the British pound played a role until the 1950s, when the country needed “too much to support a major currency”. was considered weak. The British pound never regained its global role.
There will be a slow transition, more “an accumulation of dissatisfaction with the current order that does not manifest in change unless they suddenly do,” Mitchell said. “Certainly, China and Russia and some other countries would prefer to displace the central role of the dollar. This was one of the big dangers of the US engaging in central bank sanctions. [on Russia], There is little push toward actors becoming less comfortable with Dollar’s central role. ,
