Russia Challenges the US Dollar’s Hegemony

Russia Challenges the US Dollar’s Hegemony. By Tom Luongo.

Russia recently announced that the West would henceforth have to pay for its gas and oil in rubles. This will create a large new demand for rubles, which will thus move up in value.

Next, Russia linked the ruble to gold, the old money that the bankers cannot print.

On Friday the Bank of Russia announced:

RUB5000 to the ounce at an exchange rate of 100 RUB/USD implies a $1,550 per ounce gold price. …

Russia won’t be selling any gold. They’re buying it. …

What [Western banks] think they understand is that they still control the flow of commodities around the world through price suppression schemes on the CRIMEX [New York Commodity Exchange, where the worldwide price of gold is set every day], LBMA [London] and ICE.

Banks currently control commodities though their power to manufacture money (as credit) and paper contracts that represent real commodities (thus creating artificial supply).

Davos’ power rests on the ability to create credit and sell it at a positive interest carry to commodity producers. Since base commodity production in any kind of efficient market should be a very low margin enterprise, think 1-4% real annual return, selling them debt to extract oil or gold out of the ground at higher rates than that ultimately sucks all the profit out of the venture.

Free markets when allowed to function properly grind out profit through competitive arbitrage. It is both brutal and the spark of new innovations and efficiencies.

It is the desire for higher profits over baseline that does this.

In base commodities that is difficult, at best, to do. Why? Because they aren’t anything more than a second order good. First order would be the ore or timber harvested. Second order would be the ingot or lumber produced. The higher order the good, the more specialized it is and the higher opportunity for profit through product differentiation on something other than price emerges. [Smartphones, software and social media are several orders higher, and the profits are so much higher, because barriers to competition are so much higher.]

[In resource extraction] most of the major gains in efficiency occurred in the past when the economy was less specialized.

Modern finance controls the producers:

If the banks are on both sides of the trade setting the price of money, then they ultimately control who wins and who loses while this goes on. And let’s not mince words, it’s them. The profit rolls up to those that produce the highest order goods with the most complex supply chains.

The banks plough the profits from getting interest on the original debt into the very companies producing the higher order goods needed to ensure the lower order goods produce no wealth through the grinding out of profit via arbitrage throughout the supply chain.

Don’t believe me? Ask cattle farmers.

In this respect the current financing of these industries is nothing more than a virtualized version of the colonial economic model of the 15th through 19th centuries.

Instead of using physical men to subjugate the locals through superior weaponry and bribes to get them to extract the mineral wealth which the colonialists take back home, today we use the post-WWII institutions to run that same system through debt issuance for [capital expenditure] and the interest payments …

The producer countries of all the mineral wealth in the world are nothing but debt slaves to the money masters in Brussels, City of London and New York. That’s the gig.

But banking and finance have been hitting the debt limit, ever since the GFC in 2008. Debt growth stopped, due to lack of worthy borrowers and the lack of ability to afford even more interest payments. Now the debt problems cannot be staved off by governments any more. Inflation is the harbinger of an upcoming debt catastrophe.

Since we’ve reached the point of debt saturation, where no more debt can be issued to extract mineral wealth and have the markets believe it could ever be paid back at these real yields, the system has to be reset.

The whole Great Reset is a way to crash the existing system but leave the same colonialists in power legally. It’s not really more complicated than that.

When you understand that dynamic now you can understand why Russia, in particular, is the vanguard of the Global South’s desire to change the System of the World.

It is also the one country that has the commodity production power to expose the vulnerabilities of this System.

The country with the most nukes happens to be a commodity producer, and it just threw down a challenge to the banks that rule the world:

The Bank of Russia is now a buyer of gold at 5000 rubles to the gram, or 155,500 rubles to the troy ounce. At a Friday March 25th closing price of RUB96.62 vs. the USD that implies a gold price of $1,610 per ounce.

The ruble is now freely strengthening versus the US dollar.

At $1,550 per ounce the first order effect here is that it implies a RUB/USD rate of around 75. … This creates a positive incentive loop to bring the ruble back to pre-war levels.

Then after that market effects take over as ruble demand becomes structural, based on Russia’s trade balance. Once that happens and the RUB/USD falls below 75, then the USD price of gold rises structurally draining the paper gold markets and collapsing the financial system based on leveraged/hypothecated gold. …

This scheme incentivizes Russians to hold savings in rubles, because the ruble is undervalued. It also incentivizes foreign traders to hold rubles, because the ruble is undervalued relative to [the current] gold price.

Clearly currency speculators in Moscow, Shanghai, Singapore, Mumbai and Hong Kong are having a field day with this.

Coupled with Putin demanding ‘unfriendly countries’ paying for their Russian imports with either gold or the ruble, the natural choice is for them to buy rubles until such time as the price of gold and the ruble are in sync on international markets. …

Davos versus the market:

The reason why this current scheme is already working is that Russia runs a positive trade balance mostly in base commodity exports. Davos doesn’t want them making any money selling those commodities to the world and will continue to put sanctions on to get people to not use rubles.

They are however fighting the invisible hand of Adam Smith’s market. The demand for the ruble will rise above the pre-war exchange rate of around 75:1 vs. the USD.

The price point for gold/ruble implies that exchange rate. Russia will revisit this at the end of Q2. This also implies they expect the ruble/dollar rate to fall to 75 by the end of Q2, if not earlier.

After that if the ruble strengthens beyond that they can adjust the gold buying price.

If the ruble/dollar rate dips below their pegged price, buyers are getting oil at a discount when paying in gold. That will force the CRIMEX and LBMA into a supply shortage situation or they will have to end the expansion of paper gold versus real gold and allow real price discovery to the upside.

If the sanctions are successful in scaring everyone into not using rubles … then the exchange rate will stay stubbornly above 75 and the boycotting world will lose competitive advantage versus those willing to brave the US’s ire by getting Russian commodities on the cheap. …

So who need US dollars for trade anymore? Gold and bitcoin are looking good:

This same scenario is going to play out in Bitcoin, now that Russia has said ‘friendly countries’ can pay for imports with Bitcoin. Has anyone noticed the current rally in the World’s Most Hated Cryptocurrency?

We now have a full gold/bitcoin/ruble (and soon Yuan) interconversion system that completely and utterly cuts out Davos and destroys their colonial debt model while also taking away their power to crash economies through hot money in and out flows.

Because the next step in all of this is for Russia to close their capital account and nationalize the Bank of Russia, making it the only source of international rubles … Internally, the ruble will be de facto backed by gold and can circulate freely.

This might get interesting.

If the US dollars loses its role as the world’s reserve currency, all those dollars being used for trade by the rest of the world outside the US will return to the US, in order to buy things before their value is inflated away. This return home of those previously emitted dollars will cause a large inflation in the US.

Meanwhile, the gap in per capita wealth between the US and the rest of the west will narrow or even disappear — because it is principally caused by the US manufacture of the world’s reserve currency. The US defense forces will have to shrink.

The good news for the US is that their manufacturing industry will no longer be priced out of the world market. Efficient US manufacturers will bloom once more, and the US working class will have more job opportunities.

hat-tip Stephen S.