Cyclical transformation turning into doomsday

“The best way to predict the future is to create it”, Abraham Lincoln

The whole world is in accelerating transformation process, which seems to be cyclical and is now turning into doomsday direction.

Politico-philosophical context

We are living historical times; nearly all well-known things and procedures will be destabilized from this on. Transformation process is changing in…

  • polarity of international system, from previous unipolar hegemon towards more polycentric (multipolar) direction, where one possible outcome may be “Twinpolarity
  • world order, from previous liberal political message to multifaceted range of political doctrines
  • Bretton Woods monetary and finance system (fixed after WWII, since 1944), all present institutions and procedures (IMF, MB, AIIB, BRICS Development Bank etc.) will be re-formed in a “foundry ladle”
  • new geopolitical constellations worldwide, the US-led “Western camp” (Europe, Australia) will face growing challenges from China-led “Eastern camp” (Russia, Iran, India, Pakistan and majority of Asian, African and Latin American countries); some major countries like Japan, South Korea and Turkey may have difficulties to position itself on the scene
  • nothing familiar can avoid thorough-going changes

The first post-Cold War decennium was characterized by optimism, hopes, values and views of the better and safer future, at least among Western countries. The collapse of Soviet Union moved the world system from the bipolarity to the new world order of unipolarity, the US-led unilateral world order with liberal hegemon.

Historian Francis Fukuyama wrote an article: End of History in the National Interest 1989 (which later was published in the form of the book: End of History and The Last Man, 1993).  Fukuyama’s main themes were that after the Cold War, the ideological development is ending, market economy and democracy based on Western liberal values will become as global societal order.

In 1993, as a reply to Fukuyama, Samuel Huntington wrote an article in Foreign Affairs (Summer 1993): Clash of Civilizations. According to Huntington, the ideological confrontations may step aside but instead come cultural and religious value contradictions, which cause clashes between civilizations.

There have been much discussions and argumentation, both among scientists and scholars as well as in public media that the world moved from geopolitical and hard power world to soft power world.

Now, it is clear that Fukuyama’s end of history lasted 20 years and ended by Putin’s prophetic speech in Munich 2007, which started an era of turbulence and slow transformation process accelerating and culminating in 2022 Ukraine crisis.

Huntington’s clash of civilizations did not take place either as such but something much bigger is now emerging, a clash of “world camps”. The humanity seems to be divided in two camps, the Western camp (the US, Canada, Europe, Australia) and the Eastern camp led by China and Russia and covering majority of Asia, Africa and South America.

Here below is shortly studied some key dimensions of this transformation process.

Growing fiat money crisis

Starting from Bretton Woods

After fifty years from the end of the Bretton Woods Agreement, the system of fiat currencies appears to be moving towards a crisis point for the US dollar as the international currency. Whether the US dollar suffers a collapse or merely an accelerated decline, remains to be seen. The current situation is unsatisfactory, widely recognized by multiple commentators, even Americans, calling for a financial and currency reset.

The US Treasury kept the dollar’s exchange rate stable by selling gold via the London Gold Pool at $35 an ounce. Finally, in August 1971, President Nixon stopped the drain by closing the Gold Pool and halting gold convertibility of the dollar (so called Nixon shock) and declared the dollar to be a floating currency. The suspension of dollar convertibility marked the end of the Bretton Woods system. Other major currencies became under pressure and finally in early 1973 all became floating.

From the days of Nixon Shock, when the Bretton Woods agreement was suspended, US Government debt has increased from $413 bn to about $30 trillion — that’s a multiple of 73 times and given the US Government’s commitments, it shows no signs of stabilizing. Measured by money, which is and always has been only gold, the US dollar has lost over 98% of its relative purchasing power in that time.

Triffin’s dilemma allowed the US to run economically destructive policies without undermining the currency catastrophically. Naturally, that has led to the US Government’s belief that not only will the dollar endure but it can continue to be used for America’s own strategic benefits. But the emergence of rival superpowers in Asia has begun to challenge this status and the consequence has been a financial geopolitical cold war particularly between the dollar and China’s renminbi, which has increased its influence in global financial affairs since the Lehman crisis in 2008.

Kinetic, physical war – finance and commodity combat – economic war

The battle over global energy, commodity and grain supplies is the continuation of an intensifying financial war between the dollar and the renminbi (& rouble). It is becoming clear that the scale of an emerging industrial revolution in Asia is in stark contrast with Western decline, a population ratio of 1:12 (the US:Asia). The dollar’s role as the sole reserve currency is not suited for this reality.

Media and the public understand physical wars but the financial and credit combats between currency-issuing power blocs passes it by. Like in all wars, there will be a winner and a loser also in this war. Now, when the US is penalizing the global commodity powerhouse, Russia, the consequence is that the financial cold war has become very hot and is now a commodity battle as well. Bringing commodities into the conflict may lead to unintended consequences. Depending how the Russians respond to US-led sanctions, which they have to do, matters could escalate. Russia may use the commodity export as a “nuclear weapon” and China could compound the problem for the West by restricting its exports of strategic commodities claiming they are needed for its own manufacturing requirements.

Commodities are the visible manifestation of a trade war, while payments for them are not. Yet it is the flow of credit on the payment side where the further battle for hegemonic status is fought. The US and the EU have tried to shut down payments for Russian trade through the SWIFT system and even the Bank for International Settlements is siding with the West today. When comparing the power positions of the Western and Eastern camps, the disproportion turns out: the Western camp (the US, the EU the UK, Canada, Japan, Australia, New Zealand, totaling approx. 1040 million people, 13% of world total), the Eastern camp, depending on definition, 5000 – 6000 million people, 65-75% of world total. The outlook seems to be gloomy for the West.

Economic war escalates, “sanctions from hell”

The Western response to Russia’s invasion of Ukraine has been furious. President Biden has led the Western community in slapping punitive sanctions on Russian elites and firms with the intention of crippling the Russian economy and forcing a change of course. In the wake of Russia’s invasion, the US government has launched its most aggressive sanctions campaign ever, exceeding even campaigns on Iran and North Korea, Russia is now the most sanctioned nation in the world.

Factually, the US and EU have launched an unprecedented economic war… with seeming little thought on how it all ends. Even though many people do not realize it, Russia can escalate to the top of the economic escalation ladder. Just like in a kinetic war, Russia can match US moves to escalate an economic war to the top of the escalation ladder. But unlike a kinetic war, neither side is deterred. On the contrary, it seems all but inevitable that things will escalate from here, which makes the situation incredibly dangerous.

Punitive measures by the West

The US and European governments froze about a half of Russia’s US dollar and euro reserves—the accumulated savings of the nation—worth around $300 billion. This measure as such, has awaken serious worry and concern worldwide, how the action (freezing /confiscating of national wealth of a sovereign state) was performed on light grounds. This action will have thorough-going, massive ramifications in the future.

Russian banks have been kicked out of SWIFT, the system to send international wire transfers. A stampede of Western companies has left Russia, popular cryptocurrency exchange Coinbase blocked over 25.000 accounts linked to Russia; Visa, MasterCard and American Express have cut off Russia from their networks. The US government banned all imports of Russian oil. Even formerly neutral Switzerland joined the orgy of sanctions. These are just a few examples of how Russia is being cut off from the US-dominated global financial system.

Russia as a target of sanctions

Russia is not a tiny country that cannot punch back. On the contrary, it is a giant producer and holder of all kind of raw materials based on the largest natural resource assets in the world. The value of Russian national resources has been estimated, by Swiss bankers some years ago, amount up to $ 75 trillion.

Russia is the world’s largest exporter of natural gas, lumber, wheat, fertilizer, and palladium (a crucial component in cars), the second-largest exporter of oil and aluminum and the third-largest exporter of nickel and coal. Russia is a major producer and processor of uranium for nuclear power plants. Russia is the second-biggest producer of gold accounting for more than 10% of global production. There are many strategic commodities that Russia dominates.

In short, Russia is not just an oil and gas powerhouse but a commodity powerhouse. Europe and many other regions as well cannot survive without Russian commodities. Taking Russian commodities off of global markets would cause an across-the-board price shock that would decimate financial markets, banks and practically every industry.

Counter-measures by Russia and China

All this came as no surprise to the Russians. They have prepared for this exact outcome for many years together with China. The Chinese understand that, if the US can take down Putin, they will be next. That’s why the Chinese are unlikely to abandon their strategic partnership with Russia. So, instead of capitulating to US pressure, Russia immediately implemented alternatives to bypass the US dollar and US-controlled financial institutions. So far, these measures have failed to compel Russia to accept a cease-fire or to withdraw.

In return, Russia has matched these moves with defensive maneuvers and escalations of its own.

Moscow has banned the export of rocket engines to the US, with an official saying, “In a situation like this we can’t supply the United States with our world’s best rocket engines. Let them fly on something else, their broomsticks.”

Russia and China have national, functioning alternatives to SWIFT to facilitate international financial transactions, which limits the effect of being kicked out of SWIFT. Russian banks started issuing credit and debit cards (Russian Mir card) linked to China’s global payment processing network UnionPay. Russia has announced, or already is, doing business with China, India, Iran, Turkey and other countries in local currencies instead of the US dollar, neutralizing much of the effect of sanctions.

Escalation ladder

In perhaps the most significant escalatory move, the Russian government has allowed all external debt obtained from unfriendly countries—estimated to be over $400 billion— to be redenominated in rubles. As a result, instead of paying back creditors in the US and Europe in dollars and euros at Western banks, Russian companies can now repay their external debts by depositing rubles on their creditor’s behalf in Russian banks, which are inaccessible to them because of sanctions.

This move would force the US and EU to either ease sanctions so that the estimated $400 billion in external debt can be repaid or give massive losses to Western banks and other creditors. Russia and the US are climbing the economic escalation ladder, with neither side showing any sign of slowing down.

 A logical next step Russia could take if the US and EU increase their sanctions would be to force Europe to pay for its energy imports in rubles. European buyers would have to first buy rubles with their euros and use them to pay for Russian gas, oil, and other exports. Such a move would neutralize the entire sanctions regime because it would force Europeans to deal with the sanctioned Russian central bank or get cut off from crucial commodities.

The Europeans have no alternative to Russian energy in short/medium term and would have no choice but to comply. Moscow could implement its economic nuclear option, if the US really pushes Russia to the point where it has nothing left to lose. That would be demanding payment for oil and other commodities in gold. Since Russia is such a dominant player in the commodity markets, it could dictate this.

Such a move would send gold skyrocketing and blow up the entire Western financial system. Moreover, the dollar and euro would likely suffer an enormous loss in purchasing power as commodities would be repriced in gold. If the US continues up the escalation ladder, this is where it will ultimately lead meaning we are likely on the cusp of a historic financial earthquake altering the direction of the US forever. Yet few people are aware of what is happening.

Unpredictable and unpleasant outcomes of West’s sanctions

Global supply shocks are historically rare events. The world is now experiencing two consecutive shocks in the form of the Covid Pandemic shock followed by the West-Russia economic war. The most visible symptom of the supply disruption is the sky-high price of energy and a range of other commodities.

The waging of a long and all-out military war usually exerts a toll in terms of surging prices. But this economic war waged through Western sanctions by states not simultaneously engaged in direct military conflict is a very special case. The practical similar examples in history for such warfare is nearly zero. Indeed, there is no experience with which usefully to compare the West’s economic war against Russia in the present.

It started as a clear threat by the US and its main European allies, aimed at deterring a Russian invasion of Ukraine. It failed in that first objective. Both the economic war and the military war are now in a “dig-in” phase. Obviously, the Russia’s military campaign will reach a “permanent ceasefire stage” long before the effective end of the economic war.

This economic war’s scope is unbounded. The campaign plan in the present dig-in phase is apparently to “close down” large parts of Russian economy. In considering scope, one should recognize that in the West’s economic war against Russia, much of the world is neutral—including China, India, Latin America, Africa and Middle Eastern nations. So, what appears initially as a cutoff of trade and financial intermediation might quickly mutate into something more like geographical diversions on a large scale.

There has been no statement of economic war aims—whether regime change in Moscow or Russian military withdrawal from Ukraine. But one can assume that an armistice agreement in which Russia takes over large corridors of Ukrainian territory in the East and South would not bring the economic war to an end.

Russia’s rearranging of its trade and international business relationships away from North America and Western Europe to the neutral world would amount to a substantial negative demand shock for Europe (most of all Germany and the eastern European countries). That comes on top of the negative effects of the energy shock.

Among direct negative economic impacts of sanctions in the West, there are price-increase implications or inflation and the efforts of governments to work against the negative economic impact.  The squeeze on real incomes from energy and wider commodity price hikes and the loss of incomes and employment hit overall prosperity in the West.

Global demand for US Treasury bonds, hitherto regarded as the premier reserve asset, is to become much less robust, at least on the part of large present dollar-reserve holders. Higher yields on Treasury paper would weigh on US public finances and increasing debt servicing cost would mean that the Fed is forced to keep rate hike low and allow monetary inflation.

Coincidentally, the US imposing “sanctions from hell”, is facing some ominous events and processes, at the same time: massive federal debt (and other debts), record large federal budget deficit, expansive money supply, record large foreign trade deficit, stumbling economic policy, national economy entering into recession, inflation is setting records and bankrupting the middle class, which has been the backbone of the American society. All these adverse processes even before the obvious dollar collapse.

Significant Chinese-Russian projects dethroning US dollar

National SWIFT-alternatives and Credit card switch

Russia and China have national, functioning alternatives to SWIFT to facilitate international financial transactions, which limits the effect of being kicked out of SWIFT. This topic has been studied here and here on this website. Both partners have been in the process of de-dollarization for years, more information here, here and here on this website.

After US credit card companies blacklisted with Russia from their systems, Russian banks seamlessly switched much of their payment processing with Russian Mir cards combined   to China UnionPay.

UnionPay is China’s alternative global payment processing network. It works just like Visa, MasterCard or American Express, except it does not depend on the US government’s good graces. It can operate independently of the US financial system. China UnionPay is growing rapidly worldwide. Merchants and ATMs in over 140 countries accept it. It is now one of the largest payment processors in the world.

Joint project – alternative to SWIFT

There are now some, obviously reliable, market rumors that China, Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan will reveal a new, independent, international monetary and financial system, which is progressively interconnecting EAEU free trade with the Chinese Belt and Road Initiative (BRI).

The member states of the Eurasian Economic Union (EAEU) and China will develop a project for an independent international monetary and financial system. This was agreed upon by the participants in the economic dialogue “A New Stage of Monetary, Financial and Economic Cooperation between the EAEU and the PRC, Global Transformations: Challenges and Solutions”, which was held on March 11 via videoconference.

It is envisaged that the system will be based on a new international currency, which will be calculated as an index of the national currencies of the participating countries and commodity prices. The first draft will be submitted for discussion by the end of March. Russia and China will also reveal their Unfriendly Nation Lists.

The Eurasian system is bound to become a serious alternative to the US dollar, as the EAEU may attract not only nations that have joined BRI but also the leading players in the Shanghai Cooperation Organization (SCO) as well as ASEAN. West Asian actors – Iran, Iraq, Syria, Lebanon – will be inevitably interested. In the medium to long term, the spread of the new system will translate into the weakening of the Bretton Woods system, based on the US dollar.

Oil trade – from petrodollar to petroyuan

One of the core staples of the US dollar’s reserve status has been a global financial system based on the petrodollar, where oil producers would sell their product to the US (and the rest of the world) for dollars, which they would then recycle in dollar-denominated assets and investing in dollar-denominated markets. This procedure explicitly props up the US dollar’s status as the world reserve currency and the US as the world’s undisputed financial superpower.

Now, Saudi Arabia is in active talks with Beijing to price its oil sales to China in yuan, a move that could cripple not only the petrodollar’s dominance of the global petroleum market but also a move aimed at the heart of the US financial system, which has taken advantage of the dollar’s reserve status by printing as much dollars as needed to fund government spending for the past decades.

China buys more than 25% of the oil that Saudi Arabia exports, and if priced in yuan, those sales would boost the standing of China’s currency and set the Chinese currency on a path to becoming a global petroyuan reserve currency. The Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.

Futures contracts within the Saudi petroleum and natural gas company, Aramco, may also be denominated in yuans, which would be dubbed the “petroyuan.” This would be a major shift in the oil market, as approximately 80 percent of oil sales are transacted in US dollars.

The oil market and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency. If that block is taken out of the wall, the wall will begin to collapse.

So, the pieces of the endgame are falling into place: Russia is starving the western world of much needed resources, sending commodity prices ever higher, while its silent partner China quietly picks up the monetary pieces and takes advantage of the Western scramble to secured resources at all costs and approach all those other “non-western” former petrodollar clients – who are also rich in other resources – to offer them a new product, the yuan, which Beijing is now actively and aggressively pushing to dethrone the dollar as a global reserve currency.

A growing coalition

Russia’s national initiatives to avoid holding of the dollar may be defensive in nature but it has also worked with other countries to chip away at the dollar’s dominance. These coalitions present a long-term threat to the dollar’s preeminent role in international commerce and, consequently, a challenge to US global leadership. The shared desire to reduce dependence on the dollar has strengthened the relationship between Russia and China. Bilateral currency swaps between the two central banks helped Russia bypass US sanctions in 2014 and facilitate bilateral trade and investment.

In 2019, China upgraded its ties with Russia to a “comprehensive strategic partnership of coordination for a new era,” the highest level of China’s bilateral relations. Thereafter, Russia’s central bank invested $44 billion in yuan, increasing its share in Russia’s foreign exchange reserves from five to 15 percent in early 2019. Russia’s yuan holdings are about ten times the global average and account for nearly a quarter of global yuan reserves.

Putin seeks to expand such alternative financial infrastructure through Russia’s dealings with other countries. In 2019, Iran and Russia connected their financial messaging systems, thereby bypassing SWIFT by allowing banks in both countries to send cross-border transaction messages. Russia and Turkey have discussed using the ruble and the Turkish lira in cross-border trade. Russia introduced its version of SWIFT to banks in the Eurasian Economic Union (a partnership of five post-Soviet states) and expressed interest in expanding it to countries in the Arab world and Europe.

Russia has tried to muster further support for de-dollarization in multilateral forums such as the BRICS grouping, which consists of Brazil, China, India, Russia, and South Africa, and the Shanghai Cooperation Organization. BRICS’ New Development Bank has raised funds in local currencies as part of its goal.

In 2020, SCO members underscored the importance of using national currencies in trade among one another and discussed the establishment of a development bank and development fund. Russia and China can use these forums to create a broad de-dollarization coalition with the promise of greater financial autonomy for all and reduced dependence on the dollar.

In just last couple of months, Russia has made significant trade agreements with China, India, Pakistan, Iran, UAE and some other states regarding bilateral trade and using of national currencies in settling. By isolating Russia and its trading partners, the US government incentivizes almost half of mankind to find alternatives to the dollar. In other words, the US is undermining themselves and promoting de-dollarization on an unprecedented scale.

The contrast between a forthcoming divided global economy would be stark: nations around China and Russia seem genuinely interested in the idea of sound money backed by commodities (or even gold), while the United States seems preoccupied with academic jargon trying to convince both itself and others that debt is money that “we owe to ourselves”.

Closing words

2020s will be the Time of Great Chaos until the dust settles down at some point later in this decade. If the humankind avoids Nuclear Armageddon and wages “just economic wars”, still the future outlook is very unlike compared with today’s situation.

The status and position of the Western camp will be fallen down significantly. The US will be reduced, highly likely, as a middle-size power with heavy-indebted, dwarfed economy and robustly castrated military machine. Europe has run itself in the marginal by the sanctions policy and its insane energy policy, which has destructed the whole industrial backbone of Europe, making it as a kind of “outdoor museum”. In addition, Germany’s re-militarization will give rise to enlarging suspicions and discord inside the EU. Australia is living in containment in the Pacific.

No doubt, this century will belong to Asia and will be led by the great power China supervising the Eastern camp.

Right now, the Western camp may see Russia as a “rogue state”, due to losing the battle of PR and image regarding Ukraine crisis in the Western media. On the other hand, it seems that Russia may be the most outspoken “champion” of throwing off the yoke of the dollar among many Asian, African and Latin American countries. Russia’s massive natural resources confirm its recovery. China’s commitment to diversifying its foreign exchange reserves, encouraging more transactions in yuan and reforming the global currency system through changes in the International Monetary Fund further buttresses Russia’s strategy.

Deteriorating US-Chinese relations incentivize Beijing to join with Moscow in building a credible global financial system that excludes the United States. Such a system will attract countries under US sanctions. It would even appeal to major US allies who hope to promote their own currencies to the detriment of the dollar. When China, Russia, India, Iran, Pakistan, Vietnam, Indonesia, Brazil, South Africa and the majority of Asian, African and Latin American countries belong to this new system, there is no doubt of the winner.

Politically such “forever crisis” like “Taiwan Reunification” and North-South Korea case will be settled, under China’s supervision in one way or other but a lot of other crisis and political disputes still stay for the future.