De-dollarization goes on, April 2023
I have studied this topic in number of articles on my website: basic report “Dollar and de-dollarization”, some recent articles “Armageddon of US dollar approaching”, February 16, 2022 and “New currency system, BRICS and SCO”, January 12, 2023.
Bretton Woods I, II, III
On March 7th, 2022, Zoltan Pozsar, who formerly worked at the New York Fed and at the US Treasury and currently is a currency strategist, published a world-famous research report titled “Bretton Woods III.”
Under Bretton Woods I (1946-71) the US Treasury kept the dollar’s exchange rate stable by selling gold via the London Gold Pool at $35 an ounce. 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 I and formulated “Bretton Woods II”. Other major currencies became under pressure and finally in early 1973 all major currencies became floating.
Bretton Woods III, coined by Pozsar that name,is a reversion back to a monetary system, in which currency is backed by commodities as opposed to being backed by a sovereign issuer’s “full faith and credit.” Fiat currency is a “promise” to repay a debt obligation and nothing more. A hard asset-backed currency is a guarantee that repayment will occur.
Now, that Russia announced the Russian ruble will be a general means of payment in international trade and is backed by commodities (oil, gas etc.), the real game-changer is emerging. Pozsar said that “We are witnessing the birth of Bretton Woods III – a new world (monetary) order centred around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.”
Pozsar distinguishes “inside money” from “outside money.” Inside money is created by the Central Bank/inter-bank lending mechanism that turns one dollar of reserve capital into nine dollars of “credit” capital and the one dollar of reserve capital is backed by nothing tangible – just the “full faith and credit” of the issuing entity. In contrast, Pozsar’s Bretton Woods III means that “outside money” is “commodities collateral,” meaning tangible assets for which definitive value can be determined, as opposed to the sovereign promise of “full faith and credit.” If currency issued by governments and printed by central banks is backed by hard assets, the problem of mutual mistrust is avoided.
Freezing Russian currency reserves, held at western Central Banks, by the US/EU authorities brought to light the inherent fragile point of the modern Central Bank fiat currency reserve system. Any country that keeps currency reserves for trade settlement purposes at foreign Central Banks, specifically the Federal Reserve and the ECB, is at risk of having those reserves confiscated, thereby rendering them worthless.
In response, Russia is now demanding payment for energy in either rubles or gold from “unfriendly” countries. In this trade settlement arrangement, a country purchasing oil or gas from Russia in exchange for gold would need to 1) demonstrate that the gold for trade payment actually exists and 2) transfer the ownership rights to Russia, which would demand repatriation of the gold.
It appears for now that Russia – likely with China’s tacit support – has set in motion a global monetary system reset. In the new system, countries which supply the world with goods that have price inelasticity of demand – like oil, natural gas and food commodities – will have the power to enforce trade settlement in hard currencies – gold or other hard assets rather than fiat currency.
Fatal mistakes of Biden administration – speeding up of de-dollarization
A growing number of countries are threatening the US dollar’s status as the global reserve currency by conducting global trade without dollars.
The process began to speed up after the Biden administration started wielding the dollar as a political weapon by freezing US dollar deposits held by Russians. A critical feature of a reserve currency is its apolitical nature, which Biden is now devastating. After both parties in Washington destroyed the dollar’s stability with inflation, now the Biden administration has chosen to wield the dollar as a weapon. The message to foreigners is clear, they should get out of dollars, while they still can.
In response to Russia’s war with Ukraine, the US froze the dollar reserves of Russia’s central bank (up to $300 billion). To be clear, these were not American assets but were dollars owned by the Russian central bank and the Russian people. The seizure was intended to cause bank runs and collapse Russia’s credit system. It didn’t work but backfired very badly. It exposed the Biden administration’s willingness to violate the trillions of dollars foreigners rightfully own. The danger of this precedent is difficult to overstate.
Smart foreigners started to dump the US dollar, because the US dollar was no longer a reliable store of power. Suddenly it was a political weapon that could be wielded at will against anyone who held it. As a result, dollars begin to look much less appealing to the rest of the world and so de-dollarization began to accelerate at remarkable speed, almost without comment in the American media, over the last year.
Some US currency experts also point out that nobody wants to hold a currency that continues to devalue due to endless printing by the Fed and while Biden “is continuing to send the contents of our treasury – our dollars, to corrupt oligarchs in eastern Europe and around the world,” at the very same time, “he’s selling off America’s most valuable hard asset – that’s our Strategic Petroleum Reserve, because unlike the US dollar, oil – which is in the reserve, has inherent value.
How Biden administration could reverse this vicious circle, would be ending the war in Ukraine but the current politicians in Washington are hellbent on winning this war at all cost. War always is a destabilizing event. It always challenges the existing order but it was the West’s reaction to the Russian invasion that seemed too ominous. President Biden, helped by his Republican allies in the Senate, appear to be determined not simply to topple the Russian government in some kind of regime change war but to blow up the postwar economic order that had served the US so generously for so long.
The real threat was/is the unprecedented economic sanctions that Joe Biden encouraged to impose. Those sanctions were supposed to hurt Russia but it is obvious they are hurting the US much more than they hurt Russia.
Now, the Biden people seem to have no idea, how this is going on. These Biden policies have driven Russia, China, India, Turkey and other countries to accelerate their flight from the US dollar. This may be the most reckless and destructive thing any American president has ever done to the United States.
In the early twentieth century Germany, the Weimar Republic and the government collapsed because of hyperinflation and then economic collapse led to revolutions across Germany and ultimately to the Nazi regime. Why did the German government blow up its own currency? Well, the German government took on too much debt in order to pay for a pointless war.
A pointless war did that and if that sounds familiar, it is exactly what the US has done repeatedly for decades; in Vietnam, in Iraq, in Afghanistan and now in Ukraine. Every time the US got away with it, because uniquely holding the world’s reserve currency. However, this time could be very, very different, since the war against Russia will be the last war the US can afford to fight.
These two “points” below tell all you need to understand the above-described metaphor of Weimar Republic.
Consequences of the loss of reserve status will be devastating to the US economy
It is the only glue holding the US system together. The ability to defer inflation by exporting it overseas is a superpower only the US enjoys. The Fed can print money perpetually, if it wants to in order to fund the government or prop up US markets, as long as foreign central banks and corporate banks are willing to absorb dollars as a tool for global trade.
If the dollar is no longer the primary international trade mechanism, the trillions upon trillions of dollars the Fed has created from thin air over the years will all come flooding back to the US through various avenues and hyperinflation (or hyperstagflation) will be the result.
This dynamic is already in play, as foreign holders of US debt and dollars have been dumping them at record pace since 2017. The process continues at a time, when the Federal Reserve is cutting its balance sheet and raising interest rates, which means there is no longer a buyer of last resort. This may be why multiple foreign central banks have renewed their purchases of gold reserves and are once again stockpiling precious metals. They seem to be well aware of what is about to happen to the dollar, while the American public is kept in the dark.
The latest bank crisis some weeks ago, indicated that the US banking system is broken. Yet, the central banks will keep moribund institutions on life support but the era of dollar-based reserves and floating exchange rates that began on August 15, 1971, when the US severed the link between the dollar and gold, is coming to an end. The pain will be transferred from the banks to the real economy, which will starve for credit and the geopolitical consequences will be enormous. The seize-up of dollar credit will accelerate the shift to a multipolar reserve system, with advantage to China’s RMB as a competitor to the dollar.
Dam is breaking
We are facing now an unprecedented era geopolitically and geoeconomically. There is a historic divide in the making between the BRICS nations, led by Russia and China, and the West, led by the United States. The majority of western MSM (mainstream media) has not realized that Russia and China openly announced a “new global reserve currency” in summer 2022. Russia and China are not going by two but they are working with nations like Saudi Arabia, Iran and India to help put their plans into practice.
Crucial to dethroning the US dollar would be the removal of its use for buying and selling oil – a system that has been in place since the 1970s, when the US promised military and other security for the Saudi Kingdom in exchange for the petrodollar system that underpins the dollar’s strength as global reserve currency. This was one of Henry Kissinger’s “masterpieces”.
The dollar hegemony is right about ready to break, when Saudi Arabia is about to join the BRICS nations and likely also to the SCO. The dollar was made reserve currency only because of the US protection of the Saudi Kingdom but now they have organized new protection agreements with Russia and China. Now it looks like Saudi Arabia has just issued a death knell to the exclusivity of the petrodollar. The first of several dominoes that needs to fall before the US is exposed financially as “an emperor with no clothes”.
Rise of the petroyuan
Since the finance crisis 2008-2009, Beijing has implemented a policy to reduce its reliance on the US dollar in commercial transactions. This policy includes settling the majority of its goods in foreign markets in its local currency, establishing mutual lines of credit with several central banks worldwide and negotiating with West Asian and North African countries to conduct trade using the yuan. These efforts have started to show results recently, with a number of Asian governments partially adopting the Chinese currency.
Iraq is one of the countries that have partially adopted the yuan in trade. In February 2023, the Iraqi Central Bank announced plans to allow direct settlement of trade from China in. Egypt also announced its intention to issue yuan bonds last August.
Russia has played a significant role in changing the course of the yuan by signing the Eastern Natural Gas Pipeline Agreement from Russia to China and converting the currencies of gas payments from the US dollar to the Chinese yuan and the Russian ruble. According to the latest data from the Russian Central Bank, the yuan has become a major currency in Russia’s foreign trade.
During the World Economic Forum in Davos, Saudi Finance Minister Mohammed al-Jadaan said that “the kingdom is open to trading in currencies other than the US dollar in order to improve trade” and while President Xi visiting recently to Saudi Arabia, encouraged Gulf Cooperation Council (GCC) countries to use the SHPGX for yuan-based energy deals.
This shift towards national currencies in global trade “is mainly due to Washington’s sanctions policy against Russia.” Riyadh is now “following an increasing trend of hedging against US dollar use in trade” amid concerns that the US may use its currency as a weapon for trade and sanctions.
Saudi Arabia signals the end of petrodollar’s status
One of the key pillars keeping the dollar in place as the world reserve is its petro-status and this factor is often held up as the reason why the Greenback cannot fail. The other argument is that the dollar is backed by the full force of the US military and the US military is backed by the US Treasury and the Federal Reserve; in other words, the dollar is backed by the dollar, which is a very circular and naive position.
The relationship between Saudi Arabia, Russia and China has grown very close. Arms deals and energy deals are becoming a mainstay of trade and this has led to a quiet but steady distancing of the Saudis from the dollar. The dominoes were set in motion for dollar collapse, when Saudi Arabia announced at Davos that they are now willing to trade oil in alternative currencies. In response, Xi Jinping pledged to ramp up efforts to promote the use of the Chinese yuan in energy deals.
Saudi Arabia publicly confirmed that it is considering selling its oil in other currencies. Chinese President Xi Jinping then visited Riyadh in December 2022, where he held a historic meeting with the Gulf Cooperation Council (GCC) and the 21 member states of the Arab League. Xi said he and top officials from Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain, and Oman discussed purchasing Persian Gulf energy with China’s own currency, the renminbi. China is already Saudi Arabia’s top trading partner, and Beijing, Riyadh, and the GCC pledged to deepen their multilateral trade.
On 28 March, 2023, the Chinese company (SHPGX) made history by announcing the first-ever deal on importing 65,000 tons of liquefied natural gas (LNG) from the UAE, settled in the Chinese yuan currency. The yuan settlement of international LNG trading is a “major event in China’s market-oriented oil and gas reform. This deal represents a departure from the decades-long practice of conducting global oil sales exclusively in US dollars.
The importance of the Saudi announcement cannot be overstated; this is the beginning of the end of the dollar. Without one, you cannot have the other. This is almost the exact same dynamic that led to the implosion of the British Sterling decades ago.
The yuan payment also follows the global polarization taking place over the Ukraine war and further demonstrates the reluctance of Persian Gulf states to align with western hostility toward Russia, China, and other US adversaries. Chinese allies control 40 percent of OPEC+ oil reserves, and the Gulf Cooperation Council (GCC) controls another 40 percent. With this China-UAE gas trade settled in yuan, the petrodollar today is under serious threat.
Road to a globalized yuan runs through Moscow
China and Russia are committed to “significantly” increasing trade volumes by 2030 and pledged to steadily boost the proportion of local currency settlement, according to a joint statement released during the Putin-Xi meeting in Moscow. China has pushed for deeper trade and investment links with Russia using its own currency. That suggests the path of least resistance for yuan internationalization now runs through Moscow instead of London or Singapore.
The share of yuan in Russian export payments surged 32-fold in 2022 to 16% by year-end, according to the Bank of Russia. Its use in Russian imports also jumped to 23% from 4%. Yuan savings accounted for 11% of Russia’s total FX deposits as of January, compared with practically zero when the war broke out. The Chinese currency has also overtaken the dollar and euro as the most traded FX on the Moscow Exchange.
Russia is now the 5th biggest user of the Chinese currency, with 2.3% of global yuan payments, behind Hong Kong, the UK, Singapore and the US, according to SWIFT. At this speed, Russia is poised to become the biggest yuan user outside Hong Kong in the next couple years. Should the current trajectory persist, Russia will probably become the first major economy where the Chinese currency has an equal standing with its American and European counterparts.
In his annual address to the Federal Assembly, President Putin stated that Moscow will work with its allies to create a secure system of international settlements that is not reliant on the US dollar or the euro. This situation has resulted in Moscow’s decision to pursue a de-dollarization policy and to encourage the use of national currencies in international trade.
The process of de-dollarizing the Russian economy began in 2014 when Western nations introduced sanctions against Moscow over the invasion of Crimea. Since the beginning of the Ukrainian invasion, restrictions have caused the situation to develop quickly, especially since the United States and its allies blocked over $300 billion worth of Russian foreign exchange reserves and other resources. Despite the challenges, Putin has made it clear that the de-dollarization of the Russian economy is a strategic priority. He has emphasized the need to strengthen the role of national currencies in global trade.
De-dollarization process and emerging multipolar world
Since the 1970s it’s been virtually impossible for any country to function internationally without access to US dollars and Washington has maintained this highly-favorable status quo by putting various kinds of pressure — from sanctions to election theft to outright invasion — on anyone who stepped out of line.
This weaponization of the world’s reserve currency has, not surprisingly, created indignation in a lot of foreign capitals and now that resentment is erupting into a rebellion against dollar hegemony. Some big recent events can be mentioned here below.
Based on IMF and World Bank recent forecasts, the tectonic shift of world economy is clearly seen in the picture below: Ex-oriente lux
BRICS coalition has become the hotspot in geopolitics. Brazil, Russia, India, China, and South Africa (the BRICS) have been toying with the idea of forming a political/monetary counterweight to US dominance since 2001. But beyond some aggressive gold buying by Russia and China, there has been more talk than action.
Then the floodgates opened in 2021-2023. Whether due to the pandemic’s supply chain disruptions, heavy-handed sanctions imposed by US-led NATO during the Russia-Ukraine war, or just the fact that de-dollarization was an idea whose time had finally come, the BRICS alliance has suddenly become the real hotspot.
In just the past year, Argentina, Indonesia, Saudi Arabia, Iran, Mexico, Turkey, the United Arab Emirates (UAE) and Egypt have either applied to join or expressed an interest in doing so. Many new bilateral trade deals that bypass the dollar are both made and being under discussions. Combine the land mass, population and natural resources of the BRICS countries with those of the potential new members and the result is more or less half the world. Saudi Arabia’s desire to join BRICS and the SCO, which are the most influential multipolar organizations in the world right now, could turn this scenario into a reality a lot sooner than even the most optimistic observers might have expected.
The BRICS countries are working on creating a new form of currency and may present ideas on its development at the organization’s upcoming summit in South Africa, in August 2023. The transition to settlements in national currencies is the first step. The next one is to provide the circulation of digital or other form of a fundamentally new currency in the nearest future. It cannot be ruled out the possibility of a single currency emerging in BRICS. This currency could be secured not just by gold but also by other groups of products.
Saudi Arabia is set to join the Shanghai Cooperation Organization (SCO) as a “dialogue partner”. The SCO is the world’s biggest regional political, economic and defense organization both in terms of geographic scope and population. It covers 60 percent of the Eurasian continent, 40 percent of the world’s population and more than 20 percent of global GDP. It was formed in 2001 by China, Russia, Kazakhstan, Kyrgyzstan and Tajikistan. Aside from its vast scale and scope, the SCO believes in the idea and practice of the multipolar world, which China anticipates will be dominated by it by 2030.
Saudi Arabia has developed close relations both with China and Russia, since 2015. Both Russia and China know how to leverage such relationships, as they have been doing in the Middle East ever since the US withdrew from the Joint Comprehensive Plan of Action with Iran in 2018 and Afghanistan in 2021.
China brokers a peace deal between Saudi Arabia and Iran, two bitter historical enemies who want to join the BRICS alliance. Should they stop now competing and start cooperating they could dominate the Middle East and raise China’s clout in the region, at the petrodollar’s expense.
Eurasia’s geo-economic integration took a great leap forward as a result of the Iranian–Saudi rapprochement, which unlocks the Gulf Cooperation Council’s (GCC) trade potential with Russia and China. Its wealthy members can now tap into two series of Iranian-transiting megaprojects with the North-South Transport Corridor (NSTC) connecting them to Russia while the China-Central Asia-West Asia Economic Corridor (CCAWAEC) will do the same with China.
Only two weeks after this announced, more news surfaced that Saudi Arabia was also planning to reopen its embassy in Syria for the first time in over a decade. Rumors are swirling that Iran, Saudi Arabia and Syria are on the verge of geopolitical and economic agreements that sidestep the US.
Once Saudi Arabia begins to sell its resources in non-dollar-denominated currencies like China’s yuan, then the petrodollar upon which the economic-financial aspect of the US’ unipolar hegemony is predicated, will be dealt a deathblow. The global systemic transition to multipolarity thus further hastening America’s ongoing demise. It is now quite obvious that, a year after the imposing of sanctions and attempt to isolate Russia, the whole western counter-policy has failed.
In late March 2023, China and Brazil reached an agreement to settle trades in one anothers’ currencies. Over the past 5 years, China has replaced the US as the main trading partner of resource-rich Brazil and but within the context of recent circumstances, this appears to be another in a series of recent blows to the central role of the dollar in global trade. The switch from dollars to a yuan-real settlement basis in Chinese-Brazilian trade is only the latest in a growing trend.
Russia and India agree to trade oil for rupees. Russia is now India’s largest oil supplier, with 35% of that massive, growing country’s imports. The US is not happy about this but India doesn’t seem to care. Besides, Russia and India use national currencies in their bilateral arms trade and in growing amounts of other sectors as well.
African leaders travel to Moscow, in March 2023. Representatives of 40 African nations traveled to Russia for the Second International Parliamentary Conference “Russia – Africa in a Multipolar World.” According to the press release, the attendees… discussed the potential for collaboration across a range of sectors, their contribution to the African continent’s economy and security, and their work in the realms of science and education, politics, and techno-military area.
During the conference, the African continent was invited to work together to form a new multipolar world order. This is especially important given the significant human resources of Africa, which is home to more than 1.5 billion people and has enormous mineral reserves in its soil. Russia is organizing a large Russia – Africa summit in St. Petersburg in summer 2023.
Brazil and Argentina announce a common currency. In February, the two dominant Latin American economies announced plans for a common currency called the “sur” for use in bilateral trade. South America is a big, resource-rich place. So, a de-dollarization movement there, is both plausible and potentially serious for the dollar. India and Malaysia have recently begun using the Indian Rupee to settle certain trades.
The agreement between the Central Banks of Russia and Iran formally signed on January 29, 2023, connecting their interbank transfer systems is a game-changer in more ways than one. Technically, from now on, 52 Iranian banks already using SEPAM, Iran’s interbank telecom system, are connecting with 106 banks using SPFS, Russia’s equivalent to the western banking messaging system SWIFT.Confirming that the share of ruble and rial in mutual settlements already exceeds 60 percent, they ratified the “joint use of the Mir and Shetab national payment systems,” thus bypassing western sanctions. This is likely to become a landmark case in bypassing Belgium-based SWIFT – which is essentially controlled by Washington, and on a minor scale, the EU.
Economist Zoltan Pozsar has observed that the “unipolar era” of US hegemony is quickly being replaced with a new “multipolar” order of “one world – two systems”. In this increasingly multipolar world, “China is proactively writing a fresh set of rules” and “creating a new type of globalization through institutions such as the Belt and Road Initiative, the BRICS+ group of emerging economies and the SCO”. This transition threatens “the exorbitant privilege that the dollar holds as the international reserve currency”. The dollar-based monetary order is already being challenged in multiple ways, in particular by “the spread of de-dollarization efforts and central bank digital currencies (CBDCs).
These historic developments are part of an international shift to a multipolar economic order. The loss of its weaponized reserve currency will lessen the US’ ability to impose its will on the rest of the world. To sum up, tomorrow’s world is multipolar and for the US and its allies, inflationary.
Iran-Saudi rapprochement will deal a deathblow to the US dollar
Eurasia’s geo-economic integration took a great leap forward as a result of the Iranian–Saudi rapprochement, brokered by China. This unlocks the Gulf Cooperation Council’s (GCC) trade potential with Russia and China. Its wealthy members can now tap into two series of Iranian-transiting megaprojects either with the North-South Transport Corridor (NSTC) connecting them to Russia or with Central Asia – West Asia Economic Corridor (CCAWAEC) connecting them to China.
Saudi Arabia’s comprehensive economic reform policy, known as “Vision 2030”, was introduced by Crown Prince Mohammed Bin Salman (MBS) upon his rise to power in 2015. However, it stumbled as a result of the disastrous Yemeni War that he’s been waging since that same year but all is now back on track and even more promising after securing $50 billion worth of investments from China last December.
China regards Vision 2030 as complementary to its Belt & Road Initiative (BRI) due to MBS’ focus on real-sector investments for preemptively diversifying the Saudi economy away from its presently disproportionate dependence on oil exports. His country’s location at the crossroads of Afro-Eurasia also makes investments there extremely attractive from the perspective of China’s logistical interests.
Without last week’s Beijing-brokered deal, China would have had to rely on maritime routes under the control of the powerful US Navy to facilitate the forthcoming explosion in bilateral real-sector trade but now everything can be conducted much more securely via the Iranian-transiting CCAWAEC. Looking forward, there’s also a theoretical possibility of Chinese energy investments in Iran connecting the Gulf to Central Asia and thenceforth to the People’s Republic, thus fully securing its strategic interests.
India, which sits on the South Asian end of the NSTC that transits through Iran enroute to Russia, also scaled up its purchases of discounted oil from Moscow to the point where its decades-long strategic partner is nowadays its largest supplier. A growing number of India’s deals are in non-dollar-denominated currencies, which have sped up de-dollarization processes.
No doubt that upcoming Saudi moves in support of the petroyuan that are taken in coordination with Iran and Russia would catalyze the next natural phase of de-dollarization. Russian-GCC real-sector trade, carried out via Iran across the NSTC, will be conducted in national currencies, which will give a deathblow to the petrodollar. All in all, the dollar’s prior dominance is done for as a result of the Iranian-Saudi rapprochement, which can be seen a game-changer.
Aim of Global South: commodity-backed new currency
The Central Banks of Iran and Russia are studying the adoption of a “stable coin” for foreign trade settlements replacing the US dollar, mulling the pros and cons of a gold-backed central bank digital currency (CBDC). The attractive issue here is the trade in the International North South Transportation Corridor (INTSC), with Russia processing cargo travelling across Iran in merchant ships all the way to West Asia, Africa, the Indian Ocean and South Asia. Trade is mainly in agricultural products, metal manufacturing, chemicals and medical products, only the Russia-Iran section of the INSTC represents a $25 billion business. Then there’s the crucial energy angle of INSTC – whose main players are the Russia-Iran-India triad.
The BRICS bloc of Brazil, Russia, India, China, and South Africa is working “to develop a fairer system of monetary exchange”, to challenge the “dominance of the dollar”, South Africa’s foreign minister Naledi Pandor has revealed. His comments were ignored by Western media outlets but widely reported in the Indian press. In 2014, the BRICS countries created the New Development Bank (NDB) as an alternative to the US-dominated World Bank. Now the BRICS is gradually moving toward de-dollarization. The adoption of commodity-backed currencies by the Global South could upend the US dollar’s dominance and level the playing field in international trade.
South Africa holds this year’s rotating BRICS presidency. Russian Foreign Minister Sergey Lavrov said in January 2023 that Brazil, Russia, India, China, and South Africa – BRICS countries – will discuss creating a common currency at the group’s forthcoming summit this August in South Africa. This year will also mark the start of BRICS+ expansion, with candidates ranging from Algeria, Iran and Argentina to Turkey, Saudi Arabia and the UAE.
Yaroslav Lissovolik, head of the analytical department of Russian Sberbank has proposed closer BRICS integration and the adoption of a BRICS reserve currency. The name for the new reserve currency is designed as R5 (the first letter of each BRICS currency: real, ruble, rupee, renminbi, rand). In the longer run, the R5 BRICS currency could start to perform the role of settlements/payments as well as the store of value/reserves for the central banks of emerging market economies.
The R5 project does intersect with what is being designed at the Eurasia Economic Union (EAEU), led by the Economics Minister of the EAEU Commission, Sergey Glazyev. In his most recent paper (Golden Ruble 3.0), Glazyev makes a direct reference to two reports by strategist Zoltan Pozsar: War and Commodity Encumbrance (December 27, 2022) and War and Currency Statecraft (December 29, 2022).
Pozsar is a staunch supporter of a Bretton Woods III – an idea that has been getting great traction among the Fed-skeptical crowd. What’s quite intriguing is that the American Pozsar now directly quotes Russia’s Glazyev and vice-versa, implying a fascinating convergence of their ideas.
Glazyev’s emphasis on the importance of gold. He then proceeds to explain how gold can be a unique tool to fight western sanctions, if prices of oil and gas, food and fertilizers, metals and solid minerals are recalculated in gold. Fixing the price of oil in gold at the level of 2 barrels per 1g will give a second increase in the price of gold in dollars. Here we see Glazyev and Pozsar converging.
What Glazyev proposes now is for Russia to boost gold mining to as much as 3 percent of GDP: the basis for fast growth of the entire commodity sector (30 percent of Russian GDP). With the country becoming a world leader in gold production, it gets “a strong ruble, a strong budget and a strong economy.”
Meanwhile, at the heart of the EAEU discussions, Glazyev seems to be designing a new currency not only based on gold but partly based on the oil and natural gas reserves of participating countries. Pozsar seems to consider this potentially inflationary, if the new currency would be linked to such a large base. Both Glazyev and Pozsar know that, when Bretton Woods was created, the US possessed most of Central Bank gold and controlled half the world’s GDP. This was the basis for the US to take over the whole global financial system.
Pozsar understands how Glazyev is pursuing a formula featuring a basket of currencies and commodities and what the drive towards the petro-yuan means what are the industrial ramifications. “Russia, Iran and Venezuela account for about 40 percent of the world’s proven oil reserves and each of them are currently selling oil to China for renminbi at a steep discount; BASF’s decision to permanently downsize its operations at its main plant in Ludwigshafen (Germany) and instead shift its chemical operations to China was motivated by the fact that China is securing energy at discounts, not markups like Europe.”
The race to replace the dollar; One key takeaway is that energy-intensive major industries are going to be moving to China. Beijing has become a big exporter of Russian liquified natural gas (LNG) to Europe, while India has become a big exporter of Russian oil and refined products such as diesel – also to Europe. Both China and India – BRICS members – buy below market price from fellow BRICS member Russia and resell to Europe with a hefty profit. The whole sanctions policy, imposed by the West, is now backfiring in ominous way to Europe.