Russia allied with India on currency to counter US sanctions

Economic sanctions against Russia are working against the dollar itself and casting doubt on the soundness of the current financial system. Russia is actively making financial alliances with friendly countries (such as India…) to deal with the US.

Great step towards de-dollarization

Russia and India took a small but important step towards non-USD investment and trade finance on March 25, 2022, when the Reserve Bank of India (the central bank of the country) This) allows Russia to invest proceeds from arms sales to India in corporate bonds denominated in local currency.

Russia’s account with the Central Bank of India is small, with a balance of only about $263 million, but the prospect for both countries is huge: India will pay for one of its key imports. (Russian weapons) in local currency, while Russia will invest the proceeds from arms sales in a financial market unaffected by sanctions.

According to Bloomberg News, India has changed its rules on commercial borrowing from abroad to meet Russia’s proposal in the context that the US, European Union (EU) and Japan have frozen the Bank’s reserves. Russia’s central bank as well as the assets of wealthy Russian citizens after the Russian military launched a “special operation” into Ukrainian territory at the end of February 2022.

This exposes a small but very noticeable rift in the network of dollar-denominated reserves.

News that Saudi Arabia will accept the yuan of China used to pay for oil shipments to China – their biggest customer. As such, Saudi Arabia would maintain a substantial proportion of its reserves in the form of China’s local currency, possibly by an arrangement similar to that between India and Russia in terms of reinvesting the proceeds of the trade. selling weapons.

After seeing the blockade of Russia’s reserves, Saudi Arabia was hesitant about how to store its wealth in places where the US and Western governments could seize it at any time. Therefore, diversifying through the use of yuan is a logical choice for them.

Spectacular moves raise the position of the ruble

Meanwhile, Russia has demanded that gas exports to “unfriendly” countries be paid for in its local currency, forcing gas customers in Europe to buy Russian rubles on the open market. . So the ruble from 140 rubles to 1 USD on March 8, 2022 has skyrocketed to 100 rubles for 1 USD on March 25.

After the United States, Europe and Japan blocked more than half of Russia’s $630 billion in the wake of the Russia-Ukraine war, the Russians had few safe places to store the money they earned from selling gas in dollars and rubles.

By accepting payments in rubles, Russia has effectively taken part of its currency out of circulation, maintained the ruble’s exchange rate, and prevented inflationary pressures arising from the currency devaluation.

Economist Clemens Grafe of Goldman Sachs assessed that “nuclear” sanctions on the Russian economy would shrink this economy by 10%, accompanied by 3-4% growth in the next few years. in 2023 and 2024.

With oil and gas revenues estimated at $1.1 billion per day, Russia could have a current account surplus of $200 billion by 2022, up from $165 billion in 2021. .

The International Monetary Fund (IMF) – an international financial institution created in 1944 to manage world currencies on the standard of a combination of gold and USD, is concerned about this fact. The gold aspect of this standard disappeared in 1971 when the United States unilaterally stopped paying its current account deficit with gold transfers.

But the centrality of the dollar was confirmed in 1974, when Saudi Arabia and other Gulf oil-producing countries agreed to keep oil trade in dollars, in return for guarantees in terms of security from the US side.

Reshape the global financial and payment system, strengthen the role of gold

All of that could change, the IMF wrote on its website on March 15: “The Russia-Ukraine war has the potential to fundamentally change the global economic and geopolitical order, through trade Energy changes, supply chains are reconfigured, payment systems are fragmented, and countries rethink the way they hold reserve currencies.

One indicator of skepticism about the dollar’s central reserve role is the rise in the price of gold. The underlying gold trades closely with yields on Inflation Protective Securities (TIPS). Both of these prevent unexpected inflation shocks and currency devaluation.

Over the past month, gold prices have decoupled from TIPS yields, rising instead of falling due to a spike in interest rates tied to inflation.

The US Treasury Department said on March 24 that current sanctions prevent Russia from selling its gold reserves, which are estimated to be worth about $140 billion at current market prices (about $1,960 an ounce). There are countless reports of “freezing” of Russia’s gold reserves due to orders punishment of the West – this can be completely misleading. In fact, Russia doesn’t need to sell gold to raise cash. Because every day, Russia earns up to 1.1 billion USD from selling energy.

Central banks that transact outside of the USD system, such as Russia and India, can use gold to settle balances. If Russia invests more in India (in local currency arrangements) than the other way around, Russia can invest the difference in Indian assets, under a new arrangement with the Reserve Bank of India. Or India can choose to move gold to Russia to handle the difference.

US and European sanctions are inappropriate in the case of bilateral gold transfers between central banks.

The US threat to the world is narrowed down to the possibility that the US might stop borrowing money from the rest of the world (if the US net foreign investment position is negative $14 trillion) to buy goods from the rest of the world.

The US runs a current account deficit of $1 trillion a year, and it spends money to fill it by selling reserve assets to the rest of the world.

By blocking several hundred billion dollars of the reserves of the Central Bank of Russia, the United States has raised questions about the rationality of the current financial system, and also encouraged the world to “rethink the money”. monetary reserves”, including the trillions of dollars that the world lends to the US.