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The Russia Story that Really Matters

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We’ve heard a lot about Russian election hacking over the last year. But Jim Rickards said there is only one Russia story that really matters – that is the country’s efforts to break away from the hegemony of the US dollar and the dollar payment system that currently dominates global trade.

Over 60% of global reserves and 80% of the world’s payments are in dollars. But Russia is taking steps to free itself from dollar dominance. And As Rickards points out, the most aggressive weapon in the Russian war against the dollar is gold.

As we reported last month, gold creates a foundation for Russia and China to shift economic power from the West to the East.
At 1,700 tons, Russia’s has the sixth largest gold reserves in the world. Russian gold makes up about 17% of the nation’s wealth. In 2016 alone, the Russian central bank purchased 201 tons of gold, far more than any other central bank in the world.

Meanwhile, Russia and China have reportedly been moving closer to developing a gold-based trading system.  Last month, that became a reality when China announced the launch of a gold-backed, yuan-denominated oil futures contract. The move potentially creates a way for oil exporters to circumvent US dollar denominated benchmarks by trading in yuan. The contracts will be priced in yuan, but convertible to gold. In June, China took the first step toward establishing a “petroyuan” when it launched a direct trade relationship with Russia, allowing oil purchases to be made strictly in the Chinese currency.

In another move to establish its economic independence, Russia has reportedly created an alternative to SWIFT. The Society for Worldwide Interbank Financial Telecommunication enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar is the world reserve currency, SWIFT facilitates the international dollar system. The US has used SWIFT as a tool to cut countries off from global trade and has specifically targeted Russia. In 2014 and 2015, it blocked several Russian banks from the system as relations between the two countries deteriorated. Just last month, the US Treasury secretary threatened to pull the plug on China if it doesn’t cooperate with sanctions against North Korea. Those threats could become moot. According to Rickards:

 The head of Russia’s central bank, Elvira Nabiullina, has reported to Vladimir Putin that ‘There was the threat of being shut out of SWIFT. We updated our transaction system, and if anything happens, all SWIFT-format operations will continue to work. We created an analogous system.'”

But perhaps the biggest news is a report that the Russians are working to create a blockchain alternative that will free them completely from SWIFT and the global dollar system.

Russia’s development bank, VEB, and several Russian state ministries are reportedly teaming up to develop blockchain technology. They want to create a fully encrypted, distributed, inexpensive payments system that does not rely on Western banks, SWIFT or the US to move money around. This has nothing to do with bitcoin, which is just another digital token. The blockchain technology (now often referred to as distributed ledger technology, or DLT) is a platform that can facilitate a wide variety of transfers — possibly including a new Russian-state cryptocurrency backed by gold.”

It is clear that Russia and the Chinese are working toward de-dollarization. As economist Ronald-Peter Stöferle put it:

The world is looking for alternatives to the dollar — and finds them more and more often.”

Rickards leaves us with a pretty stark conclusion

The ultimate loser here will be the dollar. That’s one more reason for investors to allocate part of their portfolios to assets such as gold.”

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