The Golden Opportunity Behind the Ruble Defense

After a short-term slump, the Russian ruble is still strong, proving that the US and Western sanctions against Russia have failed. Putin's signing of the "Ruble Order" not only successfully won the battle to defend the ruble, but also launched a counterattack against "unfriendly countries". The dollar hegemony system formed after World War II may have collapsed.

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Since Russia announced its "special military operation", Western countries led by the United States quickly launched multiple rounds of economic sanctions, which once depreciated the Russian ruble by more than 50%.

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But there is an indisputable fact that although Western countries are still increasing related sanctions, with the Russian central bank binding their local currency to gold and energy, the exchange rate of the Russian ruble has almost fully regained lost ground, and it has also promoted a global The historical process of energy settlement mechanism. As of Friday's close, the dollar was at 83.95 against the Russian ruble, after falling to 121.21 at its lowest.

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The Russian central bank essentially binds the ruble to gold by purchasing gold from the Russian bank at a fixed price of 5,000 rubles/gram. Since gold can be traded in dollars, it also sets a "floor" for the dollar against the ruble.

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This relationship also had an immediate effect. When the Russian central bank announced the move on March 25, the dollar/ruble exchange rate was around 100 and then gradually climbed to around 80. Because the international market price of gold is about 62 US dollars / gram, 5000 divided by 62 is about 80.6. This price also forms the anchoring psychological price of the market and arbitrage traders, which actually acts as a base for the ruble.

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Conversely, if gold-owned exchanges such as London/New York try to push the dollar lower, they also have to figure out how to weaken the ruble, otherwise the manipulation will be exposed. At the same time, if the ruble continues to strengthen, it will also drive gold to strengthen.

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By tying the ruble to gold and requiring foreign countries to pay for goods in rubles, the Kremlin and the Central Bank of Russia are fundamentally changing how the international trading system works and accelerating the transformation of the international monetary system

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The dollar's global reserve currency status has been backed by oil since 1971. The petrodollar was able to form mainly because of the continued use of the dollar for global transactions and the ability of the United States to prevent challenges to the dollar.

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But the 50-year-old system appears to be winding down, and a multilateral currency system backed by gold and commodities is sprouting.

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Recently, Goldman Sachs warned that the dollar faces the risk of weakening its global dominance. The dollar is facing some of the same challenges that the pound faced in the early 20th century.

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These challenges for the dollar include that the U.S. has a relatively small share of global trade compared to the dollar’s ​​dominance in global payments. The U.S. has a deteriorating net foreign asset position, rising foreign debt and geopolitical issues.

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This week, the chief economist at the International Monetary Fund said Western sanctions on Russia could create a more fragmented global system that could hurt the dollar. She also said the increasing use of other currencies in world trade would lead central banks to diversify their foreign exchange holdings at the expense of the dollar.

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. A series of sanctions by Western countries, including freezing Russia's foreign exchange reserves and attempting to target Russia's gold, clearly demonstrate that foreign exchange reserves held abroad pose a risk of not respecting property rights. Similar concerns include the possibility of confiscation of gold reserves held in warehouses at the Bank of England or the New York Fed.

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Therefore, other non-Western governments and central banks are likely to be interested in Russia’s actions and feel that they should adopt a similar strategy, including Iran, Saudi Arabia, the United Arab Emirates, and Qatar, the world’s major oil and gas exporters. If the hegemony of the dollar is about to die out, everyone wants their own currency to be the beneficiary of the new global multilateral monetary system.

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In the long run, the biggest hidden danger in the United States is the "failure of the US dollar system". The stability of the US dollar monetary system requires two foundations: the unification of the monetary policy framework of the Federal Reserve and non-US central banks is the basis for the stability and cyclical operation of the global economy; the stability of US debt , safety and high returns on US stocks are the basis of the US dollar liquidity cycle.

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Since the financial crisis, the Federal Reserve has incorporated fiscal factors into its policy framework, and the dollar system has been weakening. During the post-epidemic QE process, the dollar's share of the world's confirmed foreign reserves fell below 60% for the first time.

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After Biden took office in 2021, he could have used the budget reconciliation process under the fiscal year 2021 budget resolution to raise taxes to open up the U.S. finances, so as to avoid the monetization of fiscal deficits in future recessions and reverse the weakening of the U.S. dollar monetary system. momentum.

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However, Biden chose to give the third round of fiscal transfer payments the opportunity to get rid of Republican interference and to lead the internal affairs of the Democratic Party, which not only exacerbated the inflation situation in the United States, but also delayed the Fed Taper time, and it is more likely that the United States will no longer have a chance to land. tax policy. Looking forward, once the United States faces a recession again and therefore uses QE, the dollar's share of the world's confirmed foreign reserves will further decline. In other words, the weakening of the dollar monetary system may be a fait accompli.

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We may consider the Russia-Ukraine incident as a "catalyst event" for the further weakening of the dollar system.