The tough sanctions blockade has created necessary prerequisites for a 180-degree reversal of Russian foreign trade. The main foreign economic partners of Russia were the EAEU member states, China, India, Iran, Turkey, the UAE, etc. And with each of these countries, the Russian Federation has a trade surplus. According to the preliminary assessment of the Bank of Russia, in January – September 2022, it strengthened to $198.4 billion, which is $123.1 billion more compared to the same period last year. This surplus was taken out of the country (while half went to repay the external debts of Russian companies with their replacement by domestic ruble lending) and is reflected in the balance of payments article “net capital outflow”.
In friendly countries, the process of de-dollarization has begun, the share of settlements in “soft” currencies is growing. In September, Russia became the third country in the world in terms of the use of the yuan in international settlements. According to the Central Bank, in recent months, yuan trading accounts for up to 26% of foreign exchange transactions in the Russian Federation. The yuan/ruble pair on the Moscow Stock Exchange has many times overtaken the dollar and the euro in terms of daily trading volume. When using yuan, rupee, rial, etc. in foreign trade settlements of the Russian Federation. and the presence of a trade surplus results in the accumulation of multibillion-dollar cash balances on the accounts of Russian exporters in “soft” currencies in the banks of the above-mentioned partner countries.
The accumulation of funds in “soft” currencies will keep on increasing. But ever since this money is also subject to exchange rate and possible sanctions risks, there is a need to sterilize their excessive mass. The best way is to buy non-sanctioned gold in China, the UAE, Turkey, possibly Iran and other countries for local currencies. The “foreign” gold purchased by the Russian Central Bank can be stored in gold and foreign exchange reserves (gold reserves), within certain limits being in the central banks of friendly countries, can be used for cross-country settlements, currency swaps and clearing operations. Some of the gold can be recovered to Russia.
Russia’s transition to trade in national currencies in relations with friendly countries is a right tactical choice, but not a strategic one. If pricing continues in dollars on Western exchanges, trade flows are insured by English companies, then there is no real independence from the Western “crooked mirror” – derivative pricing systems.
Regardless of unprecedented sanctions stress, Russia’s task is not to learn how to play by the “crooked rules” of the West, but to build transparent and mutually beneficial rules of the game with friendly countries, create its own pricing systems, exchange trading, and investment. Thus said gold can be a unique tool in the fight against Western sanctions, if you recalculate the prices of all major international goods (oil and gas, food and fertilizers, metals and solid minerals) in it. Fixing the price of oil in gold at the level of 2 barrels. for 1 g, it will give a 2-fold increase in the price of gold in dollars, calculated Credit Suisse strategist Zoltan Pozhar. This would be an adequate response to the “price ceilings” introduced by the West – a kind of “floor”, a solid foundation. So India and China can take the place of global commodity traders instead of Glencore or Trafigura.
Gold (along with silver) has been the core of the global financial system for millenia, an honest measure of the value of paper money and assets. Now the gold standard is considered an “anachronism”. It was canceled in its final form half a century ago (the United States announced the “temporary” closure of the “golden window” adopted in 1944 in Bretton Woods), re-linking the dollar to oil. But the age of the petrodollar is coming to a finale: now talks of the petroyuan and other mechanisms to limit the abuse of the issuer of the reserve world currency by its status are being held. Russia, together with its eastern and southern partners, has a unique chance to “jump off” the sinking ship of a dollar-centric debt economy, ensuring its own development and mutual trade in accumulated and extracted strategic resources.
This is not the first attempt by Russia to introduce a solid ruble based on a peg to gold. The gold standard in the 19th century was lobbied in Europe by Rothschild – this gave him (and Britain) the chance to subordinate continental Europe to the British financial system over gold loans. Russia joined the “club” under Count Witt. The “Golden Ruble 1.0” ensured the process of capitalist accumulation, while tying domestic bankers and industrialists to the sources of Western capital. There was no large scale gold mining in Russia at that time. The industry appeared only under Stalin.
Gold played an important role both in industrialization and in the post-war refusal of the USSR to join the dollar standard (at the time the country accumulated record gold reserves). Having signed the Bretton Woods Agreements, the USSR did not ratify them, having determined the binding of the ruble not to the dollar (which was a condition for participation in the Marshal’s plan), but to gold and to “the entire wealth of the country.” The “Golden Ruble 2.0” ensured an accelerated recovery of the economy after the war, made it possible to implement nuclear and missile projects. The reformer Khrushchev abolished the binding of the ruble to gold, having carried out in 1961. Monetary reform with the actual devaluation of the ruble by 2.5 times and linking it to the dollar, creating conditions for the subsequent transformation of the country into a “raw material appendage” of the Western financial system.
Now objectively there are conditions for the “Golden Ruble 3.0”.
The sanctions imposed against Russia have hit the Western economy like a boomerang. The geopolitical instability provoked by them, rising prices for energy and other resources, inflation and other negative factors put the global economy under great pressure, especially the global financial market. In 2023, all these circumstances will surely affect the change in investment policy stereotypes in the world – from risky investments in complex financial instruments to investing in traditional assets, primarily in gold. According to analysts of Saxo Bank, in 2023 increased demand for this metal will lead to the fact that the price of it will rise from the current $ 1800 per ounce to $ 3000. As a result, there is a real opportunity to significantly increase gold reserves in the very near future – due to both increase in physical volumes of gold and a revaluation of its value.
Large gold reserves allow the country to conduct a sovereign financial policy and minimize dependence on external creditors. The amount of reserves affects the reputation of the country, its credit rating and investment attractiveness. Large reserves make it possible to plan the state budget for a long term, eliminating many economic and political risks. In 1998, the lack of sufficient international reserves was one of the causes of the crisis, which ended in default for Russia. Now our country already has large gold and foreign exchange reserves, having the fifth indicator in the world (after China, Japan, Switzerland and India) and ahead of the United States, but this is still not enough.
The volume of annual gold production is estimated at only $200 billion (at current prices), the volume of accumulated reserves is $7 trillion, of which central banks have no more than a fifth, and in the third quarter they bought a record 400 tons of gold. For the first time in many years, the People’s Bank of China announced an increase in its gold reserves. But the Bank of Russia publicly informed the market that buying gold is a bad idea, as it leads to excessive monetization of the economy, and set a discount to the world price for about 15%. As a result, gold miners are experiencing double stress: The West has outlawed Russian gold, prohibiting any transactions with it, and the Central Bank of the Russian Federation pushes gold (as well as currency) abroad, giving companies the right to export everything through intermediaries with melting or re-branding of metal in “good jurisdictions”.
In China, which ranks first in gold production, there is a legislative ban on the export of all mined gold. According to the Shanghai Gold Exchange, over the past 15 years, customers have seized (received in physical form) 23,000 tons of this metal. India is considered the world champion in the accumulation of gold – more than 50,000 tons (the Reserve Bank of India has almost 2 orders of magnitude less). For the last quarter of a century, gold has been flowing from West to East through the main hubs (London, Switzerland, Turkey, UAE, etc.) with a capacity of 2000-3000 tons per year. Has the “despicable metal” remained in the vaults of the Western Central Banks, or is it all “demonetized” through swaps and leasing? The West will never say that, and there will be no Fort Knox audit.
Over the past 20 years, the volume of gold mining in Russia has almost doubled, while in the United States it has dropped by nearly 2 times. It’s like with the uranium deal (HEU-KNOW): having demonetized real wealth, the United States has lost competence and interest in the production and processing of these strategic resources (both gold and uranium, etc.) – the printing press will ensure the purchase of everything we want. The same thing happened, for example, with the extraction of rare earth metals, it almost entirely went to China. The time has come to reap the benefits: the States are desperately buying palladium, uranium, and other resources in Russia (as their customs statistics for recent quarters show).
Gold mining, which today barely occupies 1% of GDP, may well grow (due to the growth of both production and relative oil prices) to 2-3% of GDP and become the basis for the rapid growth of the entire commodity sector (30% of GDP) and the balancing of foreign trade, which up to now relies on the tyranny of issuers of “hard” currencies and risks of devaluation and insufficient convertibility of “soft” currencies. In this case, Russia, due to a well-organized global “gold rush” (and the Russian population, following the world central banks, has already increased investments in gold by 4 times compared to last year), will be able to increase gold production (only due to three large deposits already being commissioned) from 330 tons by 1.5 times to 500 tons, becoming a world leader in this strategic industry as well. As a “bonus” we will get: a strong ruble, a strong budget and – when implementing a strategy of advanced development – a strong economy.
Authors: Sergey Glazyev (Russian Academy of Sciences) and Dmitry Mityaev (Executive Secretary of the Scientific and Technical Council under the Chairman of the EEC Board)
27 December 2022 – Vedemosti
Translated by Elena Gülsün from Russian.
