Russian Rouble to attack
the $ - Exchange Controls in the U.S.?
President Vladimir Putin called for work on making the
national currency convertible to be completed, oil and
gas to be traded in Roubles on a domestic exchange,
and an innovation-based economy.
In his annual state of the nation address
before both houses of parliament, ministers and reporters,
Putin said work on making the national currency fully
convertible should be completed by July 1, almost six
months ahead of the original January 1, 2007 deadline.
The president called for the establishment
of a Rouble-denominated oil and natural gas stock exchange
in Russia. "The Rouble must
become a more widespread means of international transactions.
To this end, we need to open a stock exchange in Russia
to trade in oil, gas, and other goods to be paid for
in Roubles," he said. Putin said this would
be impossible without economic growth of over 7%, which,
he said had been achieved in the past three years.
This is the second most significant step
in removing the U.S.$ from the throne of sole global
reserve and trading currency! Should any more oil producers
take this step, it will precede a U.S.$ crisis and create
massive potential instability in the globe’s foreign
exchanges. Because this is so important to gold and
to you the reader, we are going to turn this into a
series of pieces detailing the way forward. Needless
to say, these moves are very,
very positive for gold. [If Putin keeps his word
on the gold front, we should expect Russia to enter
the gold market as a buyer soon too?]
Russia has completed these steps [July onwards], we
expect to see the greatest bulk of Russia’s oil
sold for Roubles.
Following China’s valuation of its
currency against a basket of currencies of the countries
with which it trades and the proposal by Iran of a multi-currency
Oil Bourse in Tehran, other than the U.S.$ as well,
this move by Russia tolls the bell on oil being exclusively
priced in the U.S.$.
With the oil comprising a huge portion
of global trade, as part of the 86% of global trade
denominated in the U.S.$, the impact of this change
will be heavy on the value placed on the $.
So far, as the oil price rose, the demand
for the U.S.$ grew heavily, in line with the rising
price, giving it the stability it has maintained over
the last few years, despite the series of record Trade
Deficits. The fact that this has been in effect a devaluation
of the $ in terms of oil, is not yet deemed of consequence.
But the rest of the globe doing trade
with the U.S. is under no illusions that the sheer volume
of dollars being printed to pay the bill for this Trade
deficit has forced them to accept a suspect currency.
They have, of necessity, to hold these surpluses in
U.S. assets. Most have found their way into highly liquid
U.S. Treasury Bonds and Bills. Now is the time to attempt
to slow the acquisition of new dollars into their reserves.
Clearly, a lowering of the demand for the U.S.$ in international
trade will lower the demand for the $ and U.S. Treasury
Bonds and Bills. As the $’ role shrinks, so will
the globe’s ability to absorb, not just the Trade
deficit of the U.S. but also the growing volume of dollars
surplus to requirements.
Let’s make clear what this could
mean eventually, with Russia
supplying oil to the U.S., the U.S. will have to buy
Roubles to pay for it just like other nations.
Many are the dollars held in reserves
to buy oil with and many are the countries who need
to change their currencies to the $ to pay for their
oil with currently. Where they can use their own or
have to buy Roubles, the demand for the dollar will
drop and significantly. This will lead to a steady sale
of $ assets, then the $s themselves with which to buy
these Roubles [and Euros].
This will precipitate, in time, upward
pressure on interest rates. We would expect this to
start in the markets through sales at the long end of
the Treasury Bonds, then as these are sold off, move
down to the short end of the market until foreign investments
are concentrated at the short-end [T-Bill] and at worst,
held in ‘call’ money. The liquidation of
these assets and subsequent purchases of foreign currencies
will pull the $ down and cause a heavy outflow of foreign
Before this happened, we would expect
the Fed, as we mentioned in a previous issue, to heavily
intervene in the foreign exchanges to defend the exchange
rate of the $. The Fed has already made preparations
for such a defence. Should this prove insufficient and
we have no doubt they will, we expect the Fed to try
to stem the capital outflow from the country with Exchange
Controls from initially gentle to eventually harsh levels.
[The writer has many years of experience in Exchange
Controls in different countries].
Many of you readers may feel these prospects
are impossible, but history has precedents. At the turn
of the century, the British Empire was in its heyday.
Seventy years later it had to impose Exchange Controls
of its own to prevent the sudden exit of foreign investments
from its shores.
Next week we will look at what happened
and how it is pertinent to the U.S. today! Later we
will describe just how Exchange Controls work to protect
a nation’s financial base and the benefits that
can come with them to the U.S. but to the detriment
of the global monetary system.
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