We Are In A Transition To A Multi-polar Currency System

This is an excerpt from In Gold We Trust 2015, released by Incrementum Liechtenstein:

For years, Vladimir Putin was known as a supporter of the euro. In 2010, he even mooted a currency union between the EU and Russia. This would have transformed the euro into a de facto petro-currency and would have put it on an equal footing with the US dollar. However, in the wake of the imposition of sanctions, Moscow is increasingly turning towards Asia. The sanctions could prove a boomerang, as it appears as though they have strengthened the Beijing-Moscow axis further.

Gold is likely to play a very prominent role in this geopolitical power struggle. Russia has been gradually increasing its gold reserves for years. Since 2005 alone, its gold reserves have more than tripled, as a result of which Russia now holds the fifth largest (officially reported) gold reserves in the world, after the US, Germany, Italy and France. Since the beginning of the Ukraine conflict, Moscow has shifted into a higher gear and increased the momentum of gold purchases. These purchases are an unambiguous statement against the hegemony of the dollar, especially in combination with the fact that since January 2014, Russia has sold more than half of its US treasury holdings.

gold_reserves_russia_2015

Does Moscow plan to introduce a gold-backed ruble? Economist Jude Wanninski had already recommended this in an attention-grabbing editorial in the Wall Street Journal back in 1998.170 Only a gold-backed ruble would be able to lead Russia out of the debt crisis and provide the ruble with international acceptance. It appears as though Vladimir Putin has adopted this idea two decades later.171 Putin’s quite pronounced aversion to the monopoly of the dollar is summarized trenchantly in the following quote:

“The Americans are living well beyond their means and are shifting a part of the weight of their problems to the global economy. They are living like parasites off the global economy and their monopoly of the dollar. If there is a systemic malfunction in the US, this will affect everyone. Countries like Russia and China hold a significant part of their reserves in US securities. There should be other reserve currencies.”

However, critique of the dollar’s dominance is also becoming more widespread and frequent on the part of high-ranking institutions. Justin Yifu Lin, the former chief economist of the World Bank, proposed replacing the US dollar with a single global currency: “The dominance of the greenback is the root cause of global financial and economic crises. The solution to this is to replace the national currency with a global currency.”

The fact that emancipation from the dollar is gaining momentum is confirmed by numerous other examples:

  • At a conference in Krasnoyarsk in Siberia, Russia’s vice prime minister Dvorkovich remarked that Chinese companies would be permitted in the future to purchase stakes of more than 50% in state-owned Russian oil and gas fields. This would represent a milestone in the strategic economic partnership between these two nations. And the measure would not be limited to just the energy sector. Closer relations are also planned in other key sectors, such as the financial and the defense industries.
  • The gas delivery agreement struck between Russia and China last year is a turning point in the strategic energy cooperation between the two countries. The exact size of the transaction is not yet known, some have reported up to USD 500bn. For the time being, payments will be made in USD. However, the contracts can be changed into yuan or rublebased contracts at any time, upon which the US dollar would no longer be needed. Apart from this deal, 48 additional economic agreements were signed. The volume of trade between the two countries is set to double over the coming five years to an annual USD 200bn.
  • The “China International Payment System” (CIPS) is designed to increase the renminbi’s importance in crossborder trade and associated international payment transactions. Russia is working on an alternative to SWIFT, after the British government threatened Russia with an exclusion from the financial messaging system.
  • Russia and China have opened a USD 25bn (equivalent) currency swap line. Currently, some 75% of all trade between Russia and China is settled in US dollars. As a result of this agreement, the dollar can be circumvented from now on.
  • China has entered into a comprehensive foreign exchange agreement with Canada, traditionally one of the US’s closest allies. A further agreement was also struck with the ECB, in this case over EUR 50bn. Additional agreements were signed with Switzerland, Malaysia, Argentina, Ukraine and New Zealand. Companies in those countries can thus now completely circumvent the US dollar in trade and foreign exchange transactions.
  • The liberalization of China’s bond market is moving forward rapidly. More than 20 foreign financial institutions have so far received licenses allowing them to enter China’s bond market. Currently the bond market has a volume of nearly USD 6 trillion, and thus appears to be – after the US and Japan – the third largest bond market in the world.175 More than 50 central banks are by now holding RMB bonds as part of their foreign exchange reserves.
  • London, Paris as well as Frankfurt harbor ambitions to establish themselves as the main trading hub for European renminbi trading. In London, the first RMB denominated bonds have been issued, which are held as a reserve by the Bank of England.

Conclusion:

We are currently in a transition period to a multi-polar currency system. The period of dollar dominance appears to be slowly but surely coming to an end. In the wake of Russia and China significantly strengthening their strategic alliance in recent months, it appears as though Western sanctions have heralded a new round in the struggle over the global monetary architecture.

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