By Surya P Sethi*

The Hype and the Current Reality

On March 28, 2022; Russia pegged the Rouble to Gold and the press went wild with some reporting that “Russia just wiped out about 30% of the value of the US$ worldwide when it comes to Gold Bullion”. Others reported this as the equivalent of “detonating a nuclear bomb”; especially when coupled to Russian demands seeking payment in Roubles for all its commodity exports, especially oil and gas.

First, linking the Rouble to Gold, as announced, is a temporary move for just three months. Secondly, the immediate objective of the move was to stem the free fall of the Rouble in the post-sanctions World. The Rouble had breached the 150 Rouble to the US$ mark. The move had immediate impact and the Rouble quickly returned to its pre-sanction parity of around 83 Roubles/US$. Third, all the talk of payment in Roubles for all Russian commodity imports (including oil and gas) is simply talk at this stage. Such a move can only succeed if the World cannot do without the Russian supplies. We are not there yet. The World is not buying Roubles against Gold to pay for Russian commodity imports. Russia, on her part, is happy to accept hard currency payments as that is worth as much as gold, to Russia, in the post-sanction World. And, last but not the least, the peg of 5000 Roubles/gram of Gold was just marginally below the prevailing price of Gold on the day of the announcement translated to Roubles at its pre-sanction parity. So, Gold reserves across the World did not loose their value by 30% as reported!

The Long-term Geopolitical Implications of the Russian Move

While the above Russian moves may have been triggered by the immediate fall out of the US - led sanctions against Russia, their longer-term implications for the current world order are inescapable. The fiercer the sanctions the greater will be the focus on the vulnerability of individual Nations due to the dominance of the US$ in global trade; as also the dominance of the financial settlement mechanism controlled by the Society for Worldwide Interbank Financial Telecommunications that helps move value across borders and backs the trade and non-trade settlements globally based on over 5 billion secure financial messages annually. Such dominance can easily become a potent geo-economic weapon in the hands of those who control it.

It is no secret that China, the World’s largest Mercantile power, has been restive in seeking a bigger role for the Yuan as an alternative to the US$ in global trade. The BRICS nations have been talking about an alternate payment mechanism, outside SWIFT, based on local currencies of the participating Nations on a regional basis if not a global basis. Saudi Arabia along with other gulf-based energy exporters has been, for some years, discussing the possibility of non-US$-based energy trade with China, France and others. Are we seeing the green shoots of de-globalisation and the emergence of a new post Bretton Woods world order based on a multi-polar framework with more regional, if not totally national, aspirations driving the future global agenda?

All sanctions or restrictions on global trade yield arbitrage opportunities. The arbitrage on Brent and Ural crude has exploded since the recent sanctions on Russia. It is this arbitrage that is being mistakenly called the “discount” that Russia is offering on its oil to friendly nations. Similarly, Russia a big player in the global gold trade alongside India and China has suddenly been excluded from the London Bullion Market and other gold exchanges. The resulting arbitrage forced Russian gold to be sold at a ‘discount’. By offering a fixed 5000 Roubles/gram of gold and seeking payments for its commodities in Roubles (purchased with gold) is the Russian Central Bank seeking to hoard Gold and set a new Rouble based Gold Standard or a hybrid gold-cum new non-US$ Petroleum standard, that has long been a desire of Saudi Arabia and Iran, the two other major oil exporters. What would China’s role be as the world’s largest energy consumer and mercantile power in such a new geo-economic world order?

Lest we forget, the dominance of the US$ in the post-World-War II Bretton Woods era was based on pegging the US$ to gold at the fixed parity of 35$/oz. This gold standard raised the confidence in the value of the US$ and it emerged as the preferred medium of trade. The gold standard placed a check on indiscriminate printing of money by USA in the post Bretton Woods era. Facing domestic inflationary pressures and the funding needs of the Korean and Vietnam wars Nixon gave up the gold standard in 1971 and the World moved into an era of floating exchange rates pegged to a basket of currencies dominated by the US$. Had the Gold standard remained in place the US Federal Reserve would not have been able to expand its balance sheet by a factor of over 10 times since 2008. Are the Russian moves trial balloons that precede the beginning of a new world geo-economic order that will shape the future?

To borrow from Bob Dylan, ‘the answer my friend is blowing in the wind’. What is unclear is how many roads and seas must our current bunch of global leaders walk before they can be called men or women worthy of leading us safely in a climate and resource constrained world tethering on the brink of self-immolation.