by Pepe Escobar, first published at The Cradle, reposted here by the author’s permission
The adoption of commodity-backed currencies by the Global South could upend the US dollar’s dominance and level the playing field in international trade.
Let’s start with three interconnected multipolar-driven facts.
First: One of the key take aways from the World Economic Forum annual shindig in Davos, Switzerland is when Saudi Finance Minister Mohammed al-Jadaan, on a panel on “Saudi Arabia’s Transformation,” made it clear that Riyadh “will consider trading in currencies other than the US dollar.”
So is the petroyuan finally at hand? Possibly, but Al-Jadaan wisely opted for careful hedging: “We enjoy a very strategic relationship with China and we enjoy that same strategic relationship with other nations including the US and we want to develop that with Europe and other countries.”
Second: The Central Banks of Iran and Russia are studying the adoption of a “stable coin” for foreign trade settlements, replacing the US dollar, the ruble and the rial. The crypto crowd is already up in arms, mulling the pros and cons of a gold-backed central bank digital currency (CBDC) for trade that will be in fact impervious to the weaponized US dollar.
A gold-backed digital currency
The really attractive issue here is that this gold-backed digital currency would be particularly effective in the Special Economic Zone (SEZ) of Astrakhan, in the Caspian Sea.
Astrakhan is the key Russian port participating in the International North South Transportation Corridor (INTSC), with Russia processing cargo travelling across Iran in merchant ships all the way to West Asia, Africa, the Indian Ocean and South Asia.
The success of the INSTC – progressively tied to a gold-backed CBDC – will largely hinge on whether scores of Asian, West Asian and African nations refuse to apply US-dictated sanctions on both Russia and Iran.
As it stands, exports are mostly energy and agricultural products; Iranian companies are the third largest importer of Russian grain. Next will be turbines, polymers, medical equipment, and car parts. Only the Russia-Iran section of the INSTC represents a $25 billion business.
And then there’s the crucial energy angle of INSTC – whose main players are the Russia-Iran-India triad.
India’s purchases of Russian crude have increased year-by-year by a whopping factor of 33. India is the world’s third largest importer of oil; in December, it received 1.2 million barrels from Russia, which for several months now is positioned ahead of Iraq and Saudi Arabia as Delhi’s top supplier.
‘A fairer payment system’
Third: South Africa holds this year’s rotating BRICS presidency. And this year will mark the start of BRICS+ expansion, with candidates ranging from Algeria, Iran and Argentina to Turkey, Saudi Arabia and the UAE.
South African Foreign Minister Naledi Pandor has just confirmed that the BRICS do want to find a way to bypass the US dollar and thus create “a fairer payment system not skewed toward wealthier countries.”
For years now, Yaroslav Lissovolik, head of the analytical department of Russian Sberbank’s corporate and investment business has been a proponent of closer BRICS integration and the adoption of a BRICS reserve currency.
Lissovolik reminds us that the first proposal “to create a new reserve currency based on a basket of currencies of BRICS countries was formulated by the Valdai Club back in 2018.”
Are you ready for the R5?
The original idea revolved around a currency basket similar to the Special Drawing Rights (SDR) model, composed of the national currencies of BRICS members – and then, further on down the road, other currencies of the expanded BRICS+ circle.
Lissovolik explains that choosing BRICS national currencies made sense because “these were among the most liquid currencies across emerging markets. The name for the new reserve currency — R5 or R5+ — was based on the first letters of the BRICS currencies all of which begin with the letter R (real, ruble, rupee, renminbi, rand).”
So BRICS already have a platform for their in-depth deliberations in 2023. As Lissovolik notes, “in the longer run, the R5 BRICS currency could start to perform the role of settlements/payments as well as the store of value/reserves for the central banks of emerging market economies.”
It is virtually certain that the Chinese yuan will be prominent right from the start, taking advantage of its “already advanced reserve status.”
Potential candidates that could become part of the R5+ currency basket include the Singapore dollar and the UAE’s dirham.
Quite diplomatically, Lissovolik maintains that, “the R5 project can thus become one of the most important contributions of emerging markets to building a more secure international financial system.”
The R5, or R5+ project does intersect with what is being designed at the Eurasia Economic Union (EAEU), led by the Macro-Economics Minister of the Eurasia Economic Commission, Sergey Glazyev.
A new gold standard
In Golden Ruble 3.0 , his most recent paper, Glazyev makes a direct reference to two by now notorious reports by Credit Suisse strategist Zoltan Pozsar, formerly of the IMF, US Department of Treasury, and New York Federal Reserve: War and Commodity Encumbrance (December 27) and War and Currency Statecraft (December 29).
Pozsar is a staunch supporter of a Bretton Woods III – an idea that has been getting enormous traction among the Fed-skeptical crowd.
What’s quite intriguing is that the American Pozsar now directly quotes Russia’s Glazyev, and vice-versa, implying a fascinating convergence of their ideas.
Let’s start with Glazyev’s emphasis on the importance of gold. He notes the current accumulation of multibillion-dollar cash balances on the accounts of Russian exporters in “soft” currencies in the banks of Russia’s main foreign economic partners: EAEU nations, China, India, Iran, Turkey, and the UAE.
He then proceeds to explain how gold can be a unique tool to fight western sanctions if prices of oil and gas, food and fertilizers, metals and solid minerals are recalculated:
“Fixing the price of oil in gold at the level of 2 barrels per 1g will give a second increase in the price of gold in dollars, calculated Credit Suisse strategist Zoltan Pozsar. This would be an adequate response to the ‘price ceilings’ introduced by the west – a kind of ‘floor,’ a solid foundation. And India and China can take the place of global commodity traders instead of Glencore or Trafigura.”
So here we see Glazyev and Pozsar converging. Quite a few major players in New York will be amazed.
Glazyev then lays down the road toward Gold Ruble 3.0. The first gold standard was lobbied by the Rothschilds in the 19th century, which “gave them the opportunity to subordinate continental Europe to the British financial system through gold loans.” Golden Ruble 1.0, writes Glazyev, “provided the process of capitalist accumulation.”
Golden Ruble 2.0, after Bretton Woods, “ensured a rapid economic recovery after the war.” But then the “reformer Khrushchev canceled the peg of the ruble to gold, carrying out monetary reform in 1961 with the actual devaluation of the ruble by 2.5 times, forming conditions for the subsequent transformation of the country [Russia] into a “raw material appendage of the Western financial system.”
What Glazyev proposes now is for Russia to boost gold mining to as much as 3 percent of GDP: the basis for fast growth of the entire commodity sector (30 percent of Russian GDP). With the country becoming a world leader in gold production, it gets “a strong ruble, a strong budget and a strong economy.”
All Global South eggs in one basket
Meanwhile, at the heart of the EAEU discussions, Glazyev seems to be designing a new currency not only based on gold, but partly based on the oil and natural gas reserves of participating countries.
Pozsar seems to consider this potentially inflationary: it could be if it results in some excesses, considering the new currency would be linked to such a large base.
Off the record, New York banking sources admit the US dollar would be “wiped out, since it is a valueless fiat currency, should Sergey Glazyev link the new currency to gold. The reason is that the Bretton Woods system no longer has a gold base and has no intrinsic value, like the FTX crypto currency. Sergey’s plan also linking the currency to oil and natural gas seems to be a winner.”
So in fact Glazyev may be creating the whole currency structure for what Pozsar called, half in jest, the “G7 of the East”: the current 5 BRICS plus the next 2 which will be the first new members of BRICS+.
Both Glazyev and Pozsar know better than anyone that when Bretton Woods was created the US possessed most of Central Bank gold and controlled half the world’s GDP. This was the basis for the US to take over the whole global financial system.
Now vast swathes of the non-western world are paying close attention to Glazyev and the drive towards a new non-US dollar currency, complete with a new gold standard which would in time totally replace the US dollar.
Pozsar completely understood how Glazyev is pursuing a formula featuring a basket of currencies (as Lissovolik suggested). As much as he understood the groundbreaking drive towards the petroyuan. He describes the industrial ramifications thus:
“Since as we have just said Russia, Iran, and Venezuela account for about 40 percent of the world’s proven oil reserves, and each of them are currently selling oil to China for renminbi at a steep discount, we find BASF’s decision to permanently downsize its operations at its main plant in Ludwigshafen and instead shift its chemical operations to China was motivated by the fact that China is securing energy at discounts, not markups like Europe.”
The race to replace the dollar
One key takeaway is that energy-intensive major industries are going to be moving to China. Beijing has become a big exporter of Russian liquified natural gas (LNG) to Europe, while India has become a big exporter of Russian oil and refined products such as diesel – also to Europe. Both China and India – BRICS members – buy below market price from fellow BRICS member Russia and resell to Europe with a hefty profit. Sanctions? What sanctions?
Meanwhile, the race to constitute the new currency basket for a new monetary unit is on. This long-distance dialogue between Glazyev and Pozsar will become even more fascinating, as Glazyev will be trying to find a solution to what Pozsar has stated: tapping of natural resources for the creation of the new currency could be inflationary if money supply is increased too quickly.
All that is happening as Ukraine – a huge chasm at a critical junction of the New Silk Road blocking off Europe from Russia/China – slowly but surely disappears into a black void. The Empire may have gobbled up Europe for now, but what really matters geoeconomically, is how the absolute majority of the Global South is deciding to commit to the Russia/China-led block.
Economic dominance of BRICS+ may be no more than 7 years away – whatever toxicities may be concocted by that large, dysfunctional nuclear rogue state on the other side of the Atlantic. But first, let’s get that new currency going.
A currency, or basket of them, where each currency is redeemable for either a resource with intrinsic value (gold has intrinsic value as a potential Specie monetary object) like oil, or wheat, or anything humans can use to live, is effectively a fiduciary media being used as money. It is still subject to manipulation because humans can play with the redeemability ratios of each fiduciary in the basket and if the basket of fiduciaries is averaged into a common one all the players in the basket fooling around with their redeemable ratios can add to the confusion. In the end nobody might be able to figure out what a unit of the composite can be redeemed for or who shall do the redeeming. It might wind up like the subprime CDO’s where it was a mess nobody could figure out. Just use gold.
“The crypto crowd is already up in arms, mulling the pros and cons of a gold-backed central bank digital currency (CBDC) for trade that will be in fact impervious to the weaponized US dollar.”
While the idea sounds great, the simple fact is there is no currency or indeed central bank that is immune to the sort of idiotic meddling that has created the current sorry state of affairs. Human avarice knows no bounds, and there will never be a shortage of amoral people to do whatever is needed to fill that “need”.
No doubt a lot is happening in finance these days, debt limits and extraordinary measures used to combat the political dysfunction.
I dont believe we are buying as much Saudi oil as before, but the treasury notes given to the kingdom for us to purchase that past oil, are still being paid back and in bulk and for how long we do not know.
But what we do know is that one of the extraordinary measures taken to stave off a gvt default is the treasury delaying paying their obligations, obligations like the kingdoms past oil contributions.
Now if were the King, and you already waited 10 or 30 years to pay me, and now you want to delay until the dysfunction is settled in congress, I might look for another customer to trade with too.
Sorry to sound ignorant, but I’m not an economist at all, and I thought the “Global South” in the article was somewhere in Alabama. No, seriously though even though I don’t understand much about this particular subject, I always read the article if Mr Escobar writes it, because I’m completely dumbfounded by your mastery of the English language and it’s a pleasure to read your posts. See, I’m from the south, as in Dixie, and in my experience it was rare to encounter such skillful linguistic articulation, and I genuinely appreciate it, sir.
I’ve heard of BRICS, and know a little about them, but I guess I really do need to learn about digital currency though.
This all sound like the world is quietly digging a nice grave for the Empire of Lies as its final resting place. Can’t wait for the new Bricks+ currency and central banking to start kicking.
The Central Bank Digital Currency (CBDC) can be a useful tool for total control of a world population, or it can be an excellent world financial tool for goods and services. If the CBDC is backed by commodities such as gold and silver, oil etc., it can be beneficial to all mankind providing it is not a tool for total world population control like the global world reserve currency, the USA dollar, has become. The problem with any digital currency is the control factor ie., it can be turned off, rate reduced, by control leadership. It can also be hacked, EMP destroyed naturally by the sun or by nuclear by war, or any electrical interference.
The main problem with the CBDC is that it will eliminate the physical cash based system over time.
Although digital currencies can be used for good or bad, the postential for bad is so big I question if it is worth the risk. In reality we have ‘digital’ currency to day, only a small part of it exist in physical form. It allows for a resonable degree of privacy, however with the new CBDC that is potentially gone.
Combined with other data sets from smartphones, gps in cars, internet of things etc. we approach a potential for a dystopian level of Totalitarianism unheard of. We really get 1984 monitoring of our response while watching our Smart TVs, in combo with our change in pulse from out Fitbit health trackers. All that is missing is Big Bro.
Awesome work once again from Pepe.
All I can do is perhaps expand on it a bit by challenging Zoltan Pozsar’s statement… “tapping of natural resources for the creation of the new currency could be inflationary if money supply is increased too quickly.”
As a Credit Suisse man and an ex-adviser to the US Treasury, I really can’t believe that Pozsar is giving us the entire story, especially when Credit Suisse is one of the most outrageously levered at-risk banks on the planet.
So too, I am at a complete loss to see why a so-called Bretton Woods III label is either accurate or in any way inspiring as a label when the world so desperately needs to move forward with a completely new cooperative financial, trade and security paradigm.
The circumstances are so utterly different now from what they were in 1944 when the Bretton Woods blueprint was devised as a post-war financial strategy. Over the course of 6 years of WW2 the US economy had basically doubled in size to become ~50% of the global GDP.
The U$ had emerged from WW2 with minimal domestic debt, whereas it is now it is riddled with it as well as carrying massive Govt debt (and the servicing that will soon approach $1triilion per year) to such an extent that the country is barely even competitive anymore as an exporter of industrial and value-added products.
Furthermore, the short-term credit model that Britain once pioneered (disastrously) systematically strangles production in the real economy in the long term. The UK and then the U$ both chose the casino pump and dump model where companies no longer invest profits in R&D and instead pay them out in dividends, share buybacks, and massive salary packages for their management staff.
This is the difference between industrial capitalism and financial capitalism – the former does not blow huge bubbles – neither is it inflationary… the extra money supply generated by “tapping into its natural resources” is soaked up in the production of tangibles and in developing infrastructure, which in turn generates permanent wealth and long term cost savings through efficiencies.
In contrast, Russia and China, two of the big players in BRIICS+, rely on a completely different model. They treat banking as a public utility. Debt in this system, which in effect the State owes to itself, can be written down in certain emergencies or if it is a positive for the overall economy.
No third party is taking a cut in this system and the cost of credit can be kept much lower. If it is deemed necessary to keep rates high (Russia a year ago had rates around 20%) this money goes back into the Govt coffers (not to filthy rich thieving private banksters) and is available in the fiscal budget for all manner of programs and projects.
The massive almost 900% increase in the FED balance sheet since 2008 is because entities around the world are not buying as much U$ debt any longer. The new system in Zone B is becoming a trade in bilateral goods for goods, and currency swap agreements. They will also create international bonds for their own member countries in order to create international credit at very reasonable (read not predatory) rates.
They will not require U$ dollar reserves for this new cooperative trading system – indeed they have been warned not to have these reserves on hand because they can be stolen by Uncle $am on a whim if these countries even dare to try to operate and trade as normal sovereign entities.
The new road map will involve the least possible contact with the U$ dollar, and absolutely minimal holdings of foreign reserves denominated in that currency. This is now a simple choice between imperialism and anti-imperialism for unaligned countries, and as the Zone B bloc grows and proves its worth, it gives a welcome respite for present Zone A countries to rethink their current positions. They will also be very wise to take back their gold reserves that are still stored anywhere near the Natostan sphere of influence.
The choice will not only be about giving imperialism the giant single-fingered salute, but also about disenfranchising the kleptocratic private banking cartels and moving from casino fiat currencies into tangibly backed currencies that will be the polar opposite of the inflationary paper IOUs they have been issuing.
There have been historical examples of the remarkable resilience of hard-backed currencies where there has been zero or negligible inflation for centuries. The best example is probably the Mexican Peso which enjoyed some 300 years of negligible inflation.
Imagine the BRIICS+ countries using stable sovereign currencies tangibly backed by up to 20 different commodities including PMs, and also combined with changing their central bank, infrastructural, and local cooperative banks, over to these state utility models as well. They could well enjoy a very rapid economic miracle that could rapidly further spell the death knell for the old Zone B models than cling on to the old system.
I also think Pepe is perhaps erring on the conservative side in anticipating the economic dominance of the BRIICS+ taking maybe 7 years to emerge. I personally think the change will be far more dramatic, especially if Lula is not couped or killed. If he holds onto power he will provide the inspiration and the glue to really get this movement humming.
This will be the cue for LatAm and basically all of Africa to join in. The ME are already voting with their feet and they link up the African continent with Eurasia and Russia. Furthermore, they have just set fire to the petrodollar as well = even more drastic disenfranchisement and pending financial and strategic irrelevance for the hegemon.
Also, I envisage that a complete unravelling of the Zone A banks could happen at any stage now, especially given the enormous multi-trillion dollar derivative positions the TBTF private banks have in shorting gold and silver in order to protect their fiat currencies. This was very well covered recently by Andrew McGuire when he analysed the utter chaos of the massive naked shorting where there could be up to 500:1 paper claims for every gram available and the 100:1 cash-settled silver market
Many of these TBTF banks have such massively leveraged positions they are already technically insolvent anyway, even without their massive off-the-books derivative positions. Any one of them could go tits up any day and this could domino around the world in a flash, making 2008 or 1929 look like a walk in the park in comparison.
The underlying fundamentals of global finance are currently multiples worse than either of those two instances. Global debt is currently ~ 350% of world GDP, meaning the global economy is itself technically insolvent. Nominal derivatives could be as much as of $2.5 quadrillion – IOW 30 times global GDP. At times just two of the TBTF banks can have combined nominal derivatives positions higher than the annual global GDP.
The PM exposure was very well covered by Andrew Maguire recently – see comments under this link…
https://www.zerohedge.com/news/2023-01-13/lbma-blindsided-russia-buying-physical-gold
The west might well think that they can inflate their massive debt away. Now more than ever before though, Zone B will see this as a technical default because that’s precisely what it is. The BRIICS+/Zone B countries now have a viable working alternative. A very stark choice it most certainly is.
Go BRIICS+
Col
“There have been historical examples of the remarkable resilience of hard-backed currencies where there has been zero or negligible inflation for centuries. The best example is probably the Mexican Peso which enjoyed some 300 years of negligible inflation”.
Could you cite the source of this information? Because in Mexico, at least during most of the 20th century and so far in the 21st century, we have not experienced those levels of inflation to which you refer.
Hi Orlando
Yes absolutely… but remember that up until the late 1800’s the Mexican currency was hard-backed. The period you reference was when the Mexican peso was becoming just another fiat currency.
Quoted from… https://mexicounexplained.com/untold-story-mexican-peso/
“The last eight real coin was produced during the dictatorship of Porfirio Díaz in 1897. By 1900 the Mexican dollar, once preferred over the US dollar even within the borders of the United States, was now worth only 50 cents US. At the beginning of the 20th Century the Mexican peso had become quite ordinary and was on the road to becoming a fiat currency, or a faith-based currency with little intrinsic monetary value.
The silver content of the peso dropped to 80% fine silver in 1918. Another debasement happened two years later in 1920 when the Mexican peso was minted with 72% fine silver. In 1947 the peso contained only 50% silver. By the late 1950s, the once-proud Mexican peso, featuring the likeness of revolutionary hero José María Morelos on its front side and the emblematic Mexican eagle on its reverse side, was only 10% silver. ”
Cheers
Col
Typo…
XnominalX derivatives should read NOTIONAL
Thanks. Interresting read.
To me it looks that honest Fiat currency backed by faith works well, however when trust is broken it fails.
Empires historic first(biggest) confiscation of Russian reserves seem to have blown up the system and disaster looms.
Maybe the ‘Great Reset’ the Davos crowd was talking about, is the elimination of all debt and by extension all currency ?
If one really wants to “take out” the western economy led by the U.S.A. consider simply raising the price of fuel, e.g. oil and gas. We saw a little bit of what would happen last year when fuel prices inched up mildly. The U.S. government literally freaked; so much so they released their strategic petroleum reserves simply for the purpose of keeping price down. The strategic reserves are meant to keep enough oil on hand in order to combat a major war, or other catastrophies of similar magnitude. Obviously, U.S. oil prices inching up a few cents is considered a catastrophy. Unlike just about all other major countries in the world, the U.S. economy is wholly dependant on cheap and available fuel. In Europe for example, most of the price of fuel at the gas pump is from taxes. So the rise in price at the pump was not all that dramatic. (The leaders in Europe really do not want people to drive, and otherwise foolishly spend energy.) However in the U.S., the whole economy is based on ever greater consumption. Rising oil prices will inflict a serious whamy upon U.S. lead economies probably more so than any gold or other finance manipulations. Russia and the BRICs who would just love to see the U.S.A. bend and say “uncle” now have a perfect opportunity. All they have to do is cut back supply, and there is plenty of rationale out there to do so. With NATO now commiting to sending heavy weapons to the Ukraine, the counter may well be cutting back on world oil supply as without cheap available oil heavy weapons will not move (hint hint). A little cut back in world fuel production/consumption can also be justified in the name of helping with saving the planet from climate change.
Buy gold now.
@ Ozark Grandpa on January 19, 2023 · at 4:39 pm EST/EDT
“Sorry to sound ignorant, but I’m not an economist at all, and I thought the “Global South” in the article was somewhere in Alabama…”
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Ozark Grandpa (love your nick), you’re confusing the “Global South” with the “Deep South,” and for that you don’t need to be an economist, just a bit of geography would help.
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“…No, seriously though even though I don’t understand much about this particular subject, I always read the article if Mr Escobar writes it, because I’m completely dumbfounded by your mastery of the English language and it’s a pleasure to read your posts. See, I’m from the south, as in Dixie, and in my experience it was rare to encounter such skillful linguistic articulation, and I genuinely appreciate it, sir…”
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You’re not alone in your appreciation. I am sure Pepe will love (and smile) at your comment.
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“…I’ve heard of BRICS, and know a little about them, but I guess I really do need to learn about digital currency though.”
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BRICS is a building in the making, and Pepe has been writing about it since its inception long ago. As you could read BRICS+ is coming in an augmented version. As for learning about digital currency, watch out, you can easily be misled into a rabbit hole.
The honesty of your comment was refreshing. It brought a smile to my face to learn the reactions to Pepe’s articles from people in all walks of life.
Hope you’re not covered in snow out there in the Ozarks.
Lone Wolf
Thank you. The compliments to Mr Escobar are heartfelt. I have a profound respect for his command of my native language – on top of that, I think I read where he’s from Brazil, so double compliments.
It is not really the USD as reserve currency that is important. With today’s computing power, I don’t think a reserve currency is needed at all. One could build a sophisticated algorithm to easily net out & exchange the individual currency positions at the bilateral, bloc or regional levels without having to convert to USD. One only needs to de-dollarize to the extent of cutting out the middle layer i.e. USD, EUR, YEN, GBP etc. This can be done in a number of ways i.e. bilateral trade, bloc trading, regional trade groupings.
More important is that Western banks control Fx markets & trading volumes. Theoretically, 2 counterparties could create massive Fx derivative contracts where each takes the opposite side of the same trades. The positions will net to zero or near zero so the combined exposure is minimal, but in the process they set (or “fix”) the global Fx rate. In cricket, this is called match fixing.
Pepe, why would you want global dominance by BRICS+ when you work so hard to remove global dominance by the Neocon cabal? Isn’t the point of indivisible security that no one nation or alliance of nations dominates any other nation?
Rev. the US Dollar is employed as an instrument of plunder and global hegemony. The New emerging BRICS is focused on to break the Western alliance on global trade. It’s very simple to understand if you appreciate US reasons for destroying Iraq, Libya and continuing to colonize the former Persian Empire that had existed long before the New Arrival now limping into the Dust Bin of Histoty.