STAFF NEWS & ANALYSIS
Russia Kicks Dollar Dominance
By Staff News & Analysis - June 19, 2010

Medvedev Pushes Ruble Reserve Currency to Cut Dollar Dominance … Russia wants the ruble to be one of the world's reserve currencies as President Dmitry Medvedev (left) renews his push to reduce the dollar's dominance and make Moscow a global financial hub. "Only three, five years ago it seemed like a fantasy" to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. "Now we are seriously discussing it." Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said. "It's something that's obviously needed," he said at the St. Petersburg International Economic Forum. "Developing a financial center in Moscow will considerably help to strengthen the ruble's position as one of the reserve currencies." Medvedev's comments underline Russia's ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging. – Bloomberg

Dominant Social Theme: The dollar is no more.

Free-Market Analysis: More talk about global currencies. Medvedev has announced this ruble-reserve push with great fanfare in advance of the latest G20 meeting, and the news is splashed all over the Internet. From our point of view, this statement is no accident and may have as much to do with the euro's struggles as it does with Medvedev's itch to replace the dollar with the ruble.

Yes dear readers, it is another power elite dominant social theme – or a sub-theme actually of the larger theme which is that world needs reserve currencies (versus gold) and that if it cannot have just one it ought to have several. Here's a statement from Medvedev earlier this month:

An EU-Russia summit in Rostov-on-Don in which the EU rejected Russian calls for a speedy visa-free travel deal but in which the two sides agreed a brief joint statement on EU help for modernising Russia's economy. Mr Medvedev pressed the visa issue on Saturday. "For our citizens, for the citizens of Russia as well as the citizens of the European Union, this is something extraordinarily important. If we go ahead, it will change our lives. It will make us a true strategic partners," he said. (EU Observer)

We are not quite sure why Medvedev is so hot on visa-free travel with the EU but we are just as sure the statement does not make Medvedev sound like an enemy of the West. What may be going on, regularly, is that Medvedev and Prime Minister Vladimir Putin have decided to play a kind of good-cop/bad-cop game. We never seem to stumble across palliative statements from Putin regarding Europe or America, though we read about such statements from Medvedev all the time.

In fact, just the other day we were reading a Reuters report featuring Putin and it went like this: "Putin boasts new jet fighter better than U.S. plane … Prime Minister Vladimir Putin climbed into the cockpit of Russia's newest fighter jet on Thursday and said it would trump a U.S.-built rival, the F-22 Raptor. Putin watched a test flight of a "fifth-generation" stealth fighter, dubbed the T-50 and billed as Russia's first all-new warplane since the collapse of the Soviet Union in 1991. …"

Given our suspicions about the public-relations-oriented approach of this pair, we have to think that the Medvedev approach to currencies is hyper-active to say the least. In the near term, he seems to see a world of numerous reserve currencies, including the ruble. We can't help noticing such talk gives the staggering euro a credibility boost as well. But is this realistic?

Britain's pound actually provided the world's first reserve currency, about 200 years ago, but that doesn't necessarily mean that the globe needs a multiplicity of them tomorrow. Not only that, but the dollar only replaced the pound after two devastating wars, after which the US was literally the "last man standing." In fact the dirty little secret of the current financial order is that military might is very helpful when it comes to establishing a reserve currency.

Medvedev seeks support from the Chinese; however the Chinese seem to see the SDR as a new reserve contender. We are skeptical of this as well, though we did point out recently that SDRs might become a more attractive currency if they were somehow backed by money metals, specifically gold. We don't see anything in the current Russian statements that suggest gold-backed SDRs are being seriously considered at the moment. Not only that but the US itself basically retains control over the IMF – which is an Anglo-American invention to begin with.

For all these reasons, we believe the Russian comments are as much about "talking up" regional and worldwide currencies (perhaps giving the ruble an advantage as a result) as they are a practical approach. The last time we reported on the idea of a new reserve currency, we wrote the following:

We don't think that the IMF is much of a central bank, by the way, nor an inevitable one. We don't even think SDRs are going to prove much of a substitute for the dollar except perhaps in special circumstances. The dollar became the world's reserve currency (a strange nomenclature) after World War II basically because the US was able to enforce its will worldwide. By linking the dollar to purchases of oil, the US was apparently able to ensure that the rest of the world would use the King of currencies.

But the dollar is merely the might of the Anglo-American elite made manifest. In fact, the IMF is a creation of the Anglo-American elite and to the degree that the IMF substitutes for the dollar it merely dresses up the ancient mechanism. Western elites discovered central banking and continue to utilize it no matter how the deck chairs are rearranged.

The UN, the World Bank and numerous other entities are all the creation of the Anglo-American monetary elite so far as we can tell. There is little confusion here. The goal of the Anglo-American elite seems to be the further consolidation of money and power, and such goals do not know national boundaries. Trying to take back control of such a complex and powerful system is difficult in the extreme. The system has its own logic and its own rules, and these will not be easily reconfigured, if at all.

Surely, if the dollar truly flounders, the Anglo-American elite will no doubt try to find some alternative methodology – as they are perhaps trying now, though we are not so sure. The goal, as we see it, is not to retain the dollar per se but to retain power. However the dollar still provides a mighty platform for such power. And the nations from whence the Anglo-American elite hail are not necessarily going to benefit from this process, as Brown et. al. point out.

To read more, click here: The IMF Catapults From Shunned Agency to Global Central Bank.

There are others who share our view about the IMF and SDRs as they are currently conceived as well. Here's something from Seeking Alpha written in March 2009:

SDRs have been around for 40 years, but they are not really money. Money, as economists understand it, is a means of exchange, a store of value, and a unit of account. SDRs are not a means of exchange. As a basket of already existing currencies, it might appear more stable and hence a better store of value, but what is the metric? The purchasing power of fiat currencies individually and collectively has generally been eroded by inflation. The SDR is not a fiat currency, but a basket of fiat currencies. For the most part SDRs are relegated to a unit of account for (no surprise) the IMF and a few other international organizations. Some observers suggest that SDRs are the IMF's money (sometimes they are referred oxymoronically as paper gold), but that reflects a misunderstanding. Issuing SDRs is not the same as the IMF printing money. The IMF doesn't do that. An increase in SDRs simply boosts each member's claims on the composite currencies. The IMF is not a central bank.

When one looks at what the Russians – and the Chinese – are actually DOING, the matter becomes somewhat clearer. Both countries' central banks are net, aggressive buyers of gold. As the price of gold rises toward US$1300, as the dollar stumbles, as the euro fades, money metals continue to climb. We think gold may test a price point far beyond US$2000 before this latest money metals bull market is over. Here's a recent article on central banks and gold from CNN, entitled, Central Banks Join Gold Rush:

As far as public records show, Russia appears to be the largest buyer of gold among central banks so far this year. In the first quarter of 2010, Russia's central bank increased its gold reserves by 26.6 metric tonnes, or about $1.2 billion at today's price, according to World Gold Council data. That's in addition to the 117.63 tonnes that Russia added in 2009. Russia has been adding to its gold reserves steadily for more than three years, partly through buying its own domestic mine production. It considers gold both a symbol of prestige as well as a way to bolster the country's credit worthiness, Nichols said. …

China is considered a stealth buyer of gold, said Boris Schlossberg, director of currency research at Global Forex Trading. As the world's largest producer of the metal, China often buys gold from its own mines and doesn't report those sales publicly. But in April 2009, China did admit to having added 454 tonnes, or a 76% increase, to its reserves since 2003. Analysts suspect the country is continuing to buy gold and could in fact, be the world's largest buyer consistently. It simply doesn't reveal it's pro-gold stance proudly, however, because China is also the world's largest holder of U.S. Treasurys.

There is no doubt that Russia and China are buying gold, and the amounts and ongoing purchases would tend to belie the current boosterism for an IMF currency, which so far as we can see would be something of a disguised US dollar, given that the US still has sway over the IMF as a whole. For that reason, we would tend to believe that continued comments about the IMF, especially, as a new reserve currency remain fairly far-fetched (let alone the ruble).

After Thoughts

What is actually happening is that gold is likely becoming a defacto, secondary reserve currency. Reserve currencies have to be recognized universally and buyers and sellers have to have confidence in them. Gold fits the bill. Not only that, but we would argue that gold has never ceased to be the "real" reserve currency for the world's wealthiest families and individuals and even for central bankers. Of course the powers-that-be will never admit this, which is one reason why there are continual statements regarding other reserve currencies, regional currencies, etc. Those who want to figure out what is really going on ought to simply "follow the money." And money is gold.

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