De-dollarization

Russia and China have built in an off-ramp.

As Biden and Co. keep saying, they want to reduce our dependence on foreign oil by using green energy, not by expanding U.S. energy production. The Atlanticists at the helm seem to have convinced most of Europe of the same thing as evidenced by the way in which our sanctions were formulated. The toothless sanctions swing wide around Russian Energy seem to indicate a real fear that we in the West are not in a place to live without those cheap Gazprom products we have so become accustomed too.

Back in the late 90’s, early 00’s Russia wasn’t much more than a natural resource mine akin to a cold Saudi Arabia or Qatar that just so happened to have a plethora of nukes and a leftover space program. The Russian elite that had seen the collapse of the Soviet Union were more or less willing to ride this wave of natural resource revenue and live fat without Imperialist dreams.

They had easy money from natural resources and the ready ability to spend it as they wished throughout Western Europe living like princes. And many did. However, with a combination of Western sanctions and government initiatives the Russian economy and business world was drug back to the table and into the developing world where they exist now.

Many would have had no problem remaining the kings of resource and drinking champagne without the GeoPol headaches that exist today.

The new sanctions which the West hopes brings Russia to heel may not have such an effect. What they may end up doing is dragging the business class (which in many ways is still less than enthusiastic) to the forefront of the industrial and consumer product economy of BRICS nations and the regions they plan to dominate.

Let’s look at some historical examples that demonstrate how this can play out. Take Japan or South Korea for example.

During their highest economic and social growth phases they effectively put sanctions on their own economies. They reduced and, in some cases, cut off portions of their economies to imports so that their own industries would develop.

Reducing imports and growing domestic industry and companies worked great in Japan and South Korea because governmental policy was designed with 2 things in mind:

1) Create a wildly competitive domestic market. Early growth capitalism is a magic wand in places that have government policies that support competition.

2) Allow these domestic industries to focus on export markets so that Russian companies sink-or-swim. Discipline forces them to become world-class companies in one aspect or another, or they don’t survive. In the least they have to offer a competitive product to BRICS nations and regions

So long as Russia does the two above things the sanctions may work to their benefit.

There are additional things that look to be in Russia’s favor as well. The valuation of the ruble is low and likely kept low on purpose by the Russian government. Japan did the same thing for the Yen before 1985. All of this benefits export policy.

Russia is less integrated into international markets than Japan or South Korea were, but things are quickly changing with their relational improvements with China who is certainly integrated in every corner of the globe in a big way. The West is worried.

Another thing that made Japan and South Korea so successful were the numerous international joint-ventures they undertook, especially here in the US. The sole purpose of those ventures was to technology transfer and to gain market entry. Russia has a somewhat similar opportunity to join with China in the coming years on such projects. This may allow for new market access for Russia, process utilization exchanges between the nations, and growth for both economies.

But Russia doesn’t have a ton of tech to export to China. What they do have is the opportunity to utilize joint-ventures to shift exports away from and potentially squeeze Euro partners as a form of leverage while providing increased access to emerging markets in African, Asia, and South America via BRICS.

Russia has an enormous energy supply, strong food supply, and immense natural resources. Any real restriction of this, especially the natural resources (Petro) into Europe (so long as Russia builds in an offset in Africa, Asia, and South America) and Europe hurts and Russia comes out a winner.

While we continue to try and sanction Russia, we need to recognize that anything they get from us here in the West, China can make up for in the immediate future. In many ways, so long as they adhere to the outlined plan they are perhaps even better suited for development than South Korea or Japan were. The thing about the Euro that makes it an interesting choice for the emerging Russian and Chinese polar world is that both nations can have tremendous effect on the value without necessarily putting their own currency at risk.

The futures curve for the Eurodollar inverted on December 1. The market is saying that the market doesn’t agree with what the Fed is (trying to get in control of inflation) and the back half of all this shows that the markets say they don’t think there is inflation. We’re getting contradictory dual signals.

What this means is that the markets are more than uncomfortable and thus the soft belly of the global financial system is exposed. If we see really strict EU sanctions remain in place against Russia for any considerable length of time the entire European market could see a devastating and severe contraction.

And while many will ask, doesn’t that hurt Russia? We can see that it may in the short term but so long as they stick to the outlined long-term objectives, strengthen ties with China and expedite the alternate system they are partnering in (BRICS) they can survive it and even thrive under a new BRICS order.

Russia does not see itself in competition with China for global primacy. The two countries have achieved an advanced degree of partnership built on a range of shared interests, compatible worldviews, and mutual empathy. The Russian-Chinese relationship may replace the US-Western European alliance as the dominant global partnership for the next 50 years and into the following century if they take this as an opportunity. Africa and Indian markets are set for immense growth as we head towards 2050 and beyond. The Belt and Road initiative, and the Digital Silk Road are already shaping up.

Take China’s Digital Silk Road for example and how they’ve used it to export Chinese privacy and surveillance technology: facial recognition software in Zimbabwe, social credit–like systems in Venezuela, cybersecurity laws in Uganda and Tanzania, and a great firewall in Russia.

Russia is happy to participate, and China is happy to have them. Russia in no way wants to be a pet project of China’s, but they have shown they want to establish a structure that acts as the basis of a productive relationship, and China has no problem reshaping their export economy over time. 87% of their GDP is now domestic, so they aren’t gambling the farm. And the metrics show this to be the direction the world is headed.

Just take a look…

-In 2015 90% of their bilateral transactions were conducted in dollars.
-By Q1 2020 46% of their bilateral transactions were conducted in dollars.
-De-dollarization results in a Defacto Alliance.
-They've been doing this since 2014.

Traditionally the dollar has had three major advantages to other currencies: the ability to maintain value in the form of limited inflation and depreciation, the sheer size of the American domestic economy, and the US having financial markets that are deep, liquid and open.

We have lost #1: Limited Inflation is no longer limited. While it may not yet be astronomical, it is at +40yr highs and no longer considered transient. We have a wage-price spiral that is the worst on record since the correlation has been tracked, 40% of our money supply has been printed in the past 2 years, and we currently have less pressure than ever before to exert via sanctions.

#2 has been sidestepped by China as their Domestic Economy is now massive by any and all metrics.

#3 still stands.

Economic sanctions are a powerful tool in general. However, when overused (and they have been) those on the receiving end start to look for solutions. And that is just what has happened. China has made sure our sanctions have limited effect and Russia has made considerable efforts as well. While sanctions may have short term impact on Russian markets, the off-ramp they’ve built for themselves provides a mid-to-long term solution.

So, what does the structure of that off-ramp look like?

China and Russia have an economic agreement in place that allows them to gain access to the other's currency without having to purchase it on the foreign exchange market. This has been going on since 2014.

Fastforward to June 2019 and Putin & Xi decide to settle all transactions between each other's nations in native currency and develop systems independent of SWIFT by conducting trade in rubles and yuan.

But here is what few seem to recognize. Russia has been rapidly accumulating yuan reserves at the expense of the dollar. In early 2019, Russia's central bank revealed that it had slashed its dollar holdings by $101 billion -- over half of its existing dollar assets.

One of the biggest beneficiaries of this move was the yuan, which saw its share of Russia's foreign exchange reserves jump from 5% to 15% after the central bank invested $44 billion into the Chinese currency. As a result, Russia acquired 1/4 of the entire world's yuan reserves. Russia's sovereign wealth fund has also begun investing in yuan and Chinese state bonds.

This blind to reality concept that Western leadership has of "The US dollar controls all" is based on fading truths as we operate diplomatically with our head in the sand.

These things take time, and I am not saying that the culminating moment of de-dollarization happens tomorrow or next week. But make certain it IS happening and there may be no better opportunity than now for Russia to take the sanctions the West has placed upon them and run with it. If they do, the long-term decoupling of the Russian and Asian worlds from the dollar as this plays out over 10-20-50 years reestablishes the global order.

Western leaders lose enormous trust by the day: I mean, who would invest any large amounts of money in Canada right now when they have demonstrated there is the potential for it to be seized by the government for ones political beliefs?

What emerging nation or potential partner takes American energy seriously when our Nuclear energy leadership is a confused pervert whose most exceptional quality according to western leaders is his (or her?) willingness to perform bizarre sex acts?

We’re losing the international political edge by the day.

Both Russia and China are taking cautious but firm steps towards de-dollarization.

Those who constantly say "Show me where the dollar is not the reserve or black-market currency..." don't get it. That statement is like watching the bomb fall through the sky saying "We’re not being bombed. I haven’t seen a single explosion yet!". By the time we have examples of the developing world or black-markets primarily trading in something other than dollars it will be too late.

These 2 nations are working to get away from the dollar and create a system that is insulated against our current practices. They have agreements in place to this effect. Their economies and financial industries reflect this shifting reality. We can continue to ignore it, or we can recognize it & adjust certain practices to strengthen our nation.

WHEN not IF.