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China, Russia and Gold in the De-Dollarizing World

An asset backed currency, used by Russia and China, may be the biggest challenge to Emperor Dollar.

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Trending and gaining traction throughout the economic world is the increasingly relevant search for safe, stable and secure alternatives to the US Dollar. Some due to geopolitical reasons and pressures, others from recognizing the significantly deepening debt associated with the US Dollar and government. Many have started questioning and doubting aspects of its sustainability and inviolability over the ballooning short and long term. Recently underscored by expected “trade negotiations” with the US’s largest debt holders (Japan & China) which are now to include exploring sovereign debt restructuring, usually an indicator of financial indigestion.

Others are looking to innovative crypto ideas in the hope that extra-governmental blockchain backed mechanisms of peer-to-peer “agreed value” might be the path to securing wealth. In short, all of these approaches are looking for the security which gold together with similar recognized hard assets like silver have provided and assured since the dawn of our varied successive civilizations.

China, Russia, Turkey, Iran and quite a few others see themselves sanctioned, shackled and hindered by the overwhelming market dominance of the American currency and the quickly changing policies linked to it by successive US administrations most especially of late. Some refer to this as the  “weaponization” of the US Dollar as this millennia’s new normal, the gatekeeper of trade permission.

The tariffs introduced by the US government as a form of behavior modification for other nations are understandably unappreciated and are increasingly resisted. It is likely that worsening currency as well as trade tiff’s are in the cards across the board.

The Chinese yuan is gaining internationally among users. Russia, Turkey, and Iran are making payments in their national currencies. Iran recently announced a switch from the dollar to the euro as its reporting currency. Russia and China already have a currency swap agreement that avoids settlements in the greenback. Even Saudi Arabia will have to make a choice probably sooner than later, to stay with the petrodollar fix, or go with its biggest customer – China and therefore the yuan.

China is Russia’s largest trading partner with 15% of Russia’s international trade for 2017. This year it has grown to 17.2%. In 2014 just 2% of payments for Russia’s exports to China were paid in rubles, and 9% of China’s exports to Russia were paid in yuan. In 2017, this has increased to 9% and 15% respectively and continues to grow.

There is persistent speculation and growing talk in the financial markets that Russia and China may be discussing expanding the role gold, silver and possibly other hard assets might have in realigning the value of both the yuan and the ruble independently of the US Dollar. So far it remains in the realm of rumors, then again that too is a start. Whether this remains rumor, or emerges as something more, it is a topic well worth examining if only from a risk management point of view.

There are a number of countries, which no doubt are paying close attention to what may develop. Some to join and some to try and spoil the party. However this plays out, such shifts will not be smooth or pleasant as the effects are global and will resonate throughout all financial systems, especially within the United States.

It is no secret that the central banks in China, Russia, Turkey, India and some other nations have been steadily increasing their physical gold holdings, as well as repatriating their bullion from the United States, for example Germany, and Turkey just recently this past April.

There are persistent and growing unconfirmed rumors here in Moscow that both Russia and China have formulated or are outlining plans to launch some form of a gold-participatory currency system to replace the greenback as the world’s dominant currency. Whether it will be a Ruble or a Yuan, or something entirely different is still unclear, but something interesting is no doubt afoot within this fog of speculation. Already mechanisms have been developed as potential alternatives to SWIFT, both the the Eurasian/Asia regions, and unsurprisingly as a recent development in the Euro Zone as well.

That being said I have no idea how such a system might actually look, it’s organizational profile, how it would be regulated, standardized and traded, or whether it would be a basket of hard assets (gold, silver, energy) securing it, or only gold. The key attractor for the financial world which has traditionally parked its funds in US Dollar government bonds, is if an alternative currency system is governmentally supported, asset backed and interest bearing, then the appeal of that added value and security should make such an alternative realistically appealing. It may be the single key factor which will allow any chances for real competitive use against the Dollar, Yen, Renmimbi or Euro, all of which are like the Dollar – fiat.

Backing currencies today exclusively with gold is highly unlikely; however, there is realistic potential for a new form of currency possibly connected with a state regulated blockchain crypto-currency concept, or the partial exchange within such a currency system for gold as its referenced anchor. These do have possibilities and can occur without unduly testing credulity or imagination.

The trend towards de-dollarization is happening, of that there is little doubt. Equally true is the fact that today this is just an irritant to the US government and the Federal Reserve. If implemented, it will in time erode capabilities the US can bring to bear economically, militarily and politically to all corners of the world through global financing of its dollar debt. That would be much more than just an irritation for the US. After all, according to BIS 80% of all international trade is contracted in US Dollars, it will take some time to shorten such a massive lead.

No major country currently backs its currency with gold, but many have in the past, including the US. The US effectively abandoned the gold standard nationally in 1933, silver in 1968, and completely severed any linkage between the US dollar and gold internationally in 1971. The US since then has remained a fiat money system, meaning the dollar’s value is not linked to any independently redeemable asset other than trust in the stewardship of the US government, and faith in the Treasury Dep’t and Federal Reserve to do the right thing.

Looking back, the inflection point for the US to begin dollar de-linkage from gold and similar assets was to help combat the Great Depression. Faced with mounting unemployment and spiraling deflation in the early 1930s, the U.S. government found it could do little to stimulate the economy. To deter people from cashing in deposits and depleting the gold supply, the US and other governments had to keep interest rates high, but that made it too expensive for people and businesses to borrow. Therefore, in 1933, FDR cut the dollar’s ties with gold nationally, allowing the government to print (“QE”) dollars into the economy, thereby lowering interest rates.

The U.S. continued to allow only foreign governments to exchange dollars for gold until 1971, when President Nixon abruptly ended the practice. It is worth noting that that before delinking from gold, the dollar had a fixed value reference of $35 to an ounce of gold, which limited and severely constrained financial and political policies. The value of gold was not permitted to be set by an open free market. Only after the dollar delinked from gold was the metal allowed to be openly traded as a commodity, at that time notably via the London Fix, and New York COMEX.

It is unlikely that a fully gold-backed currency mechanism will emerge onto the world financial markets as it was before 1933, especially in this interconnected economic and digital information age. However, a basket of hard assets as a reference point or linkage anchor to currencies does have traction, and may very well be what is now being discussed between China and Russia. This especially as the market can and will establish relative values indexed to the assets comprising such a basket, and not be limited to a single fixed price. This also suggests that some control may shift away from the central banks and instead become market sensitized and responsive. This can be a frightening concept, as it is a distinct departure from today’s Fed practices, requiring significant political, procedural and audit realignments.

Russia and China have been in working discussions to introduce gold-backed futures and similar mechanisms to circumvent the U.S dollar. It could be that over the next few decades we may witness the demise of fiat currencies such as the US Dollar, Yen, Euro and the debt excesses the printing of non-asset backed money has encouraged.

Currently, with geopolitical pressures, sanctions and trade tariffs increasing against Russia and China, these two countries have come to be seen as the standard bearers or ‘white knights’ for de-dollarizing global free trade. Whether they want this role foisted on them or not. This view is growing within a number of countries who have been limited and constrained from development by the dominant default role of the US Dollar, and by extension the US Government in its follow-on ability to dictate policies and pressure their sovereign national affairs in the interests of the USA.

The creation and introduction of a gold-inclusive indexed currency mechanism appears to be a likely event, perhaps sooner than we think. Russia has openly said that its national interests can be best served by reducing its exposure to the vulnerabilities and volatilities of global geopolitics by reducing the role of the greenback in its economic affairs.

Moscow and Beijing have been actively reducing their dependence on the dollar in mutual and regional trade. In October 2017, China launched a PVP payment system for transactions in yuan and Russian rubles. This means that payments for Russian oil deliveries to China, which have reached 60 million metric tons per year and continue to increase, are now working without the US Dollar as intermediary. This also has the added benefit to allow confidentiality of transactions. This is not possible if the US Dollar is used as the medium for trade as currently all such transaction details have to be cleared, therefore known in New York.

China’s launch of its own oil futures on the Shanghai International Energy Exchange plays a de-dollarization role and supports the gold-asset function as well. Today, shifting the China oil trade out of dollars into yuan takes between $600 billion and $800 billion worth of transactions out of the dollar each year.

One of the several factors supporting the creation of a Russia/China gold related currency system is that just the other day the global debt has reached $237 trillion.

The IMF warned this past week that the debt burden of the global economy is deeper today than it was before the financial crisis of 2008. The latest numbers for global debt is $237 trillion, up from the $140 trillion before the 2008 financial crisis. It is also worth noting that according to the Bank for International Settlements (BIS), there is also approximately $750 trillion in additional debt outstanding in derivatives, much of which is formally still “on the books” but practically can be considered swept under the financial rug, at least for now.

The US Treasury Department on May 1st said the government borrowed a record $488 billion in the January-March quarter. This exceeds the old record of $483 billion set in the first quarter of 2010, when all stops were pulled to prop up the financial system. The US Treasury continues to face the growing need to finance government operations when annual deficits are heading to new record levels, and a federal budget now normal at over a trillion.

Global debt has increased by roughly $21 trillion in 2017 alone. That is roughly the equivalent of this year’s US national debt. This has led to a forward-looking undercurrent of anxiety in the world’s markets, and a growing desire by some countries to do something to pre-empt being terminally caught up in these increasingly uncertain, predominantly dollar denominated risks.

The latest sanctions against Russian oligarchs and their companies, as well as trade tariffs against China are also having unintended consequences. Rusal is a major aluminum producer. They provide an estimated 6% of the world’s supply. Companies are now scampering every which way to secure new supply sources because the Russian supply might be cut off by US sanctions. The sanctions caused both the Russian stock market and the Russian Ruble to fall sharply and sent aluminum prices soaring. This simply underscores the need to create alternatives to the US Dollar sooner rather than later.

Unintended consequences certainly do not stop with sanctions against Russian companies. The dollarized trade and tariff war between China and the U.S. is also enjoying its moments in the sun. After the US imposed tariffs on China that hit aluminum products, robotics, aircraft parts, vaccines, dishwashing machines and many other items, the Chinese retaliated in turn with tariffs that hit soybeans, cars, and chemical products among others.

China’s response negatively affected agriculture products notably from the very same agricultural states that backed Trump. Aircraft parts and engines were a top U.S. export to China, totaling some $16.3 billion. Soybeans are a top agriculture product with $12.4 billion exported to China every year. Today we are expecting to see a further $200 billion in tariffs imposed on China, with an additional $267 billion package of tariffs “waiting in the wings” if the $200 billion doesn’t win China’s hearts and minds.

As this evolves, we should be seeing inflation in the US and elsewhere rather higher than the Fed’s “2% sweet spot”, in fact it may unpleasantly surprise us all.

Keeping in mind when loans are made in dollars, the debtor is then essentially a hostage, having to agree to the issuing central banks’ policies. The central bank determines the price of those dollars through politically guided monetary policy, and its (fiat) value thanks to currency printing. If such loans were issued in gold or asset-backed instruments, such counterparty pressures would lessen, or no longer be a feature.

China for many years has made it clear that gold purchased in China is to remain in China. Russia, Turkey and recently India are of the same conviction. This allows for each of these nations to be the secure custodian and guarantor of their gold assets, reducing the risk of politically motivated seizure as can happen with currencies and debt instruments.

Decisions have been acted on already by several countries repatriating their gold from the US. This is a telling sign that US control and influence is starting to shift, along with th essential element of trust that had allowed the US to play a custodial role over foreign reserves for so long.

Russia, Turkey, Iran and China are countries that are increasingly seen as threats by the West, in one form or another, and are rocking the currency boat. Various measures have been taken against them to make international trade and negotiations onerous at best. Whether through fear mongering, sanctions or trade tariffs, countries are feeling the force and weight of the US and its allies’ powers. As a result, they are increasingly considering re-enlisting gold and perhaps a basket of similar assets to shield themselves protect their financial reserves, and their ability to function as economically viable independent sovereign nations.

The process has begun, where it may take us over the coming years is the big question and one that will redefine international trade and geopolitics for decades to come. Today, after the US unilaterally exited the Iran nuclear agreement and is reimposing sanctions. North Korea and a host of other nations understandably might wonder if any agreement with the US is workable, and European allies and neighbors of the US are no doubt wondering if marching alongside America is truly in their best national interests.Trust is being frittered away quickly, and trust is what has mostly kept the US Dollar afloat in this guns & butter world. While today this possibility is still in the realm of market hearsay, rumors, and fake news – but in this increasingly curious age what isn’t?

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Russia’s Lukoil Halts Oil Swaps In Venezuela After U.S. Sanctions

Under the new wide-ranging U.S. sanctions, Venezuela will not be able to import U.S. naphtha which it has typically used to dilute its heavy crude grades.

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Via Oilprice.com


Litasco, the international trading arm of Russia’s second-biggest oil producer Lukoil, stopped its oil swaps deals with Venezuela immediately after the U.S. imposed sanctions on Venezuela’s oil industry and state oil firm PDVSA, Lukoil’s chief executive Vagit Alekperov said at an investment forum in Russia.

Russia, which stands by Nicolas Maduro in the ongoing Venezuelan political crisis, has vowed to defend its interests in Venezuela—including oil interests—within the international law using “all mechanisms available to us.”

Because of Moscow’s support for Maduro, the international community and market analysts are closely watching the relationship of Russian oil companies with Venezuela.

“Litasco does not work with Venezuela. Before the restrictions were imposed, Litasco had operations to deliver oil products and to sell oil. There were swap operations. Today there are none, since the sanctions were imposed,” Lukoil’s Alekperov said at the Russian Investment Forum in the Black Sea resort of Sochi.

Another Russian oil producer, Gazprom Neft, however, does not see major risks for its oil business in Venezuela, the company’s chief executive officer Alexander Dyukov said at the same event.

Gazprom Neft has not supplied and does not supply oil products to Venezuela needed to dilute the thick heavy Venezuelan oil, Dyukov said, noting that the Latin American country hadn’t approached Gazprom Neft for possible supply of oil products for diluents.

Under the new wide-ranging U.S. sanctions, Venezuela will not be able to import U.S. naphtha which it has typically used to dilute its heavy crude grades. Analysts expect that a shortage of diluents could accelerate beginning this month the already steadily declining Venezuelan oil production and exports.

Venezuela’s crude oil production plunged by another 59,000 bpd from December 2018 to stand at just 1.106 million bpd in January 2019, OPEC’s secondary sources figures showed in the cartel’s closely watched Monthly Oil Market Report (MOMR) this week.

By Tsvetana Paraskova for Oilprice.com

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Germany Pulls Rank on Macron and American Energy Blackmail

Why France’s Macron, at the last minute, attempted to undermine the project by placing stiffer regulations is a curious question.

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Authored by Finian Cunningham via The Strategic Culture Foundation:


It was billed politely as a Franco-German “compromise” when the EU balked at adopting a Gas Directive which would have undermined the Nord Stream 2 project with Russia.

Nevertheless, diplomatic rhetoric aside, Berlin’s blocking last week of a bid by French President Emmanuel Macron to impose tougher regulations on the Nord Stream 2 gas project was without doubt a firm rebuff to Paris.

Macron wanted to give the EU administration in Brussels greater control over the new pipeline running from Russia to Germany. But in the end the so-called “compromise” was a rejection of Macron’s proposal, reaffirming Germany in the lead role of implementing the Nord Stream 2 route, along with Russia.

The $11-billion, 1,200 kilometer pipeline is due to become operational at the end of this year. Stretching from Russian mainland under the Baltic Sea, it will double the natural gas supply from Russia to Germany. The Berlin government and German industry view the project as a vital boost to the country’s ever-robust economy. Gas supplies will also be distributed from Germany to other European states. Consumers stand to gain from lower prices for heating homes and businesses.

Thus Macron’s belated bizarre meddling was rebuffed by Berlin. A rebuff was given too to the stepped-up pressure from Washington for the Nord Stream 2 project to be cancelled. Last week, US ambassador to Germany Richard Grenell and two other American envoys wrote an op-ed for Deutsche Welle in which they accused Russia of trying to use “energy blackmail” over Europe’s geopolitics.

Why France’s Macron, at the last minute, attempted to undermine the project by placing stiffer regulations is a curious question. Those extra regulations if they had been imposed would have potentially made the Russian gas supply more expensive. As it turns out, the project will now go-ahead without onerous restrictions.

In short, Macron and the spoiling tactics of Washington, along with EU states hostile to Russia, Poland and the Baltic countries, have been put in their place by Germany and its assertion of national interests of securing economical and abundant gas supply from Russia. Other EU member states that backed Berlin over Nord Stream 2 were Austria, Belgium, Cyprus, Greece and the Netherlands.

Washington’s claims that Nord Stream 2 would give Russia leverage of Europe’s security have been echoed by Poland and the Baltic states. Poland, and non-EU Ukraine, stand to lose out billions of dollars-worth of transit fees. Such a move, however, is the prerogative of Germany and Russia to find a more economical mode of supply. Besides, what right has Ukraine to make demands on a bilateral matter that is none of its business? Kiev’s previous bad faith over not paying gas bills to Russia disbars it from reasonable opinion.

Another factor is the inherent Russophobia of Polish and Baltic politicians who view everything concerning Russia through a prism of paranoia.

For the Americans, it is obviously a blatant case of seeking to sell their own much more expensive natural gas to Europe’s giant energy market – in place of Russia’s product. Based on objective market figures, Russia is the most competitive supplier to Europe. The Americans are therefore trying to snatch a strategic business through foul means of propaganda and political pressure. Ironically, the US German ambassador Richard Grenell and the other American envoys wrote in their recent oped: “Europe must retain control of its energy security.”

Last month, Grenell threatened German and European firms involved in the construction of Nord Stream 2 that they could face punitive American sanctions in the future. Evidently, it is the US side that is using “blackmail” to coerce others into submission, not Russia.

Back to Macron. What was he up to in his belated spoiling tactics over Nord Stream 2 and in particular the attempted problems being leveled for Germany if the extra regulations had been imposed?

It seems implausible that Macron was suddenly finding a concern for Poland and the Baltic states in their paranoia over alleged Russian invasion.

Was Macron trying to garner favors from the Trump administration? His initial obsequious rapport with Trump has since faded from the early days of Macron’s presidency in 2017. By doing Washington’s bidding to undermine the Nord Stream 2 project was Macron trying to ingratiate himself again?

The contradictions regarding Macron are replete. He is supposed to be a champion of “ecological causes”. A major factor in Germany’s desire for the Nord Stream 2 project is that the increased gas supply will reduce the European powerhouse’s dependence on dirty fuels of coal, oil and nuclear power. By throwing up regulatory barriers, Macron is making it harder for Germany and Europe to move to cleaner sources of energy that the Russian natural gas represents.

Also, if Macron had succeeded in imposing tougher regulations on the Nord Stream 2 project it would have inevitably increased the costs to consumers for gas bills. This is at a time when his government is being assailed by nationwide Yellow Vest protests over soaring living costs, in particular fuel-price hikes.

A possible factor in Macron’s sabotage bid in Germany’s Nord Stream 2 plans was his chagrin over Berlin’s rejection of his much-vaunted reform agenda for the Eurozone bloc within the EU. Despite Macron’s very public amity with Chancellor Angela Merkel, Berlin has continually knocked back the French leader’s ambitions for reform.

It’s hard to discern what are the real objectives of Macron’s reforms. But they seem to constitute a “banker’s charter”. Many eminent German economists have lambasted his plans, which they say will give more taxpayer-funded bailouts to insolvent banks. They say Macron is trying to move the EU further away from the social-market economy than the bloc already has moved.

What Macron, an ex-Rothschild banker, appears to be striving for is a replication of his pro-rich, anti-worker policies that he is imposing on France, and for these policies to be extended across the Eurozone. Berlin is not buying it, realizing such policies will further erode the social fabric. This could be the main reason why Macron tried to use the Nord Stream 2 project as leverage over Berlin.

In the end, Macron and Washington – albeit working for different objectives – were defeated in their attempts to sabotage the emerging energy trade between Germany, Europe and Russia. Nord Stream 2, as with Russia’s Turk Stream to the south of Europe, seems inevitable by sheer force of natural partnership.

On this note, the Hungarian government’s comments this week were apt. Budapest accused some European leaders and the US of “huge hypocrisy” in decrying association with Russia over energy trade. Macron has previously attended an economics forum in St Petersburg, and yet lately has sought to “blackmail” and disrupt Germany over its trade plans with Russia.

As for the Americans, their arrant hypocrisy is beyond words. As well as trying to dictate to Europe about “market principles” and “energy security”, it was reported this week that Washington is similarly demanding Iraq to end its import of natural gas from neighboring Iran.

Iraq is crippled by electricity and power shortages because of the criminal war that the US waged on that country from 2003-2011 which destroyed much of the country’s infrastructure. Iraq critically needs Iranian gas supplies to keep the lights and fans running. Yet, here we have the US now dictating to Iraq to end its lifeline import of Iranian fuel in order to comply with the Trump administration’s sanctions against Tehran. Iraq is furious at the latest bullying interference by Washington in its sovereign affairs.

The hypocrisy of Washington and elitist politicians like Emmanuel Macron has become too much to stomach. Maybe Germany and others are finally realizing who the charlatans are.

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Russia Readies Own Web To Survive Global Internet Shutdown

Russia is simultaneously building a mass censorship system similar to that seen in China.

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Via Zerohedge


Russian authorities and major telecom operators are preparing to disconnect the country from the world wide web as part of an exercise to prepare for future cyber attacks, Russian news agency RosBiznesKonsalting (RBK) reported last week.

The purpose of the exercise is to develop a threat analysis and provide feedback to a proposed law introduced in the Russian Parliament last December.

The draft law, called the Digital Economy National Program, requires Russian internet service providers (ISP) to guarantee the independence of the Russian Internet (Runet) in the event of a foreign attack to sever the country’s internet from the world wide web.

Telecom operators (MegaFon, VimpelCom (Beeline brand), MTS, Rostelecom and others) will have to introduce the “technical means” to re-route all Russian internet traffic to exchange points approved by the Federal Service for Supervision of Communications, Information Technology and Mass Media (Roskomnadzor), Russia’s federal executive body responsible for censorship in media and telecommunications.

Roskomnazor will observe all internet traffic and make sure data between Russian users stays within the country’s borders, and is not re-routed abroad.

The exercise is expected to occur before April 1, as Russian authorities have not given exact dates.

The measures described in the law include Russia constructing its internet system, known as Domain Name System (DNS), so it can operate independently from the rest of the world.

Across the world, 12 companies oversee the root servers for DNS and none are located in Russia. However, there are copies of Russia’s core internet address book inside the country suggesting its internet could keep operating if the US cut it off.

Ultimately, the Russian government will require all domestic traffic to pass through government-controlled routing points. These hubs will filter traffic so that data sent between Russians internet users work seamlessly, but any data to foreign computers would be rejected.

Besides protecting its internet, Russia is simultaneously building a mass censorship system similar to that seen in China.

“What Russia wants to do is to bring those router points that handle data entering or exiting the country within its borders and under its control- so that it can then pull up the drawbridge, as it were, to external traffic if it’s under threat – or if it decides to censor what outside information people can access.

China’s firewall is probably the world’s best known censorship tool and it has become a sophisticated operation. It also polices its router points, using filters and blocks on keywords and certain websites and redirecting web traffic so that computers cannot connect to sites the state does not wish Chinese citizens to see,” said BBC.

The Russian government started preparations for creating its internet several years ago. Russian officials expect 95% of all internet traffic locally by next year.

As for Russia unplugging its internet from the rest of the world for an upcoming training exercise, well, this could potentially anger Washington because it is one less sanction that can keep Moscow contained.

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