So, as many readers will have heard, Russia has said it will only accept rubles in exchange for its exports to “hostile nations” — which is to say, those nations who have sanctioned it over Ukraine.
The main thing to understand is that the West froze hundreds of billions of dollars of Russian reserves on account in the West. They sold us stuff for Euros and dollars and we will now not let them use those dollars or Euros. Sanctions mean that even the dollars and euros they have cannot buy many, perhaps most things, in most Western countries and Japan.
So selling us anything in dollars and euros doesn’t make much sense: they can’t use them without exchanging them for other currencies, and our sanctions make that difficult, since they’re closed out from our banking system.
Thus, rubles. An additional advantage of this is that it increases the value of the ruble, which had collapsed under sanctions.
In order to buy Russian oil and gas, Europeans will have to get rubles. Russians are unlikely to want a lot of euros or dollars because they’re almost impossible to spend, so Europe will probably have to buy Yuan and Rupees, then trade those currencies for Rubles. Paying with gold isn’t really practical, because it would have to be physically shipped to Russia or on account with a country they trust (China, India, a few others). Obviously gold in Western banks is not safe.
Russia’s main exports are oil, gas, wheat and minerals. There are usually other sources, but without Russia there aren’t enough to satisfy world demand. Sanctions on Russia, because they are such a big wheat exporter, may wind up killing a few million people in the global South, more than will be killed in the war.
From the point of view of the West, this is a continuation of de-dollarization. If Saudi Arabia also sells oil to China in Yuan, it will be a big deal. Prices are still set in dollars, but I expect that may end fairly soon.
Payment systems are being set up, and the world will split into two different trade areas. China wants another five to ten years before the big (inevitable) split with the West, they may or may not get it, but if they have any sense they won’t allow Russia to be choked out. They certainly aren’t going to cooperate with US sanctions, and that means they need to cleanly separate their financial system from ours, so that funds can’t be seized in transit, executives can’t be locked up and so on.
The Russians didn’t expect this, they were taken by surprise. Probably because, in fact, it’s a weapon that can only be used against a country like Russia (as opposed to Venezuela or Iran or Afghanistan), once. No one outside the West can now trust the West’s system, and everyone with sense will want their reserves kept elsewhere.
This is mostly a good thing, the West has terribly abused its currency primary to hurt other nations, even before the abuse of sanctions which largely accelerated under Clinton. Control of dollars was part of the arsenal used to keep the South poor and the US in control. China was able to get around this because of American greed and stupidity, and now that it has, it has a veto. Since Russia being taken out will lead it to be surrounded by enemies, it is going to use that veto. Again, Russia cannot be choked out by financial and economic sanctions if China does not permit.
I have been writing about this for almost 20 years now, it was clear it would happen eventually but exactly when and how were unclear. For a few years I’ve been saying we were moving to a Cold War world, and we are.
The difference is that unlike in 1950 or 2000, the West is not clearly stronger than the coalition against it. The USSR was always weaker economically, and though for much of the 50s and 60s they had higher growth (something forgotten today), in retrospect and for some of the smarter people at the time, the outcome was never in doubt, it just needed to be managed so it didn’t turn into World War 3.
This time the outcome is in doubt, and I think the smart money would bet slightly against the West, maybe 3/2. The wild card is climate change, which will hit China very hard, but could also do great damage to Europe and America.
Putin was foolish to get into this situation, reserves should have been withdrawn, but this is a smart move. It’s also going to hurt Europe a lot and damage German industry, whose costs will skyrocket (I have little sympathy, given that Germany has used the Euro to basically de-industrialize most of the rest of the EU.)
The post-American hegemony world isn’t quite here, but it’s being born. Welcome to the Age of War and Revolution and the Twilight of the Neoliberalism.