by Philip Pilkington
Thursday, 24
March 2022
Analysis
13:15

Demanding roubles for gas is a victory for Putin

The Russian's decision is accelerating the shift away from US-led dominance
by Philip Pilkington
Credit: Getty

It is a truism of history that war accelerates change. Events that were going to happen slowly, happen quickly. The most familiar example in recent history is the collapse of the British Empire.

After World War Two, Britain found itself heavily indebted to an America that did not want to be challenged on the world stage. The Empire did not last long after that. This example highlights another historical truism: worldwide financial arrangements play a large part in shaping political arrangements.


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Yesterday, I published an essay in the policy journal American Affairs predicting that the economic war currently underway against Russia would result in the collapse of the US dollar as the global reserve currency, together with a vast diminishment of the euro and sterling as secondary reserve currencies. I argued that this would primarily be because of the Western countries confiscating Russian foreign exchange holdings.

In the essay, I argued that this would be a gradual process. Today we saw that process accelerate rapidly. Smelling weakness, Russian President Vladimir Putin has stated that Russia’s holdings of foreign reserves could be seized at a moment’s notice, and that he would only accept payment in roubles for energy exports from what he called “unfriendly countries”.

The effects of this in both the short-term and the long-term are likely to be profound. In the short-term, Europeans will have to enter currency markets and exchange euros for roubles any time they need to pay the electricity bill. This will mean that nearly €100bn a year will have to be converted into roubles.

In the medium term this will greatly bolster the rouble’s purchasing power relative to the euro, increasing European energy bills and boosting Russian exports to the region. The second effect will come when the Russians then turn around and dump these euros back into the market — to buy up renminbi, gold, commodities and so on. The Russians will do this because our sanctions have convinced them that euros are not worth holding. This will put further downward pressure on the value of the euro and cause it to decline against all these other assets.

The longer-term effects are even more important. Russia denominating its energy exports in its own currency or in an alternative to the dollar will signal to the rest of the world that, should they want to, they can do the same. Many will follow along.

Consider this chart of total annual oil production. In blue are countries I expect to continue trading oil in dollars, in orange are countries that I expect to immediately switch to alternatives and in grey are the countries that are likely to be on the fence. You need not be an energy market economist to see that the chart is evenly balanced. In the worst-case scenario up to two-thirds of oil producers could dump the dollar.

We are watching, before our eyes, the unwinding of the post-1945 US dollar-based global monetary system. It looks to me like the Russians and the Chinese have been planning this for some time. Our leaders, on the other hand, seem to have been completely caught off guard.

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Prashant Kotak
Prashant Kotak
8 months ago

“…We are watching, before our eyes, the unwinding of the post-1945 US dollar-based global monetary system. It looks to me like the Russians and the Chinese have been planning this for some time…”

I don’t know very much about economics, but it looks to me like this is complete hokum. But the author can always back his judgement and put his money where his mouth is – buy Roubles and Renminbi at scale, and short the Dollar, Sterling and the Euro – and he will make himself rich.
Will he?

Bernard Hill
Bernard Hill
8 months ago
Reply to  Prashant Kotak

…The problem for the USD, is that it is the de facto world reserve currency for the time being, because of its international ubiquity (via SWIFT), and its size (volume in circulation). In other words, it is ‘network effects’ which really give it the role. So, chopping off countries from the USD network, diminishes the value of the remaining network, which is likely to be reflected in the USD’s relative value. I think the IMF will end up creating a new international SDR, in effect an international currency, based on a new basket of assets, including the dollar, but also precious metals and established cryptocurrency.

JR Stoker
JR Stoker
8 months ago
Reply to  Bernard Hill

That does seem to the answer – an international SDR; and it would surely be better for the USA in the long run (and assuming it gets back to reasonably competent government) to be no longer the world reserve currency

Katharine Eyre
Katharine Eyre
8 months ago

Wolfgang Münchau wrote an article making a similar argument (i.e. this standoff leading to the de-dollarisation of the world) about 2 weeks ago on Eurointellligence: https://www.eurointelligence.com/column/a-bric-impenetrable-to-sanctions
I regret not having the knowledge to really assess whether it holds water.

Last edited 8 months ago by Katharine Eyre
J Bryant
J Bryant
8 months ago
Reply to  Katharine Eyre

I’m in the same situation. I don’t doubt that some countries now intend to diversify away from the US dollar, but I don’t have the specialist knowledge to assess the effects of Russia’s recent actions on this trend. One thing’s for sure: we’ll know within a year or two if Mr. Pilkington’s theory is correct.

Prashant Kotak
Prashant Kotak
8 months ago
Reply to  Katharine Eyre

The question to ask is: if this was possible, why would the Russians have waited till now, when under extreme pressure? Why would you not topple the Dollars hegemony first, any point during the last few years, before moving in on Ukraine?

Bernard Hill
Bernard Hill
8 months ago
Reply to  Prashant Kotak

… because of the network effects of the USD and SWIFT, as noted above. Neither the RUB, or the CNY are strong enough to just replace the USD, on their own, or even jointly.

Matthew Powell
Matthew Powell
8 months ago
Reply to  Prashant Kotak

There was no reason to before. As long as the West was willing to honour the foreign exchange holdings there was no need to take this action. The USD and other western currencies are the most preferable to use for reserve currencies, in part, because in most cases they drew a line between business and politics and honoured legal rights. Since this is no longer the case, they are no long reliable currencies to hold for large portions a nations reserve.

Su Mac
Su Mac
8 months ago

UnHerd doesn’t have nearly enough economics sprinkled through its articles so this is timely. However, this topic – the end of the petrodollar, American hegemony/empire, the pitfalls of printing Trillions of fiat money debt because people want it …and what happens if they switch to an alternative or start sending all those $ back again is front and centre of world events. The “how’ and the “when” have been the topic of more articles than I can remember over the last 6 years on sites like zerohedge.com and all the precious metals investor blogs.
It is a historical cycle. And it happens again and again with some of the same triggers and some different ones. This entertaining video from super-invester Ray Dalio is a great intro on how money and empire collapse are linked.
https://www.youtube.com/watch?v=xguam0TKMw8
Also Mike Maloney’s well-made series “Hidden Secrets of Money” explains how money works, in an accessible youtube series that will make your jaw drop frankly with the sheer craziness of the underpinnings of our world – of which most people are oblivious! Plus learn how to protect yourself from what is coming….

Warren T
Warren T
8 months ago
Reply to  Su Mac

Excellent video that needs to be watched by everyone seeking to understand how the world works. Thanks for sharing.

Johann Strauss
Johann Strauss
8 months ago

My gut tells me that Mr. Pilkington’s analysis is right on the money. Time will tell.

Ian Stewart
Ian Stewart
8 months ago

I’ve noticed in the last two weeks as the stupidity of Putin’s war is acknowledged that more journalists are publishing articles like this one about how clever Putin really is and how the west has been out-manoeuvred.
These articles smack of being a means to attract attention by being the devils advocate. This one is probably the worst I’ve read – claiming victory for a minor economy that corrals itself into using its own currency, and giving it superpowers in subsequently trading dollars and euros.
The Russian economy is a medium sized blip on the global economic radar, and its receding to become a tiny blip in the next 5 years. Russia ain’t leading an alternative economic hegemony. However the Chinese are, and thankfully Putin’s stupid war has woken up the west to the risk, and we’re starting to accept the end of globalisation on a western basis. So Putin resorting to roubles is a victory for this split, which won’t benefit Russia or China in the long term.