After listening to their wormtongue advisors back in March, the West imposed financial sanctions on Russia. They promised that the “Rouble would turn to rubble”. However for anybody with an ounce of understanding of how floating rate sovereign currencies work, it was always going to have the opposite effect. I said this back in February
As to replacing Russian Gas and Oil, are we sure we have enough spare pump capacity, and enough LNG ships to move that across the globe? What will happen to power prices in the meantime?
The whole idea of ‘creating inflation’ in Russia is far more likely to create inflation in the West.
Russians may want the stuff the West can supply, but they don’t need it. Where does West’s demand for Gas and Wheat sit on that divide?
And this lead naturally to the obvious conclusion I highlighted in March
Having read this far have you spotted the issue that may just cause some fun? Remember that banks are very risk averse and don’t want to hold open positions in foreign currencies. If the Bank of Russia no longer offers to take Euros from Russian commercial banks, or no longer can due to sanctions, then the exchange rate offered by the Russian banks will be the one that allows it to get rid of its Euro position. In other words it has to be matched by a Rouble to Euro purchase going in the other direction. Except that sanctions mean little is currently going in that direction.
That’s a recipe for a very large appreciation in the value of the Rouble
This is the insight you gain when you understand how sovereign currencies work.
Which is why my head hit the desk in despair when I read that the G7 are trying to impose a price cap on Russian Oil to “significantly reduce Russia’s main source of funding for its illegal war”.
It won’t because it isn’t the source of funding.
Let me explain.
From the point of view of a nation, the purpose of exports is to obtain imports. The West is refusing to supply Russia, and therefore the only reason Russia is continuing to export oil and gas is for political reasons - to curry and maintain favour in OPEC and the East. Again as I said back in February
[Russia] can demand that its exports are settled in roubles or simply stop exporting - since there is no longer anything on the other side worth importing.
The first move is already in place. The second is undoubtedly incoming.
We can see from the price of electricity in Europe that, in a supply constrained environment, the price is set by the swing producer - in this case gas turbine generated electricity using LNG. The constrained supply of LNG sets the price.
Oil is the same. The swing producer is usually Saudi Arabia as they can turn their oil wells up and down relatively easily due to their particular geology. However the Saudi spare capacity is neither infinite, nor necessarily available to replace Russian Oil. OPEC+ is a cartel and Russia is a member. If we’re not careful then Russia will become the swing producer and will then set the price. If the West refuses to pay that price we’ll end up with an Oil crisis to add to the Gas crisis.
None of the geniuses in charge in the West make the obvious connection. How can Western oil money be bankrolling Putin when Russia uses Roubles? Those Roubles have to have come from Russia in the first place. Since the West isn’t selling anything to Russia how does the West get the Roubles to pay for the oil at the moment?
The Roubles come from the Russian Central bank via Gazprombank. The West is just a conduit for central bank funding of the Russian oil companies. So if the West doesn’t want the oil, the Russian Central Bank will just cut out the middleman and fund the oil companies directly. Either the oil won’t be pumped or it will be discarded - as Russia is already doing with Gas
There’s even a small chance they will reveal the entire truth. That Foreign Reserves are an illusion and the Reserve Asset every central bank discounts is the legislature’s power to tax, which is the actual source of funding for all governments operating sovereign currencies.
After all, stranger things have happened. Mostly in the last two years.
I can only repeat the conclusion I reached in February.
Like all alchemy, financial alchemy works like the hypnotism of the stage magician - an illusion that only captures those with weak gullible minds. Pushing Russia back is going to require a rather more physical approach, which is something our effete elite appear incapable of understanding.
The West is not prepared to send its sons, brothers and fathers to die horribly in a foreign land. Instead the Western groupthink lashes out at the illusion and reacts with surprise and indignation when the punches don’t land.
It truly is the Madness of Clowns.
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