Russia’s existing monetary system ceased to exist
In the first half of the 1990s, Russia created a monetary system which could be called “currency management” (a model for colonial economies). Its essence is that the national monetary unit, the Russian rouble, is issued by the Central Bank by purchasing foreign currency. The latter is stored in foreign currency reserves, which are reflected in the assets of the Central Bank. And the Russian rouble is secured by the foreign currency reserves of the Central Bank.
This idea can be expressed more clearly: the Russian rouble in the system of “currency management” turned out to be a repainted foreign currency. A state can be sovereign, however, if the assets of its Central Bank are dominated by loans in the national currency for the development of the national economy. As a supplement, securities issued by national issuers (not any securities, but those that help to develop the domestic economy).
The latest official report from the Central Bank of the Russian Federation to date dates back to 2020. Here is a picture of the main types of assets of the Bank of Russia as of 31 December 2020 (trillion roubles, share in total assets, in brackets, %):
Assets, total – 51.27 (100)
Foreign exchange reserves (currency in bank deposits and in the form of securities issued by treasuries of other states and other non-residents) – 30.45 (59.39)
Due from IMF – 1.91 (3.72)
Loans to and deposits from Russian banks – 3.76 (7.33)
Securities issued by Russian government and other Russian issuers – 1.03 (2.00)
Gold in reserves – 10.41 (20.30).
In the composition of assets, only 4.79 trillion rubles, or 9.33% of the Bank of Russia’s assets, were used to support the Russian economy. International reserves (foreign currency reserves + claims on the IMF + gold) accounted for RUR 42.77 trillion or 83.42% of total assets. The rest of the Central Bank’s assets are real estate, equipment, communications, etc. (“technical assets”). This portion accounted for 7.25% of assets.
It is fair to say that international reserves include gold, which can be considered quite a Russian asset: it is located in Russia, controlled by the Bank of Russia, and is fully immune to economic sanctions from the West. If we add gold to Russian assets, the share of the latter in the assets of the Bank of Russia (excluding “technical assets”) would be 29.63%. And the share of international reserves without gold would be 63.12%.
Thus, the “external assets” of the Bank of Russia working for the economies of other countries are 2.13 times greater than the “internal assets” working for the Russian economy! Figuratively speaking, the Bank of Russia, according to its own annual report, has turned its face to the West and its back to Russia. And the Russian rouble turned out to be more than 2/3 backed by Western papers.
For years in Russia, there have been calls to de-dollarize the Russian economy, including the de-dollarization of the Bank of Russia, but nothing changed. And at the end of February this year, the collective West helped the Bank of Russia to de-dollarise its assets. All international currency reserves except for the Chinese yuan are frozen. According to the Bank of Russia (“Review of the Bank of Russia’s management of assets in foreign currencies and gold”, 2022, no. 1), as of mid-2021 the US dollar, euro, British pound sterling, Japanese yen and some other reserve currencies accounted for 65.2% of all international (foreign exchange) reserves in Russia.
We do not know what the assets of the Bank of Russia are at the end of February. Let’s assume they are the same as they were on 31 December 2020. If we attach the figure we get (65.2%) to the assets at that time, it turns out that the Bank of Russia has a “hole” equal to 54.39% of its assets in its balance sheet. This leaves only “domestic assets” working for the Russian economy, plus the Chinese Yuan.
The Bank of Russia seems reluctant to acknowledge the loss of gigantic amounts of international reserves. It merely states that the reserves of more than $300bn are “frozen”. It merely states that reserves of more than $300bn have been “frozen”. The experience of freezing reserves in Libya, Iran, Afghanistan and other countries shows that after a while the word “freeze” is replaced by the word “confiscation” or “nationalisation”. The Bank of Russia continues to publish data on the size of Russia’s international reserves on a weekly basis, from which it appears that so far nothing seems to have happened. Here is the latest update on the Bank of Russia website: “As of 25 March 2022, international reserves of the Russian Federation stood at USD 604.4 billion, a decrease of USD 38.8 billion compared to 18 February 2022. The main factors behind the reduction in reserves were currency interventions, currency refinancing as well as currency revaluation of assets”.
The sooner the Bank of Russia realizes that there is no USD 600 billion or more in reserves, the more likely it is that we can quickly rebuild the Russian monetary system to fit the new conditions. And such a restructuring is necessary.
If we take the assets of the Bank of Russia remaining after “expropriation” of currency reserves by the collective West as 100%, then the picture would be as follows. The main asset component is monetary gold (around 44,5% of all assets). In second place is the Chinese yuan (26.9 percent). In third place are ruble loans and deposits (16.1%). In fourth place are securities of the Russian government and other Russian issuers (4.4%).
It is clear that my calculations cannot be exact, they are based on data pertaining to December 31, 2020 and mid-2021. However, I don’t think today’s picture of Central Bank assets differs much from the one I have shown. It turns out that the rouble is no longer a “repainted” foreign currency (it is only slightly “tinted” by the Chinese yuan). Gold, of which there are currently 2300 tons in the reserves of the Bank of Russia, became its main support in an instant.
This gave some Russian experts the reason to declare with joy that unexpectedly a golden rouble was born in Russia. No, it is not a gold rouble, but a rouble backed by the precious metal in the vaults of the Central Bank. Gold currency refers to those monetary units which can be freely exchanged for the precious metal.
There are already calls for an amendment to Article 75 of the Constitution of the Russian Federation, defining that the Russian ruble is gold. And to take as a model the gold rouble, which was introduced in 1897 through the efforts of the then Minister of Finance Sergey Yulievich Witte. Many people rave about that time. I cannot share this enthusiasm. The gold standard, which was established in Russia 125 years ago, began to choke the domestic economy. To issue the rubles Russia needed, it needed a gold reserve. For various reasons the supply of gold was lagging behind the needs of the economy for money. The gold standard turned out to be akin to a gold noose. To weaken it somehow, the gold reserve had to be replenished by means of gold loans. And for loans to bow to the Rothschilds. By 1917 Russia had the world’s largest sovereign foreign debt (see my book “Gold in World and Russian History XIX – XX centuries. Moscow: Homeland, 2017).
This does not mean that gold should not be accumulated in Russia’s international reserves. Very much so, it is necessary. Firstly, by buying the metal from domestic miners the Bank of Russia would stimulate the development of the country’s “currency shop”. Secondly, it would strengthen the Russian rouble. Thirdly, it would help to create a reserve of gold as “emergency money” for settlements with other states (in case of wars, crises, etc.).
However, it is extremely dangerous to restore the gold standard, which: 1) provides for the free exchange of banknotes for precious metal from reserves; 2) ties the Central Bank’s monetary issue to its available gold reserve. I will note along the way: it has long been said that China is preparing to introduce the gold yuan and that we should follow in Beijing’s footsteps. Indeed, according to experts, through domestic production and imports, China has already accumulated more than 30 thousand tons of yellow metal, and not less than half in the hands of the State (although, Chinese statistics strongly camouflages these accumulations). However, there are no signs yet that Beijing is getting ready to move to the gold yuan. They are well aware of the disadvantages of such a move. I think that gold helps Beijing strengthen the yuan, push the dollar and the euro out of the domestic market and create reserves of ’emergency money’.
Returning to the question of restructuring Russia’s monetary system, I note that we do not need a gold ruble, but a commodity ruble. That is, the ruble, which is backed by the commodity mass created by the Russian economy.
Gold may be only one of the goods in such a mass. In addition to it, we need consumer goods. Even more necessary are investment goods – machinery and equipment, with which industrialization can and should be carried out. Article 75 of the Constitution of the Russian Federation must be amended in this regard. It defines the main function of the Central Bank of the Russian Federation as “protecting and ensuring the stability of the ruble”. However, the Central Bank must have a higher-level task – to strengthen (develop) the Russian economy. The Bank of Russia can and must strengthen the Russian economy by increasing ruble loans, the ultimate recipients of which will be enterprises in the real economy. Such loans should help build up the stock of goods. Inflation, which has been fighting by shrinking the money supply and raising the key rate (inflation has been fought by strangling the Russian economy), will then disappear.
The above calculations show that today the share of ruble loans and securities of Russian issuers in the assets of the Bank of Russia (remaining after the “expropriation” of foreign currency reserves) is about one-fifth. It should be at least four-fifths. The Russian rouble would then become truly stable and commodity-driven. Then the dedollarisation of the Russian economy will occur by itself. Then we would really win the sanction war with the collective West.
Valentin Katasonov, FSK
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