Russian Rouble to Attack the $ - Exchange Controls in the U.S.?

By: Julian D. W. Phillips | Tue, May 16, 2006
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Russian Rouble to attack the $ - Exchange Controls in the U.S.?
Russian President Vladimir Putin called for work on making the national currency convertible to be completed, oil and gas to be traded in Roubles on a domestic exchange, and an innovation-based economy.

In his annual state of the nation address before both houses of parliament, ministers and reporters, Putin said work on making the national currency fully convertible should be completed by July 1, almost six months ahead of the original January 1, 2007 deadline.

The president called for the establishment of a Rouble-denominated oil and natural gas stock exchange in Russia. "The Rouble must become a more widespread means of international transactions. To this end, we need to open a stock exchange in Russia to trade in oil, gas, and other goods to be paid for in Roubles," he said. Putin said this would be impossible without economic growth of over 7%, which, he said had been achieved in the past three years.

This is the second most significant step in removing the U.S.$ from the throne of sole global reserve and trading currency! Should any more oil producers take this step, it will precede a U.S.$ crisis and create massive potential instability in the globe's foreign exchanges. Because this is so important to gold and to you the reader, we are going to turn this into a series of pieces detailing the way forward. Needless to say, these moves are very, very positive for gold. [If Putin keeps his word on the gold front, we should expect Russia to enter the gold market as a buyer soon too?]

Once Russia has completed these steps [July onwards], we expect to see the greatest bulk of Russia's oil sold for Roubles.

Following China's valuation of its currency against a basket of currencies of the countries with which it trades and the proposal by Iran of a multi-currency Oil Bourse in Tehran, other than the U.S.$ as well, this move by Russia tolls the bell on oil being exclusively priced in the U.S.$.

With the oil comprising a huge portion of global trade, as part of the 86% of global trade denominated in the U.S.$, the impact of this change will be heavy on the value placed on the $.

So far, as the oil price rose, the demand for the U.S.$ grew heavily, in line with the rising price, giving it the stability it has maintained over the last few years, despite the series of record Trade Deficits. The fact that this has been in effect a devaluation of the $ in terms of oil, is not yet deemed of consequence.

But the rest of the globe doing trade with the U.S. is under no illusions that the sheer volume of dollars being printed to pay the bill for this Trade deficit has forced them to accept a suspect currency. They have, of necessity, to hold these surpluses in U.S. assets. Most have found their way into highly liquid U.S. Treasury Bonds and Bills. Now is the time to attempt to slow the acquisition of new dollars into their reserves. Clearly, a lowering of the demand for the U.S.$ in international trade will lower the demand for the $ and U.S. Treasury Bonds and Bills. As the $'s role shrinks, so will the globe's ability to absorb, not just the Trade deficit of the U.S. but also the growing volume of dollars surplus to requirements.

Let's make clear what this could mean eventually, with Russia supplying oil to the U.S., the U.S. will have to buy Roubles to pay for it just like other nations.

Many are the dollars held in reserves to buy oil with and many are the countries who need to change their currencies to the $ to pay for their oil with currently. Where they can use their own or have to buy Roubles, the demand for the dollar will drop and significantly. This will lead to a steady sale of $ assets, then the $s themselves with which to buy these Roubles [and Euros].

Eventual Crisis
This will precipitate, in time, upward pressure on interest rates. We would expect this to start in the markets through sales at the long end of the Treasury Bonds, then as these are sold off, move down to the short end of the market until foreign investments are concentrated at the short-end [T-Bill] and at worst, held in 'call' money. The liquidation of these assets and subsequent purchases of foreign currencies will pull the $ down and cause a heavy outflow of foreign capital.

Before this happened, we would expect the Fed, as we mentioned in a previous issue, to heavily intervene in the foreign exchanges to defend the exchange rate of the $. The Fed has already made preparations for such a defence. Should this prove insufficient and we have no doubt they will, we expect the Fed to try to stem the capital outflow from the country with Exchange Controls from initially gentle to eventually harsh levels. [The writer has many years of experience in Exchange Controls in different countries].

Many of you readers may feel these prospects are impossible, but history has precedents. At the turn of the century, the British Empire was in its heyday. Seventy years later it had to impose Exchange Controls of its own to prevent the sudden exit of foreign investments from its shores.

Next week we will look at what happened and how it is pertinent to the U.S. today! Later we will describe just how Exchange Controls work to protect a nation's financial base and the benefits that can come with them to the U.S. but to the detriment of the global monetary system.

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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