What If Putin Had Outplayed Us All ?
Has Russia executed the most devilish plan of the 21th century ?
On Wednesday, Russian President Vladimir Putin announced that from now on, Russia would seek payment in rubles for gas sales from ‘unfriendly countries’ — a list including the U.S. and EU countries. This is actually a far bigger development than is being reported, as Russian gas accounts for 40 per cent of Europe’s total consumption and whose gas imports amount to €800 million a day, thanks to rising gas prices.
This statement alone should be enough for the European buyer to be fretting. Putin seems to have tipped in favour of upping the ante and testing EU’s newly much-touted unity. Will he succeed in weakening the West’s resolve as this one is about to ratchet up economic pain on Moscow1 ?
A CONSPIRACY
Or may it be the exact opposite that was desired by Putin ? Not breaking the sanctions but rather tearing the Russia-West relationship asunder for good. In fact, there are many signs indicating that it could have been contrived as such — even prior to the “special military operation” in Ukraine.
With distance and hindsight, it is almost impossible that the recent spate of freezes of CBR’s foreign assets could catch Moscow off guard, inasmuch as such an amateurish and clumsy mistake would not be worthy of Elvira Niabullina — Russia’s highly regarded Central Bank Governor, who in 2015 was named “Central Banker of the Year” by the Euromoney magazine3.
Even more bewildering, the Central Bank of Russia had been increasing its reserves of U.S. Treasury Securities4 since last November 2021, suggesting that Moscow was ready to sacrifice them. Few in Russia may still have a forlorn hope to eventually recover these assets shortly after the end of the conflict, but this scenario seems unlikely as the EU’s abrasive behaviour shows no sign of abating.
Moscow may also have felt confident in its capacity to cushion a tumbling ruble, because it knew it could deal with any contingency by tapping into secret offshore foreign reserves — purportedly with the help of China via a complex financial system5. Sanctions also start to fade as Russia rebuilds its trade surplus in the blink of an eye with its energy exports that are constantly generating hard currency inflows.
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At the end of the day, how can Putin vindicate his unprecedented decision — to switch from payment in euros/dollars to payment in rubles — which he knows, will ripple through the West like an earthquake ? He simply got to goad the West to take a strong action that would then cause severe harm to the world. Without such a psychological shock, Putin would not have had his best argument to convince several regional swing states to follow in his footsteps, something which precisely happened when the G-7 froze $300 billion of Russia’s reserve assets in their countries. Humans can only react to a fait accompli and politicians are no exception. It appears the message has finally got through :
Many countries that do not necessarily embrace the West’s so-called democratic values — though nominally U.S. allies in the case of Turkey, the Gulf states and to a lesser extent India — have come to realize that their dollar-denominated assets could be weaponized against them as soon as that their interests start to veer off. For many years, there have been talks of de-dollarization but nothing ever materialized. Putin’s venturesomeness led him to open the pandora box which everyone wanted to open but never dared to, and usher in a new multipolar momentum.
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THE GRAND STRATEGY
That’s how he smashed the remaining liberals’ certitudes to smithereens and effectively induced the necessary electrical shock. The overarching goal has always been to unravel the dollar’s hegemony, whose sole incentive was to be backed by safe dollar-denominated securities, oil exports and the U.S. Navy. All of that shattered overnight. In all fairness, the ruble has all the characteristics of a world-class, very reliable currency, with plenty of strengths of its own. It is backed by oil, gas and many commodities exports. Most importantly, the Central Bank of Russia is not addicted to Quantitative Easing (QE) and will not eagerly export inflation to other countries, unlike the FED does.
Moreover, the Russian Navy can ensure the safety of Russia’s sea lines as Russia’s submarines circle Britain’s entire coastline16 and the Russian Navy has achieved dominance in the Black Sea17 and in the Arctic18. It means that Russia can guarantee the shipping of the goods it trades toward Asia, America and Europe, while also enjoying the Eurasian railway of the Belt and Road Initiative as an alternative. Finally, the sheer size of Russia’s nuclear stockpile, the largest in the world, merely makes it impossible to bulldoze the Kremlin into something it is not amenable to doing.
The Belt and Road Initiative
Since dollar-denominated assets are not safe anymore, it means that the green back has in reality now less incentives than the ruble as an international legal tender. A fiat currency is just a piece of paper or digital bits in a program; it’s an absolute decree from an institution and it has no other value than the trust you have in it. That’s why the world should snap up rubles en masse, which could also help you diversify your portfolio and hedge against future financial shocks. No-one knows what a world without a paramount reserve currency will resemble. Putin forced us into terra incognita, and if I’m right, he has definitely played a masterclass of power politics by reshuffling the world order on his own.
