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The international monetary system will be fundamentally changed by Western sanctions against Russia. That's what Credit Suisse analyst Zoltan Pozsar writes in two Recent Analyses. He foresees a monetary tipping point, in which a transition will take place from unbacked money to commodity-based money. In this new era, which he describes as Bretton Woods III, tangible assets such as gold and other commodities will play an important role. He expects the position of the US dollar to weaken as a result. The ruble and the yuan, on the other hand, will become more important.
In response to Russia's invasion of Ukraine, Western countries have imposed a wide range of sanctions on Russia. One such measure is the freezing of foreign exchange reserves of the Russian central bank. An unprecedented measure, which, according to President Putin, is equivalent to theft. He recently said the following about this:
"The illegal freezing of part of the Russian central bank's foreign exchange reserves marks the end of the reliability of the so-called 'first-class investments'. In fact, the US and the EU are not fulfilling their commitments to Russia. Everyone now knows that financial reserves can simply be stolen. And many countries in the near future – I'm pretty sure – will convert their paper and digital assets into tangible assets such as commodities, land, food and gold."
In response to the freezing of foreign exchange reserves, Putin announced that from now on European countries will be rubles have to pay for Russian gas. Later, the Kremlin announced that they would also Other raw materials wants to pay in roubles soon. According to analyst Pozsar, this marks the beginning of a new era, in which countries that export raw materials set the rules. When raw materials are expensive and scarce, they become a strategic reserve. Countries that export these raw materials will then have a stronger negotiating position.
Putin cleverly plays on this situation by asking for rubles for gas and other raw materials. In doing so, Russia creates much more international demand for its own currency. Other countries that need Russia's raw materials will therefore have to hold more rubles in their foreign exchange reserves. And that applies not only to European countries, but also to customers elsewhere in the world. They will then hold fewer dollars and more rubles. In a world of scarcity and high energy prices, Russia as a supplier has a stronger negotiating position than the buyer.
Russian ruble rebounded after Putin's announcement to pay for gas in rubles (Source: Tradingview)
In his analysis, Pozsar explains that in recent decades, globalisation has created an intricate network of commodity trade. The sanctions against Russia threaten to seriously disrupt these logistics chains, further increasing the prices of raw materials and reducing availability. As an example, the Credit Suisse analyst mentions the boycott of Russian oil. Previously, Russia exported a lot of oil via pipelines to the Baltic Sea, after which oil tankers transported it over a relatively short distance to the ports in Germany, the Netherlands and Belgium.
If the European market disappears, Russia will have to sell its oil elsewhere, for example in China or India. This is a major logistical challenge, because the infrastructure is not yet set up for this. For example, it takes much longer to transport oil by ship from the Baltic Sea to China. Many more ships will then be needed and will also be on the road for much longer, which will increase transport costs.
In an era of globalization, logistics chains are becoming more and more efficient, causing prices to fall. But now that trade barriers are increasing again as a result of sanctions, countries are once again relying on their own reserves. In an era of scarcity, countries will try to protect their own populations, even if it comes at the expense of others. Raw materials then become a strategic reserve. A dangerous dynamic that can result in price hikes and more social unrest. Pozsar writes:
"Bretton Woods II provided a deflationary impetus (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many). Bretton Woods III will provide an inflationary boost (de-globalization, self-reliance, just-in-case hoarding of raw materials, duplicating supply chains, and increased military spending to protect the remaining maritime trade)."
According to analyst Pozsar, Western central banks are used to adjusting economic demand with their monetary policy. With lower interest rates, they can stimulate the economy, while with higher interest rates, they can slow it down. But central banks can't control supply. They can print money, but not raw materials such as oil, gas or wheat. Also, central banks cannot solve logistical problems.
As a result, central banks are currently in a difficult situation. They can't really do much to bring inflation down and support the economy. Western economies, which have become accustomed to cheap commodities thanks to their strong currencies, are now suddenly facing unprecedented inflation. In the space of a year, for example, energy prices in the Netherlands have doubled, with disastrous consequences for the purchasing power of households.
According to Pozsar, our monetary system had two periods after the Second World War. With the abandonment of the peg between gold and the dollar in 1971, the period of the original Bretton Woods system, in which the dollar was still backed by an underlying asset, came to an end. This was followed by a period that Pozsar describes as Bretton Woods II, a period of unbacked money that was accepted by a great confidence in the creditworthiness of the US and Europe. The dollar and later the euro became the most important global currency in this system, accounting for 60% and 20% respectively in the foreign exchange reserves of central banks.
That creditworthiness is now in question due to the blocking of Russia's currency reserves. For the first time, the world is seeing that holding dollars and euros carries counterparty risk. This will not only make Russia, but also other non-Western countries think. The rest of the world will review the composition of its foreign exchange reserves based on a new reality, in which countries that produce important commodities can determine what they sell these commodities for. These can be other currencies, but possibly also gold. The dollar will therefore play a less prominent role in the future, the Credit Suisse analyst expects.
"We are witnessing the birth of Bretton Woods III, a new (monetary) world order around commodity-based currencies in the East, which is likely to weaken the Eurodollar system and also contribute to inflationary forces in the West."
Composition of central banks' foreign exchange reserves
This contribution comes from Geotrendlines
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