Research & Insights #23

Semiconductors. On May 30, the Russian government decided to limit its exports of noble gases such as neon. Noble or inert gases, such as neon, argon or xenon, are essential to the semiconductor manufacturing process. Semiconductors compose the significant part of electronic devices (computers, tablets, smartphones) critical to the industry 4.0, aeronautics or automotive sector. Restricting these Russian exports could exacerbate the supply shortage on the global market. Ukraine was one of the world’s leading suppliers of noble gas until it suspended production at its plants in the cities of Mariupol and Odessa in March. According to ministry estimates, Russia accounts for 30 percent of the world’s supply of three noble gases: neon, krypton and xenon. After the European Union banned the export of semiconductors, machinery and other equipment to Russia in April, Moscow wants to remind the “unfriendly countries” that they also depend on Russian exports in the field of semiconductor manufacturing.

Oil & Gas. China and India have increased Russian oil purchases, allowing Moscow to secure export revenue. According to Refinitiv data, China imported 800,000 barrels of Russian oil per day by sea last month, which is a 40% increase in volumes compared to January. Russian seaborne oil imports by India have also risen from zero in January to nearly 700,000 barrels per day in May. China and India are taking advantage of the drop in Western demand due to the embargo on Russian oil to buy it massively at good prices. Russian Urals crude is currently trading at around US$90 a barrel compared with Brent, the international benchmark for crude, at around US$125. While Asia is buying more and more Russian crude, the European Union recently decided to block most of it by the end of the year.

Russian stock market. The possibility for non-residents to trade their securities on the Moscow Exchange (MOEX) in a special session is under discussion. According to Interfax, the largest exchange in Russia plans to launch a separate trading session for non-residents at the end of June. They could then buy and sell Russian securities for rubles. Since the crisis in Ukraine and the sanctions taken by the West, the Russian authorities have banned the sale of securities on behalf of non-residents as one of the first capital controls. For its part, the U.S. Treasury Department has just prohibited U.S. fund managers from buying any Russian debt or equity on the secondary markets. Until now, Americans were still allowed to trade hundreds of billions of dollars of assets already outstanding on the secondary markets. 

Food Crisis. While Ukraine and the West accuse Moscow of weaponizing food, Russia blames the situation on international sanctions against its economy and mining Ukrainian ports. Indeed, the main Ukrainian port, Odesa, is currently blocked. The Russian Foreign Minister is in Turkey to discuss unblocking grain exports from Ukraine. Opening a safety corridor for ships carrying grain is at the heart of the negotiations. The United Nations is also working on plans with Kiev and Moscow on how to restart grain exports. Russian Defense Minister Sergei Shoigu said two major Ukrainian ports on the Sea of Azov seized by Russian forces (Berdyansk and Mariupol) were ready to resume grain shipments. The Russian offensive in Ukraine has disrupted shipments of wheat and other commodities from both countries, raising concerns about the risk of food shortages and famine worldwide.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Will the coming food crisis put globalisation at risk?

Recent globalisation has been marked by innovation and falling international trade costs. Both factors have led to an explosion in global production, consumption and trade. With Covid, and now the war in Ukraine, globalisation has never seemed so threatened. The disruption of agricultural supply chains and its consequences should change our positive perception of an interdependent world.

Russia is using food supplies as a weapon with global repercussions, acting the same way it does in the energy sector, European Commission President Ursula von der Leyen said on May 24, at the World Economic Forum (WEF) in Davos, Switzerland.

“In Russian-occupied Ukraine, the Kremlin’s army is confiscating grain stocks and machinery (…) And Russian warships in the Black Sea are blockading Ukrainian ships full of wheat and sunflower seeds,” she added. 

Since the start of the conflict in Ukraine, wheat and maize prices have increased by 41% and 28% respectively. Russia and Ukraine account for about a third of global wheat and barley exports and a significant share for maize and sunflower oil.

According to the International Fertiliser Development Centre, Ukraine also provides one-fifth of the world’s supply of fertiliser nutrients, while Russia and Belarus supply 40% of the potash used as a crop nutrient. In fact, the Ukrainian crisis has pushed up the price of the three most important items for agriculture: feed, fuel and fertilisers.

About 25 million tonnes of maize and wheat are currently stored in Ukraine. Farmers are unable to export their agricultural product via the Black Sea ports which are either under Russian control or blocked by its navy. Thus, farmers are trying to export their grain by road, river and rail. 

A global food crisis seems inevitable if Russia maintains its blockade, a Ukrainian agriculture ministry official told Reuters last week. Vladimir Putin said that if sanctions were lifted, then Russia could “export significant volumes of fertilisers and agricultural products.” 

Major agricultural powers are tempted to impose restrictions on food exports as the outlook for food security continues to worsen. India has already banned wheat exports, citing a food security risk, partly because of the war in Ukraine but also a heat wave that has reduced domestic production and pushed local prices to record levels.

The first direct victims of the impending food crisis will be the countries of the Middle East and Africa, where millions of people depend on subsidised bread. It is still too early to know what the indirect effects of higher food prices will be, such as social unrest or waves of migration.

Globalisation could be the ultimate victim of the coming food crisis. 

Covid has made many Western countries aware of the drawbacks of relying on Chinese industry to produce something as simple as protective masks. The war in Ukraine should now make many countries aware of the importance of ensuring their own food sovereignty.

“We are shifting from a world in which economic considerations determine how resources are allocated to a world in which ideologies and politics determine how resources are allocated. Ideological and political wars lead to much less cost-efficient resource allocations, which is inflationary” said Ray Dalio, the billionaire founder of Bridgewater, recently.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Research & Insights #22

Central Bank. The Russian ruble continued its strong recovery, falling below 60 rubles to the dollar again this week. In theory, the ruble is the world’s best performing currency with a 30% rise since the beginning of the year. However, the exchange rate is artificial as the Central Bank of Russia has put in place strict capital controls following the imposition of sanctions by the West. Most experts believe that the national currency is currently overvalued. Russian authorities will continue to take measures in the coming weeks to ease the pressure on it. On 24 May, the Ministry of Finance reduced the mandatory sale level of export earnings from 80% to 50%. On 26 May, the Bank of Russia cut interest rates by 3%. A simple way to prevent the ruble from strengthening is to ensure now that Russian companies can pay their foreign debt in foreign currency, to stimulate foreign currency purchasing. Current EU and US sanctions make such transactions difficult.

Foreign debt. Once again, Russia is moving closer to a potential default on its foreign currency debt. The US will not extend the General License 9A (GL9A), which allowed the Russian state and its companies to service their debt in dollars to international investors. This could lead to a cascade of defaults, the US Treasury Department’s Office of Foreign Assets Control (OFAC) said on 24 May. Without this licence, it will be very difficult for the state or companies to pay, forcing them to default. Russia has some US$75 billion in outstanding debt, of which 15% is foreign debt. With an estimated current account surplus of some US$200 billion in 2022, the government has enough money to cover its bond obligations. It seems that that the US would rather force Russia to default than allow the country to pay its US creditors.

NATO. Following Russia’s military intervention in Ukraine, Sweden and Finland have officially applied to join NATO. Traditionally neutral, these two states have recently seen their public opinions rapidly shift in favour of joining the politico-military alliance. Seventy-six percent of Finns are now in favour of membership, compared to 12 percent who are against it. Moscow has warned against the move, saying it would damage relations and that Russia would retaliate. Turkish President, Recep Tayyip Erdogan, said he opposed the alliance’s expansion, citing concerns about the presence of “terrorists” in Finland and Sweden. Turkey has set several conditions for accepting Sweden’s application for NATO membership. Sweden must lift sanctions against Turkey, including the arms export embargo, end “political support for terrorism”, eliminate sources of funding for terrorism and stop supplying arms to the PKK and its armed Syrian wing, the YPG.

Food crisis. Wheat prices have reached record levels in the last two months and have risen by more than 60% since the beginning of the year. The surge has been triggered by the conflict between Russia and Ukraine, which supply almost a third of global wheat exports, and by droughts around the world. Major producers such as Russia, Kazakhstan and India have already restricted exports to protect their domestic markets. There are currently 20 million tonnes of wheat blocked in Ukraine. Usually, the country exports five million tonnes of grain per month. Currently, Kyiv can only export a fraction of its production, between 200,000 and one million tonnes per month. For its part, Moscow is seeking to strengthen control over its grain exports. According to the Russian daily Kommersant, it wants all members of the Eurasian Economic Union to introduce quotas and duties on grain exports to third countries, fearing that Russian grain will be re-exported to other markets.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Should the West acknowledge Russia’s security interests?

On 12 May 2022, the Munk Debates organised a debate on the war between Russia and Ukraine. With this conflict becoming a major risk to global security, the organisers brought together the most brilliant thinkers of our time to reflect on the biggest issue of the day.

What is the best way to resolve the crisis between Russia and the West?  Should the West continue to punish, isolate and weaken Russia, or should its security needs be recognised? Four guests were invited to debate and discuss these questions. John Mearsheimer, from the University of Chicago, and Stephen Walt, professor of international affairs at the Harvard Kennedy School, tried to defend the idea that the West should take into account Russia’s security needs. Opposite them, Radosław Sikorski, MP, former Minister of Foreign Affairs and Defence of Poland, and Michael McFaul, former US Ambassador to the Russian Federation, argued the contrary.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Why is the EU struggling to ban Russian oil imports?

Since the beginning of the conflict in Ukraine, Brussels has been putting pressure on Moscow by introducing sanctions to damage its economy. The aim is clear: to deprive Russia of its main sources of hard currency income. But the European Union is having trouble agreeing on its sixth sanction package. Initially, the EU had planned to ban the import and transport of crude oil from Russia. Due to a lack of consensus among Member States, this plan could now be watered down.

Oil is essential for all economies to create wealth. When the price of oil rises sharply, countries without oil pay the equivalent of a tax or levy to countries that produce it. A massive change in the price of oil leads to a massive transfer of wealth in a global economy.

This is the difficult situation that President of the European Commission, Ursula von der Leyen, is currently facing. By seeking to stop importing oil from the world’s largest producer, the European Union risks above all paying more for its much-needed energy. 

Will this policy inflict more pain on Russia than on the old continent? Nothing is less certain. What is certain is that this measure is not unanimously supported by the EU Member States.

Hungary, which has until now largely supported EU sanctions against Russia, is the main opponent of the suspension of Russian oil imports. Prime Minister Viktor Orban has said that stopping Russian oil purchases would be an “atomic bomb” for the Hungarian economy. “Fuel prices in Hungary will rise by 55-60%. Their growth will be followed by a surge in prices for all goods”, said the Hungarian Minister of Foreign Affairs. 

Given their dependence on Russian crude oil, Slovakia and the Czech Republic would also want to benefit from special conditions if an agreement can be reached on new energy sanctions.

According to Bloomberg, the EU is considering banning the transport of Russian oil to third countries by EU-owned ships. This time, it is Greece that is lobbying to drop this provision in the next round of sanctions. Its economy is heavily dependent on maritime transport. 

Greeks own more than a quarter of the world’s oil tankers by capacity. The share of Greek tankers shipping oil from Russian ports has risen from 37% before the war to 55% since. 

EU member states could, however, agree to sanction Russian oil exports through European insurers. To transport oil using tankers, oil companies collectively insure their ships against risks, including oil spills.

Targeting marine insurance is a powerful tool as the largest specialist insurers in this sector operate mainly in Western countries. This option still needs the UK to be persuaded to adhere to EU sanctions as it plays a crucial role in the insurance market.

“I can assure you that Europe will move out from Russian oil and Europe will move out from Russian gas. The only thing is it cannot be done overnight,” said Alexander Schallenberg, the Austrian Minister of Foreign Affairs

The paradox is that by promising to phase out Russian oil imports, the EU is helping to create uncertainty about future supplies. This in turn drives up the price of oil today and helps to increase Russian state revenues.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Research & Insights #21

Oil & Gas. Tensions between Russia and the West over energy have escalated in recent days. For the first time, Moscow has cut off gas supplies to Poland and Bulgaria since Vladimir Putin threatened “unfriendly countries” with having to pay for natural gas in rubles. This demand is intended to stabilize the Russian economy in the face of Western sanctions. On Wednesday, the European Union’s executive proposed the toughest package of sanctions yet against Moscow. The measures should mainly target Russian oil as well as all shipping, brokerage, insurance and financing services offered by EU companies enabling its transportation. The Commission’s proposal must still be unanimously approved by the 27 EU countries. It plans to phase out deliveries of Russian crude oil in six months, and of refined products by the end of 2022. Several countries worried about the impact of cutting off Russia oil imports stand in the way of agreement. The Ukrainian conflict calls into question more than half a century of partnership in the energy field between Europe and the USSR, then Russia.

Central Bank. On 29 April 2022, the Bank of Russia decided to reduce the policy rate by 300 basis points to 14% per annum. Recent data indicate a slowdown in current price growth rates due to a strengthening ruble and weakening consumer activity. Indeed, the ruble has recently reached its highest level in over two years against the dollar and the euro, supported by capital controls. There are currently no concrete signs that the Central Bank will reduce capital controls in the near future. For its part, the finance ministry said it had managed to make payments on two dollar-denominated bonds, potentially averting a default on the country’s external debt. Russia made the payments from bank accounts that were not subject to direct sanctions, according to people familiar with the matter. Moscow has ample resources to service its debt from oil and gas revenues. But Western sanctions have complicated the country’s efforts to make sovereign bond payments. In early April, the US prevented Russia from using US banks to repay its foreign debt.

Russia-China relationship. China’s leading provider of information and services to the coal and coke industries, Fenwei Energy Information Service Co, has revealed that several Chinese companies purchased Russian coal in Chinese currency in March 2022. The first shipment would be made in April.  It is also the first shipment of Russian commodities paid for in yuan to arrive in China after Russia was sanctioned by Western countries. Chinese buyers have also used yuan to purchase Russian crude oil. China’s total imports from Russia have recently increased significantly. According to the latest mid-April report from the General Administration of Customs, in the first quarter of 2022, total Chinese imports from Russia reached US$21.73 billion, a 31% year-on-year jump, second only to Indonesia (31.4%). Since the outbreak of war in Ukraine, China has refused to condemn Russia’s actions and has criticised the radical Western sanctions imposed against Moscow.

Commodity Shock. According to the World Bank, global energy prices are projected to rise dramatically, culminating in the biggest price jump in commodities in nearly half a century. In its April commodity market outlook report, the institution expects global energy prices to rise by 50.5% in 2022. Sanctions on Russia are the main reason for the disruption of the global trade supply chain, which is causing dramatic energy price increases. Food costs are expected to rise by 22.9% this year, the largest increase since 2008, with wheat prices peaking at 40%. Ukraine was expected to produce 10% of the world’s wheat in 2022, but between 25% and 50% of that production has been affected by the conflict. Meanwhile, metal prices are expected to rise by 16% before declining next year, but they will remain at high levels. According to the report, soaring commodity prices have contributed to inflation levels not seen for more than 40 years in the US, and a record 7.5% jump in consumer prices in Europe.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

The Decline of a Reserve Currency

Since the freezing of the Russian central bank’s assets by the Americans and the rise of inflation, many are wondering about the future of the US dollar as a reserve currency. In this article we will take a step back and outline, on the basis of Ray Dalio’s latest book, “The Changing World Order“, the dynamics that occur when a currency ceases to be a reserve currency.

“The times ahead will be radically different from those we’ve experienced in our lifetimes, though similar to many times in history”. With these words begins the latest book by the founder of the $140 billion US hedge fund, Bridgewater Associates.

Ray Dalio is convinced that no empire or currency lasts forever, yet almost everyone is surprised and ruined when they fail. The man who predicted the economic crisis of 2008 describes the current economic and political environment by delving into centuries of economic ups and downs. 

Through the study of four empires: the Dutch, the British, the American and the Chinese, Ray Dalio developed a framework for assessing the level of wealth and power of the archetypal empire, using eight parameters: 1) education, 2) competitiveness, 3) innovation and technology, 4) economic output, 5) share of world trade, 6) military power, 7) power of the financial center, and 8) reserve currency status.

His analysis of the emergence and decline of the Dutch guilder, the pound sterling and the US dollar as reserve currencies is of particular interest in understanding the world of tomorrow. In this informative video, Dalio explains that empires rise and fall in a predictable pattern known as the “big cycle”. He believes that a new world order is imminent.

The power of a reserve currency

If a currency has to fulfill two functions, namely a medium of exchange and a store of value, not all money printed by governments is of equal value. A reserve currency has the particularity of being accepted throughout the world for transactions and savings. 

Having a reserve currency is among the greatest powers because it allows a country to borrow more than it could otherwise afford. People around the world want to save in it, which enables the country to borrow more at a lower rate. This is what the French Minister of the Economy called in 1960 when referring to the power of the dollar: the exorbitant privilege.

An empire that borrows and spends a lot seems very strong at first glance. In reality, its finances are actually weakened because borrowing supports the country’s power beyond its fundamentals. By living beyond its means, the empire finances domestic over-consumption and engages in numerous international military conflicts to increase its power.

Inevitably, the country begins to borrow excessively, which contributes to the accumulation of large debts to foreign lenders. In the long run, a country always ends up servicing its debt by creating a lot of money and credit, which depreciates the value of its currency.

When investors start to sell government bonds aggressively

According to Dalio, a country that ceases to have a reserve currency always comes to a traumatic end. In concrete terms, this means large devaluations caused by debt crises.

Signs that such a situation is approaching are when: 1) a country’s debt level is very high, 2) the central bank already has its interest rates at 0%, 3) it is already printing money to buy its bonds, and 4) it faces a financial crisis.

In this situation, the traditional approach is for governments to increase the supply of money and credit to stimulate the economy. The problem is that interest can no longer be lowered and money printing only stimulates the financial market without impacting the real economy.

By creating a lot of money, the government reduces the value of money and credit, which is good for debtors but very bad for holders of money and credit.

People then start selling their government bonds en masse and turn to inflation-hedging assets and other currencies. In other words, holders of debt whose real return keeps falling want to sell that asset for other reserves of wealth.

Once it is widely perceived that money and debt assets are no longer a store of value, the status of a reserve currency is at risk. As Ray Dalio explained in his recent conversation with Larry Summers, the central bank is then faced with a Cornelian choice: raise interest rates to make bonds more attractive, at the risk of contracting a highly indebted economy, or print massively to buy debt that no one wants, thereby depreciating the value of money.

History has shown that central bankers generally prefer the second option and that there are very high risks in holding interest-bearing cash as a store of wealth, especially at the end of debt cycles. 

As Dalio points out: “One of the most important questions investors need to regularly ask themselves is whether the amount of interest that is being paid more than makes up for the devaluation risk they face.”

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Research & Insights #20

Oil & Gas. According to the New York Times, the European Union is preparing a phased ban on imports of Russian oil products. The measures should not be introduced until after the second round of French elections, to be held on April 24, to avoid the impact on pump prices harming President Emmanuel Macron’s re-election chances.This approach is intended to give Europe, and Germany in particular, time to find alternative suppliers. In 2020, Russia provided a quarter of the European Union’s oil supplies and a third for Germany. The EU has imposed several rounds of sanctions on Russia, but so far Russian oil and gas have been excluded because of the high level of dependence of some EU member states on energy supplies. Germany’s Vice Chancellor, Robert Habeck, recently spoke out against an immediate gas embargo on the grounds that it would threaten social peace in the country. Despite the war, Gazprom continues to supply Russian gas for transit to Europe through the territory of Ukraine.

Defence. Russia has successfully carried out a first test launch of a Sarmat intercontinental ballistic missile (ICBM) from the Arkhangelsk region, the Russian Defence Ministry announced Wednesday. Vladimir Putin congratulated the military, stressing that this unique weapon will force all those who try to threaten Russia to think twice. According to the Russian president, the new system has the highest tactical and technical characteristics and is capable of evading any modern missile defence system. It is the largest nuclear missile ever designed. The Pentagon commented on the event through its spokesman, John Kirby, who said it was a “routine” test that posed “no threat” to the United States or its allies. The Sarmat has been under development for years, so its test launch is not a surprise to the West. However, it comes at a time of extreme geopolitical tension due to the war in Ukraine.

Central Bank. Russia announced a likely further cut in interest rates and increased budget spending to help the economy adjust to Western sanctions. As a reminder, the Bank of Russia marginally lowered its key interest rate on April 8 to 17%. The country recorded 16.7% inflation in March and the World Bank expects the Russian economy to contract by more than 11% for the year 2022. The current rise in inflation is due to low supply, not high demand, according to Elvira Nabiullina. She repeated in the lower house of parliament that the goal is to bring inflation down to 4% by 2024, while the economy adjusts to Western sanctions. The latter mainly affect the financial market but should now “start to affect more and more the economy.” The main issues are the massive changes required in logistics and technology supply chains. Over time, logistics networks will be reconfigured and shortages of some consumer goods should disappear. Problems along technology supply chains will be more difficult to resolve.

Russia-China Relationship. Trade between Russia and China has surged since Moscow was cut off from Western imports. In 2022, January-March trade turnover between the two countries reached US$38.17 billion, up 28.7% from the same period last year, according to state news agency RIA Novosti. Russian imports from China rose 25.9% to US$16.44 billion, while its exports to China jumped 31% to US$21.73 billion in the first quarter of the year. In March alone, Russia exported US$7.84 billion worth of goods to the Chinese market. The bulk of Chinese imports from Russia are energy, mineral and agricultural products. China has been Russia’s largest trading partner for more than 10 years. Beijing has called on the West to lift the unprecedented sanctions imposed on Russia. Just days before the war in Ukraine, Vladimir Putin and Xi Jinping announced a “no-limits” partnership with plans to increase bilateral trade to US$250 billion by 2024.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Weaponization of the US dollar threatens its domination

American sanctions on Russia’s currency reserves could gradually prompt many countries to bypass the US currency.

On February 28, the United States and its European allies froze the assets of the Russian Central Bank following the Russian military intervention in Ukraine. Half of the Central Bank’s assets held in the form of foreign exchange reserves and gold (US $300 billion) have been blocked by the West. 

By weaponizing the dollar to preserve its global economic and geopolitical position, the United States risks jeopardizing its greatest power: its control over the world’s reserve currency and capital market system. Zhang Yanling, former executive vice-president of Bank of China, said the sanctions would “cause the US to lose its credibility and undermine the dollar’s hegemony in the long run”. 

The Russian response was not long in coming. A few weeks later, Vladimir Putin signed a decree stipulating that “unfriendly countries” will have to pay for Russian gas in rubles from April 1. This announcement caused the price of natural gas to rise and the ruble to strengthen against the dollar.

The inertia of the dollar as the reserve currency should not be underestimated.

Ray Dalio, founder of the US $140bn US hedge fund Bridgewater Associates, believes that the conflict between Russia and the West is the first battle in the long war for control of the world order. According to him: “When this first round comes to an end, most people will probably misconstrue it as the end of the fight, but it will only be the beginning.”

The end of the US dollar has been predicted countless times and the inertia of a reserve currency that dominates international transactions should not be underestimated. So why should this time be any different?

In theory, a currency can be held in the form of debt or money and must fulfill two essential functions: a store of value and a medium of exchange. 

In practice, the US dollar has ceased to be a store of value since its purchasing power began declining faster than its bond yield. And for countries that are not geopolitically aligned with Washington, the weaponization of the greenback prevents it from being a reliable medium of exchange.

Vyacheslav Volodin, speaker of the Russian Duma lower house of parliament, recently said: “Anyone who keeps money in dollars today can no longer be sure that the US will not steal their money.” Countries such as China, Russia, India and Saudi Arabia, are already reducing the share of dollars used in trade, financial transactions or central bank reserves. 

Published in a recent note, Zoltan Pozsar, Former Federal Reserve and U.S. Treasury Department official stated “We are witnessing the birth of Bretton Woods III – a new world (monetary) order, centered around commodity-based currencies in the East, that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.” 

“Demand for commodity reserves will be higher, which will naturally replace demand for FX reserves,” Mr Pozsar said. “Demand for dollars will be lower too, as more trade will be done in other currencies.”

This analysis is consistent with the new monetary paradigm presented last month by IMF’s first Deputy Managing Director, Gita Gopinath, according to which we could see the emergence in the coming years of small currency blocs based on trade between separate groups of countries.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.

Research & Insights #19

Foreign debt. Russia is getting closer to a potential default on its foreign currency debt. The Ministry of Finance recently stated that it was forced to make payments in rubles to holders of dollar-denominated bonds. For the first time, the attempt to settle the US$649.2 million payment was rejected by a US financial institution on orders from Washington. Russia has a total of 15 international bonds outstanding, with a face value of about US$40 billion. Moscow managed to secure several foreign currency coupon payments on its Eurobonds before Washington stopped the transactions. According to international rating agencies, Russia has a 30-day grace period to make the dollar payment. The Kremlin has rejected the idea of a default by the country, saying that Russia has the necessary funds and is ready to pay its debt. Indeed, Moscow has described the blocking of payments as a failure of the West to meet its financial obligations to Russia. According to the Kremlin spokesman, the freezing of foreign exchange reserves in February was an attempt to push it into an “artificial default”.

Domestic Politics. Some 83% of Russians approve of Vladimir Putin’s actions, gaining twelve points compared to February, according to a survey published on 31 March by the independent Russian institute Levada. This is the first poll since the beginning of the offensive in Ukraine that has not been carried out by pro-government institutes. Only 15% of Russians say they do not approve of the president’s actions (-12% in one month) and 2% have no opinion. Among respondents who support the actions of the Russian Armed Forces in Ukraine, the dominant opinions are that Russia launched a “special operation” to: protect the Russian-speaking population and civilians in Donbass (43%); prevent an attack on Russia (25%); get rid of nationalists and bring order (21%). Vladimir Putin justified Russia’s military offensive against its Ukrainian neighbour by accusing it of having orchestrated a genocide of Russian speakers, and of serving as a springboard for NATO, an existential threat to Russia. Since the beginning of the conflict, Russia has banned some of the largest social networks (Facebook, Twitter, Instagram, TikTok) accused of having a Russophobic line.

Dedollarization. One of the main counter-sanctions taken by Russia against the West was to order, on March 23, that Russian gas exports be paid for in rubles. In fact, the system now allows buyers to pay in the contract currency which is then changed into rubles by Gazprombank. “It is obvious that – even if this is currently a distant prospect – we will come to some new system – different from the Bretton Woods system,” Peskov said.The West’s sanctions on Russia, he said, had “accelerated the erosion of confidence in the dollar and euro.”The Kremlin wants a new system to replace the contours of the Bretton Woods financial architecture established by Western powers in 1944. The government spokesman said the West’s decision to freeze US$300 billion in central bank reserves was a “robbery” that had already accelerated the move away from using the US dollar and the euro as global reserve currencies. The decision to impose payment in rubles has boosted the Russian currency, which fell to record lows after the February 24 invasion, but has since recovered.

Russia-India relationship. Since Russia’s military intervention in Ukraine and subsequent Western sanctions, India has purchased at least 13 million barrels of Russian crude oil, benefiting from deep discounts. By comparison, India had imported in 2021 about 16 million barrels for the whole of last year, according to data compiled by Reuters. Russia is India’s largest supplier of defence equipment, despite increased purchases from the United States over the past decade. Defence analysts say Russian supplies are more cost-competitive and vital to India, which faces a superior Chinese military. As a result of the sanctions, Russia has offered a US$35 per barrel cut from price levels prior to the start of the war in Ukraine to the world’s third largest oil importer and consumer. Indian Oil Corp, the country’s largest crude refiner, has the option to buy up to 2 million tons, or about 15 million barrels, of Urals-grade crude oil from Russia’s Rosneft this year. India and Russia are also trying to work out a rupee and ruble payment mechanism to maintain their trade.

DISCLAIMER: The statements, views and opinions expressed in this article are solely those of the author and may not necessarily represent those of Equinox.