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Will The Russian Bear And The Chinese Dragon Start To Dance?
Since the start of the war (and let’s face it, it’s no longer an ‘armed conflict’, it’s a ‘war’), there has been a very interesting political fight going on between the West and Russia whereby both sides were instating ‘sanctions’ onto the other. As can be seen on the next chart, the Russian ruble has been in free fall, but as the exports have been falling off a cliff, this definitely isn’t helping the domestic economy.
Source: Yahoo Finance
To provide some protection against a falling (well, ‘crashing’ would be a better choice of words) Ruble, the Russian Central Bank has continuously sold US Dollars on the market to counter the effects of its depreciating currency. The free fall of the Russian Ruble is caused by investors who’d prefer to ‘play it safe’ which are withdrawing as much cash as they can out of the sanctioned country. To counter this effect, Russia is dumping dollars on the market to protect a targeted exchange rate.
But here’s the problem. Last week, the country dumped not less than $2B on the open market, but still couldn’t avoid a further depreciation, as the Russian Ruble still ended the week with a loss of in excess of 2%. So where do these dollars come from? Fortunately for Russia, the country still is a net exporter of oil and gas, and these contracts are still settled in US Dollars. However, as the oil price has started to nose-dive as well (the price of crude oil has decreased by 15% in less than three months time), these revenues are decreasing fast and are definitely not sufficient to meet the Central Bank’s need for Dollars to dump on the market.
This has caused a real cash drain on the Central Bank of Russia, and its estimated foreign reserves are decreasing at a very fast rate. Whereas the country had –according to the International Monetary Fund - $514B in total reserve assets in June of last year, more than 10% has just ‘evaporated’ to $457B at the last official release approximately two weeks ago. As Russia continued to dump dollars on the market, we would expect the country to have less than $450B in reserves at the next update. The situation looks even worse when you look at the amount of foreign currency reserves. In just 9 months time (the official IMF numbers are limited to July 2014), the country lost in excess of $50B in foreign currency reserves, and the outflow rate seems to be accelerating which is an alarming fact.
So, if a country’s outflow in USD is (much) larger than the inflow from oil and gas revenues, how could this shortfall be funded? The first answer is ‘by selling Dollars out of the reserves’, and this is what Russia has been doing. However, at the current outflow rate this won’t be sustainable for much longer. So what else can a country do (as ‘attracting more foreign investment’ is out of the question)? The answer is: selling off gold to raise more cash in US Dollar which would increase the liquidity.
That’s the theory, as Russia hasn’t only been dumping dollars on the market to protect the ruble, it has also increased its gold holdings. In one year time, the Russian Central Bank has added not less than 3.5 million ounces of physical gold to its reserves, for a total value of $5B. As per the latest official IMF numbers, Russia now holds 35.5 million ounces of gold. This is still less than for instance France, Germany and the USA (at least their official numbers), but it’s fascinating to see Russia is electing to INCREASE its gold position, even though it’s scrambling to get its hands on US Dollars.
The ratio of gold vs total foreign reserves at the Central Bank might perhaps clear things up. Whereas the ratio was just 7.5% in June of last year, this rapidly increased to 9.83% as of July of this year (see the next chart). Considering the stronger outflow of foreign currency in the past few weeks, we feel very comfortable to say that in excess of 10% of Russia’s reserves are held in gold, which is an increase of more than 33% in just 13 months time.
Data source: International Monetary Fund
Enter the new Russia-China energy deal whereby Russia will provide China with oil and gas. By sanctioning Russia, the Western countries have facilitated China’s attempt to get in bed with the Russians which signed a 30 year contract with an estimated value of in excess of $400B (or 1.6 trillion Russian Ruble). As we all know the Chinese are real gold-bugs, one would have to start wondering if the new Russian policy to buy more gold could be aligned with something bigger than we have been anticipating by now?
With this new energy deal, Russia and China can now be seen as relatively close allies, and it’s interesting that Russia seems to be copying China’s policy to purchase more gold. The next few months will paint a clearer picture but the Russian move to buy more gold at a moment it’s scrambling to get its hands on US Dollars is truly remarkable as it means Russia is valuing buying gold more than it is to defend its currency.
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Russia and China agree to back currency in exchange with Gold or conduct the exchange in bullion.???
Saudi Arabia cannot keep the oil price this low for too long. It has its own security concerns at home and doesn't want to give a glimmer of light to those against them.
Too much of 'cheap' oil will have their OPEC colleagues formenting civil strife in Saudi Arabia....or even some 'strage' explosion on SA oil wells. It wont be Russia, it will be those that need the oil income and oil income is all that they have, in the ME.
This is a game of chicken, but it is SA going headlong against OPEC, Russia.
The USA TPTB are too low in the scum ratings...they know SA funded/produce the terrorists and rebels that kill many many Americans on foreign and US soil. But to US TPTB it is OK to have SA killing Americans because its suits domestic and geopolitical ends of a handful of elite...and of course the perenial trouble maker of the world since ancient times.
russia has the ability to "set back" humanity 60k yrs. never happen? if it does most of us ZH'ers will be in the mix.
"It appears that the SCO formation in 2001 was another tactical win by the Sino-Russian block, against the - occupied with the war on terrorism - West, to be used against future plans by the global neoliberal dictatorship, which would probably include the dissolution of the vast Russian territory and the dangerous isolation of China by land and sea."
http://failedevolution.blogspot.gr/2014/09/cold-war-20-chinas-moves-to-a...
Too many people much of what is happening is part of a struggle to unseat America as the worlds most dominate nation. For many proud Americans who see the United States as having a right to be in control it is both threatening and frustrating to see that control slip away.
It is threatening to think the country might quickly fall to the position of a second rate power mired in debt with many of the options we have come to see as our right suddenly ripped away. It is frustrating that in many ways the country has become its own worse enemy guilty of political inaction and squandering its power through a series of bad choices and missteps. More in the article below on the massive shift in power to Asia and how America must immediately face its problems and set its house in order.
http://brucewilds.blogspot.com/2014/06/americas-struggle-to-stay-on-top....
Tyler does your proofreading for you?
I just talked with a Russian relative today who is not in Moscow. They will make it. They always survive and that is why I married one of them. They do not listen to Putin. They know it is all a bunch of lies what any government or central bank says anyway. They will take but have never relied on anyone but themselves.
Applying Western standards to Russians will not work. They are not Western and never will be because they do not want to be. They have a very different culture and it is one that I like. If I needed help and had a choice between the West and Russia I would choose Russia but I would not choose their form of .gov. The Russian people are good people.
Yeah, they always survive. ...aside from seven million of them starving to death under their last psychotic dictator.
And their girls are beautiful!
True.
It is an interesting strategy by Russia. I understand the selling of dollars, but the goal should not be to protect the Ruble. They should only focus on increasing Gold.
If they are 10% now, and they move that up to closer to 40% like EU, the money people won't care whether the country is good, bad or indifferent.
They could get lots by exchanging dollars, but they could also use the chinese buying nat resources too.
To a certain extent, China is the USA and Russia is the Canada. That is, China has the population and therefore the manufacturing, and Russia has the raw materials. To a certain extent.
Russia has far superior military tech.
Yes indeed. I just had this picture that Beijing is about the latitude of New York City and a lot of Russia is north of there, as a lot of Canada is north of there.
A Saudi pipeline or distribution facility could have a major accident in the near future, me thinks. Russians are not stupid, if anything they have an excessive amount of bravery, tenacity and patience. It's in the 30's at night in Kiev now and temperatures are falling fast. Accidents can happen you know. Putin does not need congressional approval or a positive poll to act.
Russia will earn when the gas pipeline is done in a couple of years. Until then it is going to spend something like $50 billion to build the pipeine and the pumping stations.
Saudi Arabia< Kuwait and a few others are selling oil at deep discount to Asia (including China) in competition with Russia. So Russia is going to have to pass or match the discounts.
This is why Putin is all riled up about Obo saying Russia started the WAR in eastern Ukraine and Crimea at the UN recently.
If you watch some of Putin's meetign with his advisors there isn't a one without a long (longer than Horseface) face because they know these sanctions are biting hard.
Oops
Youre to stupid to comment please refrain and exit out the retard door
What the fuck are you yammering about dude? The dude hit it on the head and you need to go back to english class & finally get that GDP.
I believe you meant "You're too stupid..."
Some modification of reality seems to be accepted here at ZH like "moar" rather than "more" but because it is so obvious, it is recognized as on purpose rather than just misspelled.
our neocons are also going to do their best to fuck up any chance of a deal with Iran - a nation we should absolutely be trading with.
You know - because Israel wants no rivals.
The nukes thng is a ruse - which is why Netanyahu has claimed Iran was "months away" - for 20 fucking years.
He himself was involved in a nuclear smuggling ring - stealing American tech and building dozens of nukes of his own... and the American people don't know this because - let's be honest - the pro-Israel crowd basically owns the media.
Stealing or demanding? I'm not convinced the Rothschild dynasty doesn't tell DC and London what to do. They were the first central bank owners back in the LATE 1700's before it all became popular. Andrew Jackson knew what they were up to and kicked the central bank out in the early 1800's. God bless his soul.
They have had a lot of time to make a shitload of mammon.
They share borders... what do you think?
"They share borders"???
You must have forgotten about some little places like Poland, Czech Repiublic, Slovakia, Austria, Hungary, Romania, Serbia that might stand in the way of that "shared borders" thing
Exactly. Which is why the USSR took all those in after WW2, to make sure it had a buffer against Germany. Sad story all the way around. Mostly, sad for the people of Poland, CZE, Slovakia, Hungary, Romania, Latvia, Lithuania, Estonia, etc.
You're right and you're wrong. You're right that they are "little." You're wrong that they stand in the way because you were right when you wrote that they are little.
But he was talking about Russia and China.
Russia and Germany were seen as "relatively close allies" at one time, also.
I could be wrong, but I don't think Russia and Germany ever trusted one another. At least, not after the Bolshevik Revolution. They did have a treaty, prior to Germany's WW2 attack on Russia, but Russia was at the same time arming furiously. That's was the purpose of the Five Year Plans: to build heavy industry, to be used for military manufacturing.
That will become manifest some time in the near future
Preparing to replace the Ruble with a gold-backed alternative? Possibly keeping the ruble up as a stop-gap.
The Euro is gold backed. The ECB holds (in total considering all EZ countries) 10,800 tons. They mark this to market. That means if there is a push by China to buy physical (as Alan Greenspan recently suggested the might) and IF a push to buy physical disrupts the predominantly paper gold market...we could see the ECB balance sheet strenghten A LOT. More than 40++% of their reserves are gold. As the gold price rises they become less dependent upon the value of their currency reserves.
Perhaps Russia is eyeing this balance sheet structure and the possibility of a move by China to buy gold. This would be a MAJOR!!! change in the reserve structure of central banks. It would remove the dollar from it's prominent role as a reserve and with a high enough gold price, would make physical gold THE reserve.
Fofoa has been thinking about this for 6 years and has written over 400 articles reviewing how this might happen....very interesting...if you ask me.
"The ECB holds (in total considering all EZ countries) 10,800 tons"
...does this reported figure that, supports your idea, include Germany's (and every other Euro nations) never to be returned stash held by the US fed?
Australia has 5200 tonne of easily mined gold sitting in the ground. Population of 23 million...
You work out the rest.
By mid-November Russia should announce new terms for the sale of Russian gas to Europe.
i.e. Russian gas for Gold Bullion only thanks. If the EU really has that much gold, it won't be a problem for them.
This is the surest way to drive a wedge between Europe & America.
yes...it is...10,800 tons is the figure reported by the ECB. Like most central banks they are vague about the form the gold is held in and if some has been leased out. Even so they appear to have the biggest stash even though it is a composite of all those countries.
All of your gold bars are belong to us
The ECB Gold will come in handy this Winter when Putin tells them it is the only payment he will take for nat. gas.
Until Europe tells Russia they'll accept payment for food in nat gas.
Russia is a large exporter of grains and food as well as NG. Putin holds a whole lot of aces, especially as winter arrives.