Economic Updates [i]

Fall of the Ruble?

Side note:

For the first time, I am trying a new (for me) concept to occasionally publish short, less researched articles. I want to see how you like/accept this one, and that will determine my frequency of publication in the future. It’d be much more fitting for me because of my business and academical engagements. Since they are less researched, please feel free to treat them like an opportunity for discussion in the comment section. Bring your own views. Unfortunately, I will not always be able to answer the comments in a timely manner due to work and other obligations. I will try hard but please bear with me. But I’m sure Piquet and Mike are there to help as well.

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Introduction

The last few days we have seen a drop of the value of the Ruble compared to the Dollar and Euro. When the Ruble falls, the pessimists rise. The Russian economy is in shambles, etc.

It is not that simple.

First let’s take a look at numbers and graphs. Here is the chart from Bloomberg.

The Ruble recently fell from about 84 Rubles per Dollar to about 92 per Dollar.

What are the implications?

In Western countries you would want to have a strong currency. But at the same time not too strong. It needs to be in balance. Why?

• You’d like to be able to purchase commodities all over the world on favorable conditions. The stronger your currency is, the better you can go on a shopping spree in BRICS/SCO countries and third world countries (btw, a term which we should abandon soon). While that sentiment is true now, everything will change soon with the new financial system which is currently under construction.

• You don’t want to have too strong of a currency. Your own commodities would become too expensive for the non-Western markets. A fact that China exploited brutally in the last two+ decades, by penetrating markets that looked favorably on buying Chinese rather than Western goods.

To make it easy:

• The stronger your currency, the cheaper are your imports. For other nations the costs for your commodities become more expensive.

• The weaker your currency, the more expensive are imports. Exports, on the other hand, flourish because other countries can import far more cheaply.

What about Russia?

• Russia abandoned most imports from the West. Hence, from the Dollar and Euro denominated markets. Not only because Russia wanted it; no, but also because the West “sanctioned” Russia away from their markets. Ha-ha 😊

• The reason for Russia to maintain a stronger currency in relation to the Dollar and Euro fell away. If you minimize the sourcing of Dollar- and Euro-denominated commodities, you can (carefully) devalue your currency relative to Dollars and Euros.

• Russia is a major industrial power. By devaluating its currency, Russia will be able to utilize its industry far more by increased exports.

• However, there is a problem. The Dollar is still the global reserve currency, and many countries all around the world are trading goods in the Dollar. It is more expensive for Russia to import from non-Western countries with a weaker currency if those countries still stick to Dollar trade. Note, though, that ever more countries are abandoning the Dollar, or at least expanding their non-Dollar denominated trade. And with certain events to come, the Dollar will find an end to its use as a reserve currency. I’ll write in the future about this.

• Russia is on a “light” war footing. Hence, it produces most of the commodities it needs on its own. It is not a problem to have more expensive imports from Dollar/Euro denominated markets, because such imports are of insignificant volume.

• Most imports are from China (as a single state and not block). Russia and China are settling their trade directly, without using the Dollar in the value chain calculation. This is part of the investment that China is willing to make to abolish the Dollar. China is helping Russia economically in the transition from the unipolar to the multipolar word order. And Russia is helping China in other areas of the mutual dependencies between Russia and China. Agreement through negotiation.

• Commodity, energy, and resource sales to Western countries result in far higher Ruble revenues which fills the Ruble (Russian State) budget for the war. 😊 Budget deficiencies will be reduced with this devaluation. Of course, provided that contracts have been signed in Ruble and not in Dollar/Euro. Which is why Russia is not using Dollar/Euro based contracts any longer with “unfriendly” nations.

There is a big aspect that I didn’t want to cover in this small update. Otherwise, it wouldn’t be small 😊.

What aspect?

Debt servicing, domestic and foreign. Small hint: Russia has low foreign debt.

Moreover, keep in mind that there are far more macro-economic implications which I can’t cover here.

Conclusion

The devaluation of the Ruble is more harmful for the West than for Russia.

In former days it would be the other way around. In the past, If the Russian currency fell then Russia had problems all around the world because it imported a lot, and all trade had been nominated in Dollars. Today we are halfway to the multipolar world. Russia reduced its imports dramatically, and its factories are running hot for import substitution. Independence. Sovereignty. There are not enough workers to produce everything that is needed.

Moreover, Russia today can trade with countries without using the Dollar, and in these trades the Dollar/Euro to Ruble exchange rate either does not matter or matter far less.

I wanted to show you with this article the first fruits of the multipolar world order.

Which is freedom and independence. The ability of nations to make their own decisions.

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End note:

I did this piece without much explanation, etc. This is a test of whether you are going to accept such short articles that don’t have huge explanation chains. Let me know in the comments. I can imagine that they might be even shorter. No worries, I will continue my “Economics and Empires” series in full length and exactly as scheduled.

[i] Edited by Piquet (EditPiquet@gmail.com)