From Russia with love

Saint PetersburgIn our last issue we explored the notion that the Euro would unseat the dollar. This is not a new concept. It is one that the doom and gloomers have talked about since the inception of the Euro. But while they have been fretting over the Euro, other threats have emerged, such as the Gold dinar. Not to be outdone, the Russian ruble has decided to make a run for the dollar’s glory. Its main cheerleader is the President of Russia. He announced his plan to the world in his annual state of the nation address. Russian President Vladimir Putin trumpeted his intention to make the ruble freely convertible on the open market. Further, he vowed to set up a means for oil and gas to be traded for rubles on an internal Russian exchange.

For those who are not students of Russian history, the ruble has one of the worst reputations for financial integrity as far as international redeemability is concerned. Russia has defaulted on their foreign debt so many times before that it is almost a cliché. So it came as a mild shock to many monetary observers when Putin said Russia’s currency should be fully convertible by July. This new timetable is just days before Russia is to host July’s Group of Eight summit in St. Petersburg and six months ahead of the January 1, 2007 deadline delineated in Putin’s aforementioned state of the nation speech. In a bid to set large parameters that clearly cut into the Dollar’s traditional role as the world currency of choice The Russian president declared, “The ruble must become a more widespread means of international transactions.” Notice the emphasis on “international transactions”.

This is the real prize for Russia. It is also in the best interest of Russia to develop its own internal capital markets, instead of relying on the Fed driven New York money center banks to fuel their expansion. Mr. Putin seems to recognize this. He said, “To this end, we need to open a stock exchange in Russia to trade in oil, gas, and other goods to be paid for in rubles.” Our goods are traded in global markets. Why aren’t they traded in Russia? Part of this had to do with the horrible reputation of the ruble. Even the most fervent Russian would rid himself of rubles as fast as he obtained them. And restrictions on currency movements made it a crime to protect oneself against devaluation.

The official decision to eliminate these currency restrictions is certainly viewed as a symbol of the remarkable turnaround in Russia’s fortunes. Compare the country’s recent financial collapse and ruble devaluation in 1998 with its current state of economic euphoria. The Russian government is now running enormous budget surpluses. It is also enjoying a renaissance of investment activity. It appears that Russia is prepared and positioned to take advantage of the benefits of all of this extra revenue. Without gushing too openly, this is quite a turnaround for the once maligned Russia and its ridiculed ruble. Their currency is stronger now than it has ever been. This is a stark contrast to the infamous 1922 revaluation when 1 “new” ruble was given for every 10,000 “old” rubles turned in by note holders. Following such a dramatic loss of purchasing power, international exchanges would not take rubles at any price. As if this were not a dramatic enough death knell, in 1947 the Soviet government implemented a further revaluation of the currency to reduce the amount of money in circulation. Rubles were revalued at one tenth of their 1922 face value, making that an effective and unbearable 100,000 to 1 revaluation. Needless to say this was the proverbial straw that broke the camel’s back. International investors left the ruble and Russia in disgust and never returned.

That is until now. Many people are aware of Russia’s substantial oil reserves. Lukoil, Yukos, and other major Russian oil companies have recently partnered with mainstream international oil companies to fully exploit Russian oil stocks. Couple that with soaring oil prices and you have the recipe for an economic powerhouse. This has contributed tens of billions of dollars each year in extra trade revenue. Investors are flocking to Russia, and coincidentally the government has been employing a much more conservative fiscal policy by paying off debts and building up foreign currency reserves. These reserves have increased 15 fold since 1998, from $15 billion to a figure surpassing $225 billion in 2006. We have characterized the ordinary Russian’s desire to own dollars as insatiable. In our 1996 book, The Secret World of Money, we described how 2/3 of the total supply of United States one hundred dollar bills were circulating in Russia. The reversal has been dramatic. Russians are now shunning dollars in favor of their own ruble. Economists have suggested that the dollar will fall as low as 15 rubles. In May, the dollar settled below 27 rubles for the first time in 6 years. Public confidence in the ruble is steadily rising. Ruble denominated bank deposits, have increased from $12 billion in 1998 to $53 billion today.

If Russia’s economy continues to develop at its present rate, international interest in trading rubles is sure to rise. Longer term, maybe the ruble has greater things in store. The way the United States Dollar has been sinking has caused many to speculate that the ruble will become a reserve currency the way the dollar has. No one can ignore this possibility. Russia and the ruble have both come a long way.

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