Weaponizing currencies

As the fighting in Ukraine becomes more intense, journalism standards are under pressure; sorting truth from lies is akin to sorting through missile-demolished buildings — you wish it hadn’t happened, and if you slip you may damage yourself.

News media organisations that traditionally required at least two sources to verify a story before publication or broadcast, seem to have lost their way. Now ‘leaks’ and anonymous rumours suffice.

Thus we have Reuters reporting that “Russian precision-guided missiles are failing up to 60% of the time in Ukraine, three U.S. officials with knowledge of intelligence on the issue told Reuters, a possible explanation for the poor progress of Russia’s invasion” — although at least Reuters acknowledge it was “unable to independently verify the figures”.

It’s been claimed on social media (via CNN’s verified Twitter account) that the US actor Steven Seagal — who holds both US and Russian nationality — is fighting with Russian ‘special forces’. Not true; CNN says the Tweet was fabricated.

Then there’s the question of military casualties. Russia says around 1,300 of its troops have been killed; NATO says the ‘real’ figure is 7,000–15,000. Ukraine official sources it even higher.

The first casualty of war is of course truth and degrees of truth.

Pavel Zavalny, chairman of Russia’s State Duma committee announced that so-called ‘friendly’ countries will be allowed to trade with Russia in their national currencies, Bitcoin, or gold, at a press conference last week.

One thing seems crystal clear — the weaponization of currencies is one unexpected consequence of this war and the sanctions imposed on Russia by the West. Money has lived through its own Cold War ever since President Richard Nixon killed the Gold Standard in 1971. The days when the US Dollar ruled supreme are over. The mutual hostility between fiat currencies — and alternatives such as cryptocurrency, or gold — has come into the open. The English language newspaper Global Times, controlled by China’s Communist Party, reported on 16 March that China was talking to Saudi Arabia about buying oil in Yuan and that India was considering buying Russian oil for Rupees. It added with some glee that these moves could “contribute to the decline of the dollar’s reserve status, which the US has taken advantage of by printing as many dollars as needed to fund its spending for decades”.

Global Times quoted a Chinese policy wonk as saying in light of “the increasingly frequent abuse of US unilateral sanctions, countries are stepping up their efforts to look for a backup currency for their international trade, and the yuan is one of the options on the table… With the world’s multi-polarisation process continuing, the trend will gain momentum and contribute to the internationalization of the yuan”.

Cryptocurrencies’ day in the sun?

In January this year, Russia’s central bank drafted proposals to ban all cryptocurrency trading and mining, because cryptocurrencies “have aspects of financial pyramids, because their price growth is largely supported by demand from new entrants to the market”. But former enemies can swiftly become allies when the shooting starts.

Ukraine is already well versed in cryptocurrencies; one source says it had the highest level of crypto usage per capita in 2020. On the second day of Russia’s invasion Mykhailo Fedorov, Ukraine’s digital transformation minister and his colleagues set up official government wallets that could accept cryptocurrency payments. By 19 March, the government had received more than $100 million in cryptocurrency donations.

Crypto exchanges are now allowed to operate in Ukraine, consumers have protections against possible fraud, and the National Bank of Ukraine and the National Securities and Stock Market Commission have been appointed regulators. The National Bank may even eventually launch its own digital currency. Ukraine’s government plans to issue its own collection of non-fungible tokens (NFTs), under the working title Meta History: Museum of War. (An NFT is a collectable token traded on a blockchain).

While Ukraine is pursuing the cryptocurrency option at full speed, the West is trying earnestly to prevent crypto use by Russia. The European Commission rules that specified companies and persons in Russia and Belarus are banned from trading digital assets in the European Union. The Office of Foreign Assets Control (OFAC) in the US has stated that US citizens and digital assets firms are required to comply with sanctions against Russia.

For some, such as Sergey Vasylchuk, all this marks a milestone on the route to cryptocurrency’s wider acceptance. He says: “Mass adoption is now inevitable”. But his objectivity is questionable — he’s the founder of Everstake, a cryptocurrency intermediary based in Ukraine.

This war is being fought on many levels — bombs & bullets, information warfare, and cyber onslaughts. The imposition of wide-ranging sanctions has meant the weaponization of currencies, creating ripples far beyond Moscow’s oligarchs’ dachas.

De-stabilisation looms

The West has shown a remarkable unanimity in response to Russia’s aggression. It has kicked some Russian banks out of the SWIFT international payments system, frozen its central bank’s overseas reserves and blitzed Russia’s means of stabilising its currency. But it has also shot itself in the foot.

A critical part of US global hegemony has long been its possession of the world’s most sought-after currency, the Dollar. But if your central bank’s reserves are in Dollars and can be frozen when you need them most, what’s the point in having them? Better to hold your reserves in something else, like Yuan, or Bitcoin, or Gold.

President Joe Biden, who wants to see the US develop digital assets ‘responsibly’ , has issued a warning that the G7 (the inter-governmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the US) will cooperate to enforce sanctions on “any transaction involving gold” related to the Russian central bank. Russia has around $630 billion in its reserves, 23% of which are in gold — slightly more than its Dollar assets. As Biden tries to clamp down on Russia’s gold transactions, President Putin signed a law that exempts individuals from paying 20% value-added tax on gold purchases.

It’s one thing to announce a sanction, it’s quite another to try to enforce it. China has notably not joined the chorus of criticism of Russia; Xi Jinping and President Putin signed an agreement before the start of the Beijing Winter Olympics, committing them to a close partnership “against” the US. One of their agreements no doubt was a pledge to continue their policy of de-Dollarization. Is that true? I have no idea, but in the current context it would make sense.

In the dark days of 2008, when the global financial system appeared to be on the verge of meltdown, a commodity trading friend said to me: “if all this wasn’t really scary it’d be really exciting”. Fourteen years later the possibility of a global catastrophe seems much more intense — not just the sabre-rattling on both sides but the financial re-ordering that will inevitably happen. The demise of the Dollar is unlikely to happen overnight; but it will happen.

And what will replace it? China is convinced it will be its own Central Bank Digital Currency (CBDC), the e-Yuan, perhaps backed by the considerable amount of gold it has built up over years.

But staking a claim to the international reserve currency requires more than just having ‘first-mover’ advantage; it also requires being trusted, and it requires possessing something the world needs. As a massive producer and exporter of some of the world’s most important commodities, Russia may stake its own claim — no matter what was agreed between Presidents Putin and Xi.

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