Tuesday, September 13, 2016

Alistair Crooke — China and Russia Press Ahead, Together

Important. Most of this has been reported here previously, but Crooke sums it up.

Consortium News
China and Russia Press Ahead, Together
Alistair Crooke

See also

The Red Dragon Has Spread Wings and Is Flying


franco said...

Glazyev proposed that the Ruble build up its strength as an alternative to the dollar system by buying gold as currency backing. He proposed that the Central Bank be mandated to buy all gold production of Russian mines at a given price, in order to increase the ruble gold backing.

So am I right to say that the aim of this would be to use gold as a substitute for US dollars to maintain the value of the ruble, seeing as given political context it might be difficult for Russia to accumulate US dollars?

Tom Hickey said...

Gold is held as a reserve by central banks. Reserves, typically USD in a dollar dominated work, strengthen currencies that need to get them for settlement. Gold play the same role, since gold can always be sold to settle in whatever currency. So what Glazyev is saying is to replace USD reserves with gold reserves acquired from domestic production.

While gold is no longer used to settle in international trade, it is a tool that central banks still use. When a central bank buys gold it expands its balance sheet by issuing more liabilities to fund the acquired real asset. When it sells gold, it shrink its balance sheet by decreasing its assets and liabilities.

Russian gold producers sell gold to Russian banks for RUB, which Russian banks fund by expanding their balance sheets. This adds to the money supply. Then the banks sell the gold to the Central Bank of Russia. The Central bank of Russia expands its balance sheet by acquiring gold as an assets and crediting banks' accounts at the central bank with settlement balances, which are cb liabilities. This injects liquidity into the banking system.

This is a form of overt money financing (OMF) by the Central Bank of Russia without increasing the fiscal deficit. Increasing the deficit would likely adversely affect the value of the RUB, which the Central Bank of Russia wants to keep in its desired range of about 65 to the dollar to boost exports.

If the CBoR were to buy dollars in the market it would depress the value of the ruble. This way the CBoR can hold the desired amount of reserves and inject RUB into the economy without affecting either the fiscal deficit or the value of RUB adversely. It actually reduces the deficit by OMF.

So Glazyev seems to know whereof he speaks.