Will Russia Sanctions Accelerate Inflation, Devalue US Dollar and Strengthen Chinese Yuan?
Russia is a commodities superpower. The nation's Eurasian landmass is rich in all kinds of natural resources from food to fuel to metals. To punish Moscow for invading Ukraine, the US and G-7 nations have imposed sanctions on Russia. These sanctions have effectively removed Russian commodities from the global supply chain, triggering double digit price increases for food, fuels and metals. Will the G-7 actions leave the US dollar much weaker? Will the Chinese currency, backed by commodities, gain strength at the expense of the US dollar and Euro? Will the era of commodity-backed money return? In a note to clients, Credit Suisse investment strategist Zoltan Pozsar has answered some of these questions. He says "this (Russia) crisis is not anything we have seen since President Nixon took the U.S. dollar off gold in 1971". "After this war is over, "money" will never be the same again.....and bitcoin (if it still exists then) will probably benefit from all this,” he adds.
|Map of "International Community" Sanctioning Russia|
Post World War II History:
The current global financial system was created in Bretton Woods located in the US State of New Hampshire. Over 700 delegates representing 44 countries met in Bretton Woods in July 1944. The Bretton Woods System, now referred to as Bretton Woods I, required a currency peg to the U.S. dollar which was in turn pegged to the price of gold. This system collapsed in the 1970s but created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank. Zoltan Pozsar believes it is now time for Bretton Woods III. What is Bretton Woods III? Here's how Zoltan Pozsar explains it:
"From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities)".
|Russia's Commodity Exports. Source: Bloomberg|
Russia is a vast country. Russian landmass extends from Europe to East Asia. It is one of the largest suppliers of oil, gas, metals and wheat. Russia is also a major exporter of fertilizer. China will likely take advantage of the western sanctions to buy up Russian commodities at lower prices.
Pozsar argues that while Western central banks cannot close the gap between Russian and non-Russian commodity prices as sanctions lead them in opposite directions, the People’s Bank of China can “as it banks for a sovereign who can dance to its own tune.”
“If you believe that the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you could also believe in unicorns,” Pozsar wrote.
|Pre-Ukraine War Inflation in US. Source: Wall Street Journal|
Bretton Woods III:
Pozsar argues that the Bretton Woods II collapsed when the G7 countries seized Russia’s foreign exchange (FX) reserves, leading to a rise of outside money – reserves kept as commodities – over inside money – reserves kept as liabilities of global financial institutions.
|East vs West Economic Output. Source: Wall Street Journal|
"We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East (Chinese Yuan) that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West,” Zoltan wrote.