By Rod Kapunan
The decision by Russia’s President Vladimir Putin to demand payment in Russian ruble for the purchase of natural gas has raised a milestone in the international currency system.
The financial turmoil raised the specter to threaten the dominance of the US dollar since the end of World War II. The Bretton Woods Agreement signed in 1946 adopted a financial doctrine to make the US dollar the international reserve currency pegged at $32 dollar per ounce of gold.
Russia’s decision to invade Ukraine prompted the US to ban the payment in ruble. This caused sharp retaliation with Russia demanding that importation of gas be paid in rubles.
The members of the European Union rejected the condition insisting that natural gas acquisition is payable in Euros or in US dollars as per contract, forgetting that the sanction was initiated by the US and its allies.
The Western allies forgot that they violated the contract by imposing economic limitations. Russia did not violate the agreement as a vendor. Rather, the violation stemmed from the US sanction and not on the currency paid by the importer. Neither can the US garnish its bonds much that neither of them was directly involved in the oil transaction. In Latin maxim, “no cause of action arises out of an illicit bargain” or ex parte illicito non oritur actio.
Moreover, the US forgot that any commodity of value can be the subject of exchange. Before, oil-exporting countries in the Middle East accepted the US dollar in exchange for oil when the US dollar was restored as the world’s international currency reserve after the Arab-Israeli war until the turbulence in the price of subsidy.
The moral lesson that any commodity of value can be used as payment to pay imports and debts.
Gold as medium exchange has historically been used and is pegged based on the value of the US dollar. It was only recently that the US fixed the value of the US dollar to the value of gold as agreed in the Bretton Woods Agreement.
The first stage of this financial imperialism was to measure the weight of gold priced at $32 per ounce. This marked the first international currency reserve to be adopted. It was anchored on the value of the precious metal, specifically gold. On that basis, the US dollar was used as the international currency reserve since it commanded the biggest exports in international trade.
Another, the valuation of the dollar need not necessarily be based on metal. It can be based on any commodity that may command value and necessity such as oil.
During the oil crisis in 1978, the use of Petro dollar facilitated international oil transaction. As soon as the “oil shock” died down, countries reverted back to the dollar based on the value of gold.
The US involvement in the Vietnam War in 1973 forced President Nixon to detach the value of the dollar from gold. The economists called this the decoupling of the dollar from the gold standard.
Instead of measuring the value of the dollar to gold, the US federal reserve bank measured the value of the dollar to its GDP considering that the US then commands the highest per capita income. Almost 75 of the world’s industrial output came from the US.
This effectively threatened Japan’s financial dominance.
The desire to stultify Japan’s financial dominance gave the US the greatest leeway to manipulate its value. It was the US that virtually pegged the value of currencies of other nations through devaluation and revaluation.
The immediate effect is that countries had to abolish their usury laws which restrict interest rate to just 6 percent per annum, or to increase or decrease the country’s import or export to other countries.
Countries had to adjust their interest rate because the currency was measured on the current valuation of their currency. They also devised measures as currency exchange rate system, meaning that loans or debts will be paid on the current value of the dollar.
Because of the seemingly uncontrollable increase/inflation in the value of the US dollar, it imposed various forms of service charges which normally were embedded in the cost of the item.
This resulted in the soaring prices of goods. Commodities that are dependent on the system of law of supply and demand, like seasonal fruits, increase in prices because inflation surpassed the value in their production cost, notwithstanding that the valuation of the dollar resulted in the unabated increase in minimum wage and cost of services.
Americans and its economic colonies in Europe thought that the increases in the prices of goods would not result in the increases in the cost of minimum wage and services. As the corresponding increase in the value of US products, they realized that slowly their whole economy was diminishing rapidly.
The immediate impact in the decoupling of the dollar from the gold standard coincided with China’s economic opening and adoption of globalism and multilateralism.
The practice was logical because it resulted in lowering of production cost and Americans thought they could reinvigorate their economy which was already reeling from trade deficit and hemorrhagic external debt. Outsourcing was thought to work to their advantage because that would tremendously increase their consumption of US products but made in China.
Instead, they only saw the deleterious effect in the devaluation and inflation in the value of their currency not knowing that sooner or later, this would have a devastating effect on their own economy.
The US imported almost everything. It was most hilarious because Americans were enjoying US-branded products but made in China much cheaper than those sold in the US. They never conceived that the price of wage and cost for services would correspondingly increase.
The ugly part of this prosaic system of economics is this dangerously sliding down to affect its own economy.
This explains why the decision of Putin to peg the value of the Russian ruble to the value of gold helped them recover in less than two weeks after Putin retaliated the economic sanctions.
First, the decision by Putin to peg the value of its currency to the value of gold affirmed that the system still worked in Russia’s favor.
Second, it discovered that the US intends to make money from its oil embargo.
Third, the US is now scouting for oil from the rogue states of Venezuela, Iran, Saudi Arabia and Qatar. Many suspect US oil reserves are intended to secure at least 25 to 30 percent discount from exporting countries and to resell them with a sure markup.
Fourth, Russia realized that the US economic sanction will not last.
The US dollar can never hold on to its old price because the US economy is based on the system of continuing inflation, believing that as the value of the dollar increases against other currencies, they will earn more from this system.
Some members of the EU are now starting to deflect from this system of currency agreement for their own survival. The West has not much choice because their currency continues to depreciate, thus losing much of their customers.
Once the value of the ruble exceeds that of the US dollar, that will put an end to the US economic sanction.
This will also disrupt the supply chain which China will not like.
As of 2019, China has about $3.2 trillion in foreign reserve currency allocated to it, followed by Japan, $1.3 trillion: Switzerland, $855 billion: Russian Federation, $555 billion: US, $517: and Saudi Arabia: $515 billion. The entire Euro Area, as designated by the World Bank, made up of 19 countries, holds $914 billion. For instance, in 2008, trade with the U.S. accounted for only 20% of international transactions in Asian countries.
Remember that China was only allowed to enter the so-called basket of international reserve currency in 2008. China’s renminbi was allocated 221.48B USD, US allocated has an amount of 6,794.91B in USD, EU’s euros in 2,197.30B in USD, and Japan’s yen in 624.97B in USD, and British pound in 486.08B USD.
One could see the colossal weight of Chinese exports to wreak havoc to world trade. China only represents about 3 percent of the allocated reserve currency. Once China devalues its currency to affect its export, that could easily put into parity the value of the US dollar.