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The Dollar’s Unlikely Competitor: The Ruble

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

Imagine you are a Russian living in September 1998. It was not long ago that your country was a great superpower and the only nation since World War II that challenged the USA’s global dominance. After 70 years of failed dictatorships and economic mismanagement, your great empire collapsed. Living under the Soviet Union may have been tough, but the transition from a command economy to a mixed economy has made life even harder. Privatization has been a chaotic process that inevitably lead to a handful of new businessmen that took advantage of the system in order to amass massive fortunes. These men are known today as the oligarchs. It is now 1998, 7 years after the collapse of the USSR and you as an ordinary Russian find yourself in a much worse place than before. GDP has since then been cut in half; you now have half the wealth you once had. On top of that, the Ruble recently lost half its value and the nation’s debt has skyrocket. Your “liberal democracy” is run by a corrupt drunkard. A people who once despised their former government are now starting to become nostalistic of the days of the Soviet Union. This was apparent when in 1996 an outspoken communist nearly won the presidential election. The situation was so bad that many even doubted Russia would be able to survive much longer as a unified state.

One year later, the situation would change drastically. Russia launched an offensive against the breakaway region Chechnya. The offensive was believed to have been orchestrated by the mysterious Prime Minister, Vladimir Putin. Russia, to the surprise of the west, quickly won the civil war and installed a puppet regional government. Soon after the end of the war, Yeltsin would resign. The once irrelevant Prime Minister, Vladimir Putin, won the 2000 election by a landslide that prevented a communist victory.

Fast forward two decades; same president, different Russia. A once divided, debt-ridden, fiscally and monetarily unstable nation is now one of the most fiscally and monetarily stable nation in the world. The current growth rate is in the double digits and GDP is 10x larger than it was in 1998. Anyone living in 1998 would be shocked if they knew how much Russia would change. Would a Russian in 2020 also be shocked to find out how different Russia will be in 2040?

Western pundits to this day still ignore Russia’s recovery as if it never happened. It’s a shame, because a lot can be learned from the recovery because America today shares many of the conditions 1998 Russia faced. That however, is a topic that would take too long to cover in one article. What this article will cover is how the western perception of Russia is very different from the reality of the situation.

Russia is perceived by the west as a poor, backwards, authoritarian regime led by a corrupt soviet holdover who has no desire to reform. It’s economy relies on non-renewable resources, which we are constantly being told will soon become obsolete. Its population also is set to decline as its pension system is becoming strained by an aging population that is getting more difficult to take care of.

While on the surface this perception may seem true, let’s go over some other facts. While it may be true the Russian population is set to decline, it has yet to actually do so. In fact, thanks to economic recovery and pro-family policies, the birth rate has risen to 1.9 children per women from its previous low of 1.2 and continues to rise, putting in doubt Russia’s predicted demographic decline. While it may be true nonrenewable resources are declining as a part of their share of the market, that doesn’t account for the fact energy consumption has also increases. Natural gas consumption has risen significantly and this trend shows no signs of ending in the long term. As millions across the world are being lifted out of poverty, Russia’s known natural gas reserves (which are the largest in the world) will continue to keep stimulating its economy for a long time. In addiction, non-energy sectors may indeed begin to make up a much larger portion of the economy as they grew by a astonishing 19% last year.

Russia is undoubtedly in one of the most stable positions in its recent history. Its national debt compared to other nations is extremely low, savings are through the roof, and its gold reserves are the 5th largest in the world. Western sanctions, although being devastating to the Russian economy in the short term, have ironically put Russia in a more stable position by breaking breaking many economic links it once had to the United States. When the next global recession is triggered by a crisis in the US economy, the effect it will have on Russia will be much less than it did in 2008.

Russia is currently at war. The outcome of this war will most likely decide the fate of the United States. It is by the far the most important war in our lifetimes, yet you may have never heard its name. This war is known as the Currency War.

Since World War II, the dollar has remained the world’s reserve currency. Because the US has abused that position, the fall of the dollar would undoubtedly lead to the worst financial crisis ever seen in the United States and possibly even the world. Other governments have attempted to challenge this, yet despite the fragility of the US economy, the amount of debt owed by both corporations and government, and the suicidal actions of the federal reserve, investors still overwhelmingly choose the dollar over any other currency. Why is that?

Firstly, Saudi Arabia, in exchange for military resources, agreed to only sell oil in the dollar after the dollar nearly collapsed in 1979. But more importantly, the United States isn’t the only country that has been taking risking monetary policies. Japan, Britain, China, (and more broadly) the EU are also doing the same. Are the Yen, Euro, and Pound really a better option than the dollar? Most investors would say no.

The same cannot be said for Russia, as it is one of the few countries that has maintained a stable monetary policy. The Russian Ruble has more potential than many would realize; its market price is believed to be half of its real value. Although the Ruble currently doesn’t even account for 1% of total world reserves, that soon could change as Russia’s international reputation continues to improve and its ties to major world powers such as India and China continue to deepen. In addiction, Russia has particular leverage when it comes to Saudi Arabia. As the US recently started to scale back on its military commitments to the Saudis, the Saudis have expressed their desire to turn to Russia for defense. If a deal between the Russians and the Saudis does indeed happen, it may involve the Saudis using the Ruble for certain transactions instead of just the dollar. If this scenario were to play out, it would lead to a currency war between the dollar and the Ruble. With the US giving no signs it will return to fiscal responsibility, along with major powers expressing their distain for the current dollar system, the Ruble has the opportunity to suddenly rise. The Ruble may just be the currency that is needed to destroy the dollar.

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The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

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Marco
October 6, 2021

But how do you buy Rubles?

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