Putin's secret weapon - how Russia is destroying the West's financial system

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Investing.com - In the wake of Russia's war against Ukraine, the West imposed a myriad of sanctions on Moscow aimed at bringing Russian President Vladimir Putin to the negotiating table. But instead of the desired peace talks, only the source of cheap Russian energy dried up, which is why Europeans were quickly overcome with the feeling that they themselves would suffer much more from the sanctions.

The sharp rise in energy and food prices left hardly anyone unscathed, which is why politicians took a wide variety of measures to counteract this. Nevertheless, criticism of the sanctions has not died down to this day.

The critics overlook the fact that the air in Russia is already burning. Because while people in Europe might freeze a little next winter, the Russian population is facing a much harsher fate. But that does not mean that the criticism of the sanctions is unjustified, because Putin has only one way out now, to destroy the global fiat money system with a strategic nuclear bomb, as Alasdair Macleod described it.

Together with the Saudis, the Russians are driving up oil and diesel prices. Just in time for the coming winter, they are firing the next salvo in the energy war. Prices for heating oil have risen by almost 50 per cent in dollar terms in the last quarter.

But this hurts Putin more than the Europeans. Because while people in Europe are freezing because of the high prices, people in Russia are freezing to death. They can no longer afford heating because of the constant fall in the value of the rouble, says Macleod.

Between September last year and the end of July, the price of oil in dollars rose by 4 per cent, from 78.72 to 81.72 dollars. At the same time, the price of oil in Russia rose by 59 per cent, from 4707 to 7500 roubles. Putin's energy war, in response to Western sanctions, thus has a boomerang effect, hitting both the rouble and Russia's own population.

This negative effect will inevitably lead to a situation where, if Russia takes full control of Ukraine, Putin will not go down in the history books as Peter the Great, but as the destroyer of the rouble.

The Kremlin is aware of this problem and that is why a new gold-backed currency for the BRICS was brought into play. However, the whole thing failed because of both China and India, Macleod explains.

But this does not mean that the topic is off the table for Russia, quite the opposite. Completely independent of the BRICS, Russia can introduce a gold standard for the rouble, which would put the other member states in a bind.

Russia is in the comfortable position of having a budget deficit of only 5 per cent of GDP this year, despite the high military spending, and the national debt itself is manageable at only 20 per cent of GDP.

The gold standard would ensure that the purchasing power of circulating money is subject to only minor fluctuations. What this means in reality can be seen in the price of oil.

Whereas in 1991 one still paid 20 dollars per barrel, it is currently just under 100 dollars. If you paid for your barrel of oil in gold at that time, you only needed 2.03 grammes, whereas today it is just 1.41 grammes.

This is precisely where Russia plans to start, because it gives Putin the greatest possible leverage.

Savers would get an incentive to accumulate funds in their bank accounts and companies would get planning security for the profitability of their investments. The economy would pick up speed at the flat 13 per cent income tax and 20 per cent corporate tax, while quickly becoming an economic counterweight to China.

This is the story Putin wants to enshrine about himself in the history books. It would also be mentioned in the same breath as the demise of the Western fiat money system.

Because in the hunt for yield, no one would be interested in holding dollars or euros any more. Instead, fiat currencies would be sold to acquire roubles and profit from the interest rates of the Russian central bank. The owners of gold would also be very interested in depositing their holdings in Russia because they would get interest on their gold with gold.

There is only one snag in all this, which could cause the scheme to fail - trust.

As Macleod writes, it must not be the central bank itself that is entrusted with issuing and redeeming the rouble banknotes. A new institution to be founded is needed for this. In addition, the gold reserves must also be stored here and the interest rates determined. For the history of gold standards has shown that the market sets the interest rates and not monetary policy.

With official gold reserves of 2031 tonnes and 7000-9000 tonnes in two state funds, Russia has a good starting point to counter the initial doubts about the gold standard.

Commercial banks connected to the Russian payment system SPFS can open an account with the issuing authority by buying gold on the international markets at an interest rate of less than 2 per cent, as is customary for gold.

With a base rate of 12 per cent, the annual return for gold buyers would be 10 per cent in gold. This way, gold stocks rise quickly and confidence is established, Macleod explains.

Only the West will remain closed to the gold rouble because of sanctions, while the Saudis and Chinese are likely to follow suit quite quickly.

It would become very unattractive for Russia to accept payment for commodity deliveries in FIAT currencies. To enforce new payment terms, Putin has a trump card up his sleeve, because Russia will take over the BRICS chairmanship from January.

As a consequence of this change, the inflation of energy prices in fiat currencies would take the West's breath away - low inflation, low interest rates and stability will then be just water under the bridge.

Putin will have no choice, because Moscow must stabilise the rouble, as the Russian president demanded only yesterday. Otherwise he will incur the displeasure of the population and will not go down in history as hoped. The introduction of a gold standard is feasible and would be a success all round, while the fiat currencies of the West implode, says Macleod.

Translated from German using DeepL.