1984 But on Steroids?
Fighting within Ukraine, a soaring inflation rate, increased food and commodity costs and a rapidly depreciating currency. It all sounds a little too apocalyptic for our world. However, this is precisely the predicament for the Russian Government, with a currency drop so severe, if not managed correctly, would harken Russia back to the early 1990s, where 224% monthly inflation became the status quo. The government has responded with a concept unheard of, in recent times “Pay for Russian Gas, in Russian Currency”.
A History Lesson
The Soviet Union (USSR), the precursor to the modern Russian Federation, was no stranger to using, so-called “alternative methods of payment”, for goods and services not easily produced within the USSR. The famous deal in 1989 “Destroyers for Pepsi”, saw the USSR trade a frigate, destroyer and seventeen submarines for the continued production of Pepsi within the USSR, aiming to be the benchmark for the possibility of increasing cooperation with western firms. However by the end of 1991, the party had come to an abrupt halt, now the nation was faced with soaring inflation, a rapidly worsening housing crisis and a GDP that within one year, had collapsed by 50%. This rapidly worsening situation gave rise to the current President of the Russian Federation, Vladimir Putin.
(A Collection of Submarines – Currently owned by PepsiCo. waiting to be scrapped)
The Modern Russian State
The Russian Federation since the 2000s has been able to effectively grow its economy by leveraging its vast amount of natural resources, primarily Oil and Gas. Europe imports 40% of its natural gas and 33% of its oil from the Russian Federation, creating a heavy dependence on Russia, to maintain the high living standards to which Europeans have grown accustomed. However, following the invasion of Ukraine, and the subsequent capital flight by corporations ranging from BP to Mcdonald’s and Forever21, the Russian ruble had collapsed from 1USD equalling 75 rubles to 1 USD equalling 133 Rubles. The Russian Government has therefore instituted a policy, essentially forcing “Unfriendly Nations” to purchase Russian oil and gas in Russian rubles. “Unfriendly Nations”, within this context, primarily include nations that have sanctioned or condemned Russia’s invasion of Ukraine, such as EU member states, Canada, Japan, Singapore and South Korea.
Why Russian Rubles for Russian Gas
The policy is quite simply a reversal of the “Destroyers for Pepsi”, within this case, European energy companies would pay GazpromBank, an intermediary, with their currencies whether they use USD or Euros. In turn, the intermediary would use these foreign reserves to purchase Russian rubles from banks within the country, therefore appreciating the currency, as demand is essentially artificially driven up by the European Union. The increased demand for rubles, would in turn slow the depreciation, alternatively, appreciate the currency, in turn allowing ordinary Russian consumers to continue to live their lives.
(President of the European Union Commission Ursula von der Leyen and President of Russia Vladimir Putin)
Even if the European Union doesn’t agree with these predatory conditions, within the short term it has no other option. Germany and Austria have already enacted gas-rationing plans, coupled with rising inflation an energy crisis could be the “final straw to break the camel’s back”. This policy acts as both an economic and political victory for both sides in this war. Politically, Putin can highlight to the Russian people, how he has forced the European Union to follow his demands, possibly even increasing his popularity among the people. Economically, the demand for the ruble will allow Russia to increase its foreign reserves, which is critical for an economy where $300 Billion USD is currently frozen by EU and US sanctions. This policy, in turn, allows Russia to continue making bond repayments, avoiding a default.
Oil and Gas are crucial commodities, injecting over $732 Million USD into the Russian Economy per day, primarily from the EU, with an annualised figure of $178 Billion USD, in 2021, therefore, a significant win for Putin and the Russian Government. The EU is politically saved, being able to continue payments in Euros and USD, allowing it to avoid directly supporting the Russian Economy, while economically, allowing it to avoid a crisis spurred on by rising living costs.
This policy, just like the “Destroyers for Pepsi”, may simply be the start of a new negotiation. This deal between Russia and the European Union may dictate how future agreements are decided, yet this also continually proves one significant point. Politics doesn’t stop with human tragedy, on the contrary, it is expedited especially when one’s own population begins to suffer.
The Russo-Indian Pact – “Rupees for Rubles”
India and Russia have continually enjoyed higher levels of cooperation, within key industries, namely defence and commodities. 86% of weaponry, deployed by the Indian Armed Forces, is of Russian/Soviet origin, therefore making high levels of cooperation beneficial for both countries. India continually imports over $1 Billion USD, worth of Russian oil, therefore not making it a crucial market for Russian exporters. However, as the Indian economy continually grows and modernises, rising energy demands may lead to an expansion in demand.
Rupees for Rubles, presents a new step forward for Russo-Indian Cooperation, aiming to strengthen both economies while avoiding Western-based banking systems. Russia has reportedly offered an enticing deal, increased military cooperation with India, and cheaper oil, to some reports a drop by $35 USD per barrel. With current rising energy costs, this policy would help lower overall inflation pressures facing Indian consumers, affording them greater disposable income, and providing a political win to Indias’ ruling party the BJP.
(Prime Minister of India Narendra Modi with President of Russia Vladimir Putin)
This policy aims to remove the dominance of the “SWIFT” Payment System. “SWIFT” acts as a system that allows banks and financial institutions to transfer funds between each other; however being a US system, it is also by extension a political tool. “SWIFT” has been disabled for over 7 Russian banks, notably allowing GazpromBank to continue operating. However, allowing Indian banks to pay for goods in Russian rubles, is little more than a bandaid for the gaping wound sanctions have caused. In 2021, Russia exported $9 Billion USD worth of goods to India, while importing goods, worth no more than $3 Billion USD, compared to the yearly revenue from the European Union, which as mentioned previously, sits at around $178 Billion USD, is “peanuts”. Russia and India, have historically attempted such a system in the late 20th Century under the USSR. However, following the collapse of the USSR, India became embroiled in a Balance of Payments Crisis. Essentially, India in 1991 was left with a “Twin Deficit”, driven by high levels of importation, coupled with high budget deficits, in turn leaving Indian Foreign Exchange Reserves, with little as three weeks worth of foreign currency. Therefore, a European Union structured deal with the Russian government, may not be possible for India, and will surely not create the same desired effects.
What are you doing, Saudi Arabia?
This continual abandonment of Western-based currencies has not been limited to Russia, India and China, but is even being explored by key Middle Eastern US allies such as the Kingdom of Saudi Arabia. Saudi Arabia has been in discussion with China over oil pricing in Yuan, for 6 Years, however recently this has been expedited, with reports highlighting that Saudi Arabia, may price 25% of oil production in the Yuan, and it’s not a bad option for the nation. Saudi Arabia has a $26 Billion USD trade surplus with China, and with this pricing switch, the nation could generate 25% of its foreign currency reserves, which currently sit at $461 Billion USD in 5 Years. China purchases up to 20% of Saudi Arabia’s yearly oil production, and purchases 3 times more than the United States, a close ally.
(Crown Prince Mohammed bin Salman Al Saud with President Xi Jinping)
Though not a complete abandonment of a Western-dominated system, Saudi Arabia is seeking to politically and economically diversify its interests, making China a clear-cut ally. Both nations have repressive policies for minorities, have atrocious human rights records, and share similar values. China and Saudi Arabia, have continually demonstrated stronger diplomatic relations, with the Saudi-Arabians refusing to condemn the Chinese for their treatment of Uighur Muslims, with Crown Prince Bin Salman, even defending the use of “Re-Education Camps” for Muslims.
Politics and economics, as shown previously, are only expedited by human tragedy, especially when a nation seeks to enrich itself on the back of these colossal international failings. We stand at a turning point where Russia, China, India and Saudi Arabia are slowly beginning to turn their back on the idea of a unipolar world. Instead, these nations seek to achieve true independence within the global system, one policy at a time.