Dimitry Orlov: Sanctionistas go shopping for rubles

 As the situation stands today:

1. Russia has announced that since the US and the EU have defaulted on their US dollar and euro obligations, respectively, by freezing Russian reserves, Russia will now only sell natural gas for rubles.

2. There is no other source of sufficient quantities of natural gas available; thus, the EU has no choice but to continue importing natural gas from Russia.

3. The EU has to keep the gas flowing or it will be unable to make it through next winter without shutting down all industrial production or letting the housing stock go unheated.

How will the EU get the required quantities of rubles? Good question! The following comprehensive analysis (credit: "adventurist") answers it pretty well.

0. Printer go brrr. Print euros and use them to buy rubles from the Russian central bank. That's not going to work because as far as the Russian central bank is concerned the euro has been defaulted on and its value as a reserve currency is effectively zero.

What's left are methods related to the physical economy rather than the mental economy of phantom digits inside computers controlled by bankers.

1. Trade. Countries of the EU export product to Russia and earn rubles. The problem is that the EU ran a trade deficit with Russia even during the best of times (for it) and it will get much worse now that the flow of goods from the EU to Russia has been curtailed because of sanctions. Also, a lot of Western companies are voluntarily curtailing their exports to Russia because of fear or misplaced feelings of Western solidarity. Lastly, Russia itself is working on freeing itself of strategically important Western imports because it doesn't want to depend on unreliable suppliers. Thus we have the situation that the EU needs 20 trillion ₽ per year to survive but can only export goods worth 2 trillion ₽.

2. Use intermediaries. The next scheme to try is to buy roubles indirectly; for example, by first buying rupees or yuan, then exchanging them for rubles. Here the problem is that neither China nor India are in the market to buy such vast quantities of euros, given that the good reputation of the euro as a reserve currency has been badly damaged by anti-Russian sanctions. Thus, it is unlikely that the required quantities of rubles could be procured in this manner, and whatever quantities could be procured would exert a strong downward force on the price of the euro. Fire sales require steep discounts, you know! And then there are the commissions: if you pay 2% here, 3% there—pretty soon you find yourself shirtless.

3. Liquidation. The EU sells all of its Russian assets: stocks, government and commercial bonds, strategic shares in companies, its own factories and facilities, real estate. These are bought by Russian entities for rubles. This is a fairly realistic way to raise rubles, although the prices will be quite depressed by the sheer volume of sales. Furthermore, now that the Russian government has blocked all sales of assets by non-residents, it is unclear how such transactions would be allowed to proceed.

4. Pawn the gold. This is very simple from a technical perspective but politically impossible. This is the same stunt that the US pulled after World War II: the Europeans parked their gold in the US and in return they got credit to buy what they needed to rebuild. Later they were allowed to get their gold back—or not, because the US has "leased" it all to China in the meantime. But that's another story. In any case, even if the EU is willing to work this way with Russia, its gold reserves won't be enough to pay for even single a year's worth of Russian gas.

5. Colonization. This is a perfectly workable scheme that requires the EU to capitulate to Russia. It would then transfer to Russia controlling shares of its strategic industries and facilities: ports, airports, pipelines, factories and plants, gas stations, etc.—whatever Russia happens to be interested in. In this case, and in this case only, it would be possible to raise almost arbitrary quantities of rubles because the result would be a dramatic expansion in the size of the Russian economy. But then the EU would effectively pass under Russian control—first economic, later political—and some Europeans may find this objectionable.

There are various other clever schemes, but they wouldn't add up to much. The basic take-home from all this is that the Europeans will be forced to struggle mightily to raise the requisite number of rubles to keep their jobs, their houses heated and the lights on. There is no doubt that this can be done; the problem is, time is short. Over the next month or so the European leadership has to run the gamut of the five stages of grief—all the way to acceptance—on the double, because there simply isn't time for any of their denial, anger, bargaining or depression.

There is something that European leaders can do to make this process go more smoothly: stop listening to the Americans and start talking to the Russians.