Dimitry Orlov: Where can the West find some rubles?

Putin ordered Russia's internal foreign exchange market to be prepared for the transition to settling export deliveries, for now specifically natural gas, in rubles. This is becoming a pressing issue because banks in "unfriendly countries" (a technical term that includes the EU and most English-speaking coutntries) are willfully and wantonly delaying payments for Russian energy. Thus, deliveries are now taking place on credit—ruble-based credit! Meanwhile, the Russian central bank's prime rate is 17%—down from 20%, but still! Sounds like somebody not very smart is working hard to get their energy prices to go up. Meanwhile, payments received for oil and gas exports have been halved, making it likely that the exports themselves (to "unfriendly countries") will be halved as well. At this point, some historians might take some dusty old books off the selves and opine that this sort of insane trade policy is what caused the Great Depression. I would beg to differ and call it Commercial Collapse, which follows Financial Collapse with its loss of access to credit caused by excessive counterparty risk.

Putin would like this problem fixed. He wants Europe on life support because Russia doesn't need a huge, festering corpse on its western border. The problem with executing on Putin's order lies in the fact that Russian banks will act as currency agents in the settlement of the "raw materials for rubles" scheme, and conversion operations will take place through the currency market of the Moscow Exchange within the Russian financial system, and within this system there is a dire shortage of foreign currency buyers. Putin is not a magician, and he cannot ex nihilo generate an army of zombies who will want to borrow rubles and buy dollars and euros with them that there is no way to invest profitably to pay off interest on the ruble-denominated debt; not with double-digit eurozone and dollarzone inflation; not with at least a 17% interest rate on the ruble. Except one; I'll get to it later.

If not zombies, then who will expand their dollar and euro positions on such a gigantic scale?

Russian Importers? No, imports stand at half of exports, plus there are problems with logistics and contracts due to sanctions.

The Russian population? Definitely not! The fashion of keeping a hoard of $100 bills under the mattress has long passed, and now the fashion for keeping dollar-denominated accounts in Russian banks has passed too. The entire money paradigm has changed, and there is not enough loose foreign currency within the Russian population to absorb export flows.

Russian businesses? Of these, only the exporters have significant resources, but having them accept dollars or euros gets them back to square one and simply enlarges their problem of having to sell 80% of those dollars and euros for rubles. And the problem is even worse for Russian exporters, who now essentially have to sell 100% of their dollar and euro revenue for rubles.

Russian banks? That's a possibility this month but not in the coming months. Banks serve the interests of their clients, and their clients, having been cut off from the Western financial system, no longer need dollars or euros. And since they themselves have been cut off from the Western financial system, they definitely do not need these currencies either. They are in the mode of closing out their dollar and euro positions.

Oh, and, last but not least, foreigners are denied access to the Russian foreign exchange market. That makes it really simple, doesn't it?

And this leaves just the Russian central bank and the Russian government which owns and operates it. While previously these were happy to accumulate dollar and euro reserves, the definition of reserves has since been changed to exclude these two. If any foreign currency reserve accumulation were to take place now, it will be of the yuan, and so all of these excess rubles will sail right past the grasping hands of energy buyers from "unfriendly nations" and right into the friendly hands of Chinese exporters.

You might think that the Chinese, being so obliging, may be willing to accept dollars and euros in exchange of their exports to Russia, opening up a possibility of actually earning rubles using these two currencies. Alas, no; China and Russia have concluded agreements to shift their trade to rubles and yuan, specifically excluding dollars.

I am afraid I don't have any brilliant ideas to propose on how to solve this problem, as ordered by Putin. There is one idea, though. It is possible to get very cheap ruble credit for the purpose of import replacement. The plan then is to borrow rubles, use them to buy dollars or euros, and then use these dollars or euros to buy, crate up, and ship to Russia plant and equipment in the West which can make products for which there is demand in Russia and in Russia-friendly countries.

Of course, Western governments will most likely work assiduously to block this plan. They don't have that many feet left to shoot themselves in, but they will surely keep trying. And the Russia will indeed have a huge, festering corpse left on its western borders. I do hope that somebody figures out a way to carry out Putin's order, but I have no idea what that would be.

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