Will Russia Sanctions Accelerate Inflation, Devalue US Dollar and Strengthen Chinese Yuan?

Russia is a commodities superpower. The nation's Eurasian landmass is rich in all kinds of natural resources from food to fuel to metals. To punish Moscow for invading Ukraine, the US and G-7 nations have imposed sanctions on Russia. These sanctions have effectively removed Russian commodities from the global supply chain, triggering double digit price increases for food, fuels and metals. Will the G-7 actions leave the US dollar much weaker? Will the Chinese currency, backed by commodities, gain strength at the expense of the US dollar and Euro? Will the era of commodity-backed money return? In a note to clients, Credit Suisse investment strategist Zoltan Pozsar has answered some of these questions. He says "this (Russia) crisis is not anything we have seen since President Nixon took the U.S. dollar off gold in 1971". "After this war is over, "money" will never be the same again.....and bitcoin (if it still exists then) will probably benefit from all this,” he adds. 

Map of "International Community" Sanctioning Russia

Post World War II History:

The current global financial system was created in Bretton Woods located in the US State of New Hampshire.  Over 700 delegates representing 44 countries met in Bretton Woods in July 1944. The Bretton Woods System, now referred to as Bretton Woods I, required a currency peg to the U.S. dollar which was in turn pegged to the price of gold. This system collapsed in the 1970s but created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank. Zoltan Pozsar believes it is now time for Bretton Woods III. What is Bretton Woods III? Here's how Zoltan Pozsar explains it:

"From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities)". 

Russia's Commodity Exports. Source: Bloomberg

Commodity Superpower: 

Russia is a vast country. Russian landmass extends from Europe to East Asia. It is one of the largest suppliers of oil, gas, metals and wheat. Russia is also a major exporter of fertilizer. China will likely take advantage of the western sanctions to buy up Russian commodities at lower prices. 

Pozsar argues that while Western central banks cannot close the gap between Russian and non-Russian commodity prices as sanctions lead them in opposite directions, the People’s Bank of China can “as it banks for a sovereign who can dance to its own tune.”

“If you believe that the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you could also believe in unicorns,” Pozsar wrote.

Pre-Ukraine War Inflation in US. Source: Wall Street Journal

Bretton Woods III:

Pozsar argues that the Bretton Woods II collapsed when the G7 countries seized Russia’s foreign exchange (FX) reserves, leading to a rise of outside money – reserves kept as commodities – over inside money – reserves kept as liabilities of global financial institutions. 

East vs West Economic Output. Source: Wall Street Journal

"We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East (Chinese Yuan) that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West,” Zoltan wrote. 

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  • Riaz Haq

    A new Huawei phone has defeated US chip sanctions against China


    https://qz.com/a-new-huawei-phone-has-defeated-us-chip-sanctions-ag...

    The new Kirin 9000s chip in Huawei’s latest phone uses an advanced 7-nanometer processor fabricated in China by the country’s top chipmaker, Semiconductor Manufacturing International Corp. (SMIC), according to a teardown of the phone that TechInsights conducted for Bloomberg.

    Huawei’s latest smartphone, the Mate 60 Pro, offers proof that China’s homegrown semiconductor industry is advancing despite the US ban on chips and chipmaking technology.


    The new Kirin 9000s chip in Huawei’s latest phone uses an advanced 7-nanometer processor fabricated in China by the country’s top chipmaker, Semiconductor Manufacturing International Corp. (SMIC), according to a teardown of the phone that TechInsightsconducted for Bloomberg

    A brief recent timeline of US chip sanctions against China
    August 2022: The US Congress passes the CHIPS and Science Act, a law that approves subsidies and tax breaks to help jumpstart the production of advanced semiconductors on American soil.



    September 2022: The Biden administration bans federally funded US tech firms from building advanced facilities in China for a decade.

    October 2022: The US commerce department bars companies from supplying advanced chips and chipmaking equipment to China, calling it an effort to curb China’s ability to produce cutting-edge chips for weapons and other defense technology, rather than a bid to cripple the country’s consumer electronics industry.



    November 2022: The US bans the approval of communications equipment from Chinese companies like Huawei Technologies and ZTE, claiming that they pose “an unacceptable risk” to the country’s national security.

    May 2023: Beijing bans its “operators of critical information infrastructure” from doing business with Micron Tech, an Idaho-based chipmaker.



    “In the AI garden, the seeds are the AI software frameworks—which China already has access to. The plants in the garden are the AI models in use, which again are already available to Chinese AI companies. Nvidia provides the best shovels and pruning shears to tend the garden, but not the only means to tend it. So it doesn’t make sense to try to build a high wall around it...[T]o over-regulate these chips creates the risk that the US could fumble away its technology leadership. Would you rather have Chinese AI customers continue to fuel Nvidia’s growth and success? Or would you rather they spend their yuan to fuel the growth and success of Chinese suppliers?”

    —Patrick Moorhead, a tech analyst, writing in Forbes in July 2023

    One big number: China’s hoard of Nvidia chips
    $5 billion: The value of orders that China’s tech giants have placed with Nvidia for its A800 and A100 chips, to be delivered this year, according to an August report by the Financial Times. The biggest internet giants—Baidu, ByteDance, Tencent, and Alibaba—have placed orders totalling $1 billion to buy around 100,000 A800 processors. Given that the US is mulling new export controls, Chinese companies are rushing to hoard the best chips on the market to train their AI models and run their data centers.

  • Riaz Haq

    Arnaud Bertrand
    @RnaudBertrand
    SCMP editorial: https://scmp.com/comment/opinion/article/3242880/dollar-still-king-...

    "The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap...

    In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.

    In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift."


    https://x.com/RnaudBertrand/status/1728923824996139481?s=20

    ---------------------

    The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap worth a maximum of 50 billion yuan (HK$55 billion) over the next three years.

    In immediate terms, the pact will foster bilateral commerce denominated in both the yuan and the riyal. In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.

    In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift. It has been a very long time coming.

    Almost a year ago, President Xi Jinping made a historic visit to Riyadh, followed by Hong Kong Chief Executive John Lee Ka-chiu in February. A flurry of deals followed.


    The Shanghai Stock Exchange and its Saudi counterpart have started collaboration on cross-listings, including exchange-traded funds (ETFs), financial technology (fintech), environmental, social and governance (ESG) and data exchange.

    China, Saudi Arabia central banks sign currency swap accord to foster trade
    21 Nov 2023
    The People’s Bank of China (PBOC) building in Beijing on Tuesday, April 18, 2023. Photo: Bloomberg
    The Hong Kong Monetary Authority, the city’s de facto central bank, and the Saudi Central Bank have enhanced ties covering the latest technologies in regulatory supervision and monitoring, and in financial fields such as tokenisation and new payment systems.

    However, the latest currency swap pact will be the most important. It means trade can be conducted in local currencies, instead of defaulting to the US dollar. This may be seen as a challenge to US dollar dominance. Perhaps in the longer term, it is. But there is a good economic reason.

    The current US federal interest rate of 5-plus per cent has pushed the dollar to historical levels against most other currencies, making trade denominated in the dollar more expensive.

    There are obvious advantages for two big trade partners like China and Saudi Arabia to be able to utilise a local-currency option, which will help relieve pressures from having to trade in a more expensive currency.

    Global “de-dollarisation” may take a while yet, but the trend already reflects cracks in a global economy long used to US currency settlements.

    The yuan may or may not pose a challenge to dollar hegemony, but its internationalisation continues apace – to the benefit of both the Chinese and global economies.

  • Riaz Haq

    The era of US dollar dominance is 'finished,' says Wall Street veteran who just retired after 54 years


    https://markets.businessinsider.com/news/currencies/dick-bove-banks...

    "The dollar is finished as the world's reserve currency," Dick Bove, who retired as a financial analyst after 54 years this month, told The New York Times. Bove, 83, predicted that China's economy would surpass America's in size.

    The dollar's reign as the world's reserve currency is nearly over, Dick Bove says.

    The newly retired bank analyst blamed corporate offshoring and flagged the threat posed by China.

    Bove highlighted the de-dollarization trend and said other analysts are too bought in to admit it.

    The US dollar has been the lifeblood of global finance and trade since World War II — but one Wall Street veteran thinks the end of that era is nigh.

    "The dollar is finished as the world's reserve currency," Dick Bove, who retired as a financial analyst after 54 years this month, told The New York Times.

    Bove, 83, predicted that China's economy would surpass America's in size. He blamed the outsourcing of US manufacturing to other countries, arguing that trend has given other countries more control of international production, the global economy, and worldwide money flows.

    He also suggested that cryptocurrencies such as bitcoin could help fill the void left by the dollar's shrinking influence.

    Dollar-denominated assets make up nearly 60% of international reserves, per the International Monetary Fund. However, several countries are embracing "de-dollarization" — working to erode dollar dominance — especially after the US took advantage of Russia's reliance on the greenback to levy sanctions against it following its invasion of Ukraine in 2022.

    Nations ranging from Brazil and Argentina to India and Bangladesh are exploring the use of backup currencies and assets, such as the Chinese yuan and bitcoin, for trade and payments.

    Several governments have blasted the excessive influence of US monetary policy on other economies and currencies, the dollar's strength for pricing out poor countries from imports, and the diminishing need for a petrodollar now the US has achieved energy independence through domestic shale oil and green energy production.

    Bove, who worked at 17 brokerages during his career, told the Times that analysts who aren't forecasting dollar doom are simply "monks praying to money" who are unwilling to bite the hand that feeds them: the traditional financial system.