After the Vietnam war in 1971, the US was a net importer facing high unemployment and inflation rates. For Richard Nixon (the US president at that time) to conserve the US economy, finance government expenditures, and set an end to the global speculations on the US dollar by exporting nations who piled up huge dollar reserves, he decided unilaterally in 1973 to elude the US from the Bretton woods agreement in which the US dollar and major global currencies were backed by gold, and started printing fiat money. Nixon’s decision was publicly named “The Nixon shock.”
The global economy has been extremely reeling since February 2022 as the Ukrainian-Russian conflict imposed severe economic circumstances due to the contradictory economic and political agendas guarded by NATO countries and Russia, who are directly involved in the current conflict. The world was trying to tame inflation and stabilize supply chain disruption right after the Covid-19 pandemic; however, the Russian occupation of Ukraine, followed by NATO economic sanctions on Russia, skyrocketed all resources’ prices like an uncontrollable wildfire.
As declared by NATO, part of the sanctions included freezing Russian foreign reserves, consequently pushing Russia to default on paying its debt and disarming Putin from his most important economic weapon. He won’t be able to utilize Oil and natural gas cashflows. This action has been linked to the circulating terminology “Weaponizing the dollar.” Relying on the dollar weaponization perception, President Putin declared that Oil and natural gas payments to the Russian government, which he called unfriendly countries, should be in the Russian ruble. Ideally, the Putin Shock” took place when president Putin unilaterally decided to peg the Russian ruble to gold, 5000 rubles per gram, given that the Russian federation ranked the 5th in gold reserves with 2,301 Tones and the 3rd in regards to the largest gold reserve increase till Q4 2021, adding 3.11 Tones.
Positioning the Ruble as a credible gold substitute at a fixed rate is the same as what the US offered as a US dollar gold peg during the 1940s. The Ruble/gold peg action envisages a situation where the dollar would be undermined with increased payments in gold and in other bilateral currencies. Apparently, the share of dollars in global identified foreign exchange reserves has been trending downward for 20 years, from a bit over 70% to 59% in the third quarter of 2021 since central banks are heading to reallocate the proportionality of currencies reserves with the clear intension to diversity from the US dollar and not increasing weights to the Euro, Sterling or Japanese Yen.
Last week, Russian prime minister Sergey Lavrov impressed upon Indian prime minister Modi that the common payment system and local currency trade arrangements have been under discussion among BRICS nations for some years in addition to the BRICS resolutions to this effect, and subsequent summit pronouncements have carried forward the idea of a common payment system which encourage payments in national currencies and ensure sustainable payments and investments among BRICS countries, which make up over 20% of the global inflow of foreign direct investment.
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