Putin Sets Stage for Energy Sales in Russian Rubles

Russia now conducts most of its energy sales in US dollars and this has greatly benefited Europe in the form of lower energy costs as the dollar has depreciated. The declining dollar may also explain why Europe and other big purchasers of energy have not pushed to have more energy sales in Euros, which would clearly bolster the Euros status as a global reserve currency.

As indicated in today’s WSJ today, Putin has made it clear that he will annoint the next leader in Russia as he is term limited by Russia’s constitution in 2008. Yesterday he dismissed the president and cabinet in preparation for next year’s election and, while he is harshly criticized here in the US, his approval ratings at home exceed 70 percent. Having made two trips to Russia in the last year, I can confirm first hand that he is quite popular, not because Russians love him but rather they are grateful for the increased stability his government has generated. Even Russian Alexander Solzinitchen, who was one of the harshest critics of the former Soviet system, has publicly stated he strongly supports Putin.

Already an energy exchange is being set up in Saint Petersburg, Putin’s home town, and clearly a key aspect will be the sale of energy in Russian Rubles, bypassing the Euro altogether, with the goal of making the Ruble one of the world’s top reserve currencies. This is nothing short of astonishing given where Russia was in 2000 and from a theoretical standpoint, the Ruble could indeed be the key reserve currency within 5 years, even surpassing the dollar.

The reason is simple and that is that the Ruble is backed by hard assets including energy, minerals and other basic materials. The Chinese Yuan is backed by manufacturing with little hard assets and the Euro has benefited from greatly expanding the Euro zone economy every couple of years, a trend that has long term limits. The dollar is meanwhile being systematically debased by gross financial corruption and incompetence here at home.

What this likely means is that Putin will control interest rates here in the United States and in Europe based upon how quickly he devalues the dollar, i.e. sells energy in rubles.

A big beneficiary of Russia’s new economic might could indeed be Germany as Russia rebuilds infrastructure using German talent, including the extensive base of Russian language skills from the former East Germany. Already former German President Helmut Schroeder is an official employee of Gazprom, the Russian state energy monopoly. Moving across to lead Gazprom would seem a natural for Putin.

Meanwhile here in the US Congress is debating the safety of Chinese toys, with lobbyists lined up on both sides. These likely include President Bush’s brother, Neil Bush, who has been a paid lobbyist for China according to a disclosure in a divorce filing.

Perhaps the good news is that everything could change quickly here in the US with a new set of leaders. The one powerful advantage we do have is the regulatory system, including the SEC and Federal Reserve, that has historically bred confidence and trust in our financial system, and with that investment in dollars.

For the time being however, at least the next 18 months, the downward pressure on the dollar will likely continue and it is Putin’s economic game to lose. Who could have possibly imagined that 6 years ago?

The following is the lead paragraph in the WSJ story.

September 12, 2007 12:06 p.m.

MOSCOW — Russian President Vladimir Putin unexpectedly replaced his long-serving prime minister with a little-known financial regulator, fueling intrigue as the Kremlin gears up to ensure triumph in the coming parliamentary and presidential elections.

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