The timing was somewhat curious, yet understandable given the actual context. If something like it happened today, it would’ve been splashed all over the headlines. Even as the prices of digital currencies face renewed pressure to begin 2022, there can be no doubt in terms of newsworthiness and attention a good proportion of the global public has bought in on the craze, even if not all of them literally.
Officials from various official development banks had gathered in Johannesburg, South Africa, for the 10th annual BRICS summit. But this was July 2018 during the so-called Bitcoin “winter”, not July 2021 at the height of the latest crypto bubble.
BRICS is an acronym for Brazil, Russia, India, China, and South Africa, the big, most important developing countries around the world. The original term, BRIC, was made up in 2001 by Goldman Sachs Economist Jim O’Neill for the first of the four nations mentioned previously; South Africa was added some years later. O’Neill’s purpose was to single out what he believed would be the top economies to dominate the world of 2050.
Such was the promise at the dawn of the 21st century. Led by China, principally, emerging markets were going to emerge more completely and take over from aging Western societies. Then “something” happened between the years of 2008 and 2011 which spoiled those expectations and so much more.
Though China had been the posterchild for the successes of pre-2008 globalization, the gains were indeed widespread. They even included the Russians who as late as the mid-nineties were still trying to survive the devastating effects of post-Soviet currency collapse and economic ruin.
Yet, by the middle 2000’s things were definitely on the upswing for Moscow. In the bubbly years between 2002 and 2008, real GDP growth (measured in chained 2000 rubles) averaged 7.8% per year. These weren’t the results of your father’s Russia, a new paradigm seemed to have taken hold justifying the inclusion of Russian with the other fast-growing contemporaries.
Whose was it, though? According to the powers-that-be at the top, obviously it was all thanks to Mr. Putin. The correlation seemed viable enough given how Boris Yeltsin “unexpectedly” resigned on December 31, 1999, leaving the former KGB boss to take over right as the new millennium dawned.
A prosperous Russia then followed.
Only for a short while, though. The “somehow” global Great “Recession” hit the Russian economy particularly hard and in a way it hadn’t the other of its peers, especially China. Real GDP in the second quarter of 2009, at the trough, was an incredibly destabilizing 9.4% less than it had been in the second quarter of 2008 when at the prior peak.
More worrisome than this, once “recovery” began for the Russians it wasn’t nearly the same as it had been before the Global Financial Crisis. In terms of real GDP, economic output wouldn’t surpass its Q2 2008 total until the last quarter of 2011.
But as slow as that had been, it got even worse beginning with the first quarter of 2012. From an average of 7.8% pre-crisis, Russian expansion after the trough in 2009 until the end of 2011 only averaged 4.3%. Then from the first quarter of 2012 to the first quarter of 2014, an average of barely more than 2% - with the pace slowing even more toward zero by the end of that period.
BRICS status and its promise of future wealth had so quickly descended into stagnation accompanied by deep, wholly unappreciated financial uncertainty. Had the Russian government lost its touch?
On February 20, 2014, the crisis in Crimea began and a little over a month later this region of the Ukraine had been de facto annexed, according to Putin, by Moscow.
Long before those events, curiously (not really) the Russian financial system and government had been shedding its reserves of US Treasuries. According to US Treasury data (TIC), reported holdings of them by Russia had reached $163.8 billion by June 2012. Though the country would manage to maintain around that level for a few months more, a little over a year later, July 2013, the balance had shrunk by about 20%.
Where’d they all go?
It had been during this same Treasury-disappearance that suddenly a new brand began popping up all across Western financial media. The Russians “coincidentally” had orchestrated a big splash, making sure during 2012 and 2013 the moniker Vnesheconombank received special attention.
As one incomplete The New York Times article celebrated in April 2013:
“The idea is to upgrade the position of Moscow in ratings, to become closer to the leaders of innovation and to the big boys of international financial centers,” Andrei V. Sharonov, the deputy mayor for economic affairs, who led a roadshow tour promoting the city in Asia, said in an interview.
A once-promising Russian economy hit hard by the Great “Recession” and several years into its aftermath selling off tens of billions of US Treasuries, now they want to be “closer to the leaders of innovation…of international financial centers”? Yes, though only because they were being buried by the renewed global dollar shortage.
Vnesheconombank is essentially a government-owned development bank. It was and remains a troubled state agency that has been variously called Putin’s own personal slush fund, borrowing dollars in these international financial centers (eurodollars) when it can to be redirected to political projects prioritized in Moscow.
That priority, though, clearly shifted after 2011…to just being able to borrow whatever dollars the “bank” could source, often using Russian oil wealth (connected in some ways to Putin’s approval) as collateral for the monetary funding. Only modestly plausible when oil prices aren’t tanking.
And it came at the worst possible time; the typical nightmare scenario which has repeatedly befallen emerging market economies in this eurodollar stage. What I mean by nightmare is that by being required to keep up a steady flow of dollars sourced by eurodollar markets (including fancy things like term repo and currency swaps, each collateralized in their own ways) this means having to always feed that monster.
When confronted with difficulties in getting dollars from the monster, dollar shortage, authorities in Russia and elsewhere do what the textbooks all tell them: build up a dollar cushion believing that, according to orthodox Economics, there are no permanent shocks meaning any crisis would only ever be temporary.
I wrote at the end of 2015 how it could only have played out from there:
“At the center of the eurodollar connection would be Vnesheconombank. Tightly tied to especially the Putin government, VEB, for short, would open a collateralized financial relationship between Russia’s commodity wealth and the usable cash (“dollars”) necessary to join and increase global access. In parlance of the Asian “dollar”, it was a vast expansion of Russia’s global dollar short.”
In between, Crimea.
Thereafter, US-led financial sanctions effectively degraded even more of Russia’s already tenuous eurodollar access. However, when attempting to explain the geopolitics here, you only ever hear about sanctions rather than anyone reporting the quite obvious eurodollar (dis)connection(s).
Not only had Russia been suffering from increasingly harsh eurodollar access long before February 2014, beginning with the middle of 2016, despite sanctions, the country experienced a modest yet significant revival in dollars therefore economic fortunes anyway (yes, tied to oil prices).
Russian holdings of US Treasuries would reach a low of $74.6 billion in October 2016 before then miraculously rebounding back over $100 billion by April 2017. That couldn’t have been all crude. Real GDP that had shrunk harshly in the first half of 2015, then stagnated at the trough into 2016, began to rebound again during this 2017 reawakening.
It had been eurodollar reflation leading to “globally synchronized growth” which had reversed the misfortune of BRICS and emerging economies everywhere; thus, synchronized. The problem, all-too-soon apparent, was that it wouldn’t actually be “growth” since the token relaxation of deflationary money pressures didn’t last.
Using TIC data again as a proxy for Russia’s dollar woes, for the rest of 2017 their stash of Treasuries would remain relatively constant at around $105 billion – well below 2012’s levels.
At the start of 2018, however, UST’s started to “disappear” all over again. By March, the balance would fall to $96.1 billion; by June, they were gone.
Between March and June, of course, the US dollar’s exchange value skyrocketed confusing pretty much everyone around the world. The Treasury curve flattened decidedly, another otherwise clearcut deflationary money sign chiefly ignored and dismissed. Bitcoin frozen in winter.
It would be India’s top central banker, Urjit Patel, who – not coincidentally also in June 2018 – would appropriately take to the virtual pages of London’s Financial Times to succinctly describe to the world what was actually going on in it. Jay Powell and Mario Draghi had convinced everyone of rising inflation pressures when there was never a chance for them.
Dr. Patel stated, “Dollar funding has evaporated, notably from sovereign debt markets. Emerging markets have witnessed a sharp reversal of foreign capital flows over the past six weeks.” [emphasis added] These very same six weeks when Russia’s Treasuries were hopelessly used, every last one, to try to stave off another devastating dollar shortage which, despite every single mainstream assurance otherwise, had grown acute and critical anyway.
A few more weeks further into the criticality, at the end of July 2018 officials from the various development banks in the BRICS got together in South Africa to announce this:
“State Corporation Vnesheconombank, Banco Nacional de Desenvolvimento Econômico e Social-BNDES, Export-Import Bank of India (Exim Bank), China Development Bank (CDB), and Development Bank of Southern Africa Limited (DBSA) signed the agreement on collaborative research on distributed ledger and blockchain technology in the context of the development of the digital economy.”
Mikhail Poluboyarinov, First Deputy Chairman and Member of the Board of Vnesheconombank further revealed how, “…developing credit financing in national currencies and implementation of innovations, [t]his joint work opens new opportunities for Russian exporters, operators of large industrial projects, recipients of investments.”
Out of options, or close to it, the Russians at Vnesheconombank undoubtedly with approval from Putin suddenly got very interested in digital currency technology at a time when the rest of the global public sector was frowning on it. Hardly anyone noticed; wintertime in crypto-land.
As such, the Russian economy fell back into recession late in 2018, rebounded only for one quarter in 2019, and then more recession for the final half of that year plus the first quarter of 2020.
Then COVID.
Quite obviously, the investigation led nowhere fruitful. Three and a half years after, there is no BRIC blockchain reserve nor one on the horizon; or way, way over it. As compelling and hopeful as digital currency technology is and can be, and I am among the more optimistic about it, it remains lightyears away from reaching the minimal capabilities and capacities to begin realistically competing as an elasticity solution to even a malfunction eurodollar regime.
What that means, though, is for Russia its economy remains gripped by stagnation at best, the repeated low-grade highs followed by regular setbacks leaving output to get nowhere and with no eurodollar cushion left to them. Even in 2021’s oil price surge, we can easily surmise how Russian banks, private as well as government, used any spare proceeds just to keep the economy afloat.
And now Russian troops mass on the Ukrainian border, raising war alarms throughout the world as had that same uneasy economic and eurodollar feeling already swept the global monetary system throughout the last half of last year – the year which was supposed to have been inflation, inflation, inflation. Too much economy.
As I wrote at the top, not even crypto prices - which had shot up from late 2020 on the widespread claim of the dollar’s imminent destruction - have escaped the soundly deflationary circumstances of the past four months. By and large, the public misreads digital currencies as a store of value based on the same exact monetary misunderstanding left to plague Russia.
Not inflationary US dollars, inelastic and deflationary eurodollar.
Though it may read like it, I’m not actually claiming these factors add up to the primary cause for Moscow’s current bellicosity. As always, conflict is the product of an array of complex and intricate motives; political, national, and just plain human nature.
Fourteen now almost fifteen years of intractable dollar issue, particularly since 2011, it goes right along with Russian economic stagnation and does provide useful background for maybe why those motives seem so overwhelming at times such as these. Peace generally reigned (a few notable exceptions) while the eurodollar spread the positive fruits of globalization all over the world – including into the formerly moribund former Soviet Union.
It then took all that away in a way no QE was ever going to fix; nor any “monetary” official worldwide able to recognize the true problem let alone devise some legit answers to it. When the rate of change in the economy goes down, the rate of change in politics goes (way) up. Internal as well as external pressures along those lines.
With all these same monetary indications lining up in the same familiar ways (while Russia doesn’t have any Treasuries left to sell, there’s selling again in the other usual places elsewhere), how is 2022 most likely to end up? According to the FOMC, it is about to get hot, too hot.
They might just be right, for once, though the kind of heat we’re talking about here wouldn’t be in any way recognizable to what’s being used to justify tapering and rate hikes. Thus, the yield curve has collapsed in recent weeks and days to the same approximate shape as when it was…March and April 2018.
BRICScoin, like inflation, never had a chance.
