Friday, December 5, 2014

Russia vs. the US Chess Match - Who is winning?

As the chess match between the US and Russia drags on, a fair question to ask is 'Who is Winning?' The answer clearly depends on who is answering the question. Western media constantly spin it as Russia is losing due to the economic strains ramping up there as illustrated in this Bloomberg article or this Bloomberg article

Pro Russian media prefer to emphasize the longer term ramifications of European reliance on Russia for energy as seen in this article. In this article, the head of the Russian Spy Agency bluntly accuses the US of conspiring to drop oil prices to pressure the ruble and to oust Putin from power.

Then we have western hard asset advocates who seem to cheer for Russia and promote the idea that Putin is masterminding a long term "trap" using gold as his leverage as seen in this article. So who is winning?

The question is really impossible to answer. Since we don't have access to the private information that nations have, we can't know who is likely to prevail over time in this chess match. There are some reports that the economic strains showing up in Russia now are causing some unrest in the country as noted in this article. It is also clear that the ruble is suffering a severe devaluation that hits the general public in the form of sharply higher prices. And falling oil prices will put pressure on the nations budget and ability to continue to build up reserves (to keep buying gold).

On the other hand, Mr. Putin was surely aware of all this when he made his decisions to annex the Crimea and oppose the western installed government in the Ukraine. We can be pretty sure he has factored in all the problems Russia will face and has concluded that he can outlast the US eventually. It is clear that Russia views the building up of gold reserves as a key to their long term strategy in the game. He is counting on the Russian public to stay behind him regardless of whatever short term pain they have to endure as the game plays out. He has a strong ally in China and the other BRICS nations.

The outcome of this chess match is truly unpredictable right now. It will depend on who can outlast the other the best. And it could easily end up in stalemate where no one really "wins".

In 2015, that will be something to watch for. Are the BRICS (led by an aggressive Russia) really interested in a fight with the west that leads to a genuine split between them? Or are they just bluffing to gain more leverage within the present international financial system at the IMF? 

We will follow it here and it will probably get a lot clearer in 2015 as both sides have to make their moves on the board eventually with both sides feeling economic pressure (deflation in the west, inflation in Russia). How the IMF handles the SDR basket of currencies will be one key to watch (adding the yuan, but what about the ruble?). Also, what other "alternative options" might the IMF turn to if its 2010 reforms don't pass?

How this all plays out will impact how the global monetary system changes which is why we will follow it here in 2015 and beyond.

Added note: After I wrote the initial version of this article Mr. Putin gave a speech in which it appears he is calling for a bailout for troubled Russian banks. And he granted a tax amnesty for money coming into Russia from out of the country. Both of these seem to indicate stress on the system in Russia.

Here is an interview Jim Rickards did on CNBC talking about this. He thinks Russia will be OK longer term despite the problems right now. He even said he is looking at Russia as a possible place to invest if they hit bottom sooner than the rest of the world. He added it may be early for that, but he is watching it. He also thinks oil will bottom out at around $60. Interestingly, this is also the price I mentioned in my blog post the other day on the oil price drop that weaker, more leveraged producers might run into problems. So it will be interesting for sure to see if it stays at $60 or above.

There is so much happening related to this story that I have had to update this article several times since I first wrote it on Tuesday.

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