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Source: The Vineyard of The Saker

Supporting the Rouble And Other Energy Exporter’s Currencies

by George Oprisko

Earler, you specifically mentioned that currencies of many energy exporters, eg: Venezuela, Iran, Malaysia, Indonesia, Russia, and Ecuador have dropped sharply against the US Dollar.

This essay explores the reasons behind the observed sellof(s), and debunks the myth that each currency stands on it’s own, and is a unique case, instead asserting that concerted action by one party is responsible.

The party I believe to be responsible for the declines observed in the above currencies, and that of Argentina, is the US Treasury. The venue for attack on these currencies, is NYMEX in NYC and it’s sister exchange in London, the world’s largest, which has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. London’s dominance in the market, determines a currency’s quoted price, which is usually the London market price. This even affects operations of the International Monetary Fund which uses noon London Market Prices to calculate the value of its special drawing rights.

Note that virtually all currency trading occurs on these two exchanges, and that currencies are traded like commodities, with only 0.1% margin required. Furthermore, both exchanges arelocated on territories hostile to theBRICs, SCO, andCSTO.

Needed is a mechanism which shifts trading in the Rouble to Moscow, and only Moscow, likewise trading in the Yuan must be shifted to Shanghai/HongKong, the Iranian Rial to Kish Island, the Argentine Peso to Buenos Aires, the South African Rand to Johannesburg, the Ecuadorian Sucre to Quito, the Venezuelan Bolivar to Caracas, and the Brazilian Peso to Rio.

Needed is a mechanism which eliminates naked short selling, while permitting trade in physical goods.

Since virtually all the currencies studied here are FIAT currencies, not backed by specie, I assert that the principles espoused in Modern Monetary Theory(MMT) apply. The key principles of MMT with respect to FIAT currencies are the following:

  1. a) FIAT currencies have value because the sovereign demands payment of fees and taxes in them
  2. b) FIAT currencies have value because the sovereign demands acceptance of them for settlement of debts, public and private
  3. c) FIAT currencies have value because the sovereign has a monopoly on their issuance

To maximize the value and utility of a FIAT currency, the sovereign must maximize the volume of goods and services purchasable in it’s currency, and must jealously guard against issuance of it’s currency by others.

In the case of the Rouble, maximization of goods and services purchasable by it, involves demanding payment in it for all goods and services produced in, imported into, or exported from Russia. This specifically means

  1. a) requiring payment in Roubles for Russian energy exports,
  2. b) demanding that importers of goods to Russia accept Roubles as payment,
  3. c) eliminating the ability of Banks to “create” Roubles through accounting entries when loans are made, via imposition of full reserve banking covering all banks(including foreign banks) operating within the Rouble Zone.

Additionally, Russia must re-industrialize, and must grow it’s agricultural sector to fully meet domestic demand for manufactures and food. This will require redefining Russia’s WTO obligations.

To protect it’s foreign reserves, and exchange rate, Russia must eliminate naked short selling of the Rouble, and must maximize international demand for the Rouble. Demanding payment in Roubles for Russian exports of energy, and materials is essential for the latter, and conversion of the electronic Rouble from a commodity into a security, via BitCoin Technology (BCT) is essential for the former.

BCT as mentioned here is the algorithm which creates BitCoins. A BitCoin is a data packet, nothing more. Yes, much of the data is encrypted, to provide authenticity, but in essence, a BitCoin, has an issue date, issuer, Denomination, serial number, and transaction history. This is similar to a paper Rouble note, which uses special paper, special inks, unique engraving, holograms, to create a paper emblazoned with the denomination, serial number, date of issue, issuer, using the former to guarantee authenticity.

This essay advocates conversion of all electronic Roubles into ElectronicRoubles, which we define here as Data Packets containing the following fields:

  1. Denomination
    2. Serial Number
    3. Issue Date
    4. Issuer
    5. Encrypted Transaction History
    6. Security Code, which is an encrypted hash of the foregoing fields

To prevent counterfeiting, all ERs are recorded in the RCB database, including the owner of record.

To prevent naked short selling, only the Owner of Record, or an authorized exchange may sell ERRs. Furthermore, authorized exchanges must post a bond with the RCB, amounting to 1oz of .999 fine gold per 100,000 Roubles in authorized open interest, subject to forfeit at 1oz of gold for every 100,000 Counterfeit/Stolen Roubles traded. This mechanism links the Rouble to gold, but does not make the Rouble exchangible for gold, and it specifically eliminates the ability of UK/US money center banks to fund naked sales of the Rouble, via the mechanism of the RCB challenging any or all sales, for the purpose of enforcing it’s monopoly on issuance.

How would this work in practice?

Consider the following example:

The Russian Government pays Sukhoi 100,000,000 Roubles for Fighter Aircraft. Traditionally, this is done by crediting Sukhoi’s account at it’s bank, which we assume to be SberBank. Using ER(s), The Defense Ministry pays Sukoi with 100 Electronic Rouble Notes, each worth 1 Million Roubles. Sukhoi deposits the notes at it’s bank, SberBank. Upon making the deposit, SberBank notifies the RCB of the transfer from Sukhoi to itself of the notes, and the RCB confirms the authenticity of the transfer with Sukhoi. The RCB recalculates the Security Code using it’s 512 bit Private Key for these notes, and ReIssues the Notes to SberBank.

Sometime later, Sukhoi pays it’s employees and suppliers 50 million Roubles, via transfers from it’s account at SberBank to other accounts at SberBank and other banks. Of this amount 25 million Roubles is owed AlfaBank. SberBank transfers 25 of it’s million Rouble ERs to AlfaBank. AlfaBank notifies the RCB of the purchase, and the RCB verifies the transaction, adding it to the transaction history of each note, recalculating the Security code using it’s private key, and re-issuing the 25 notes to AlfaBank.

Later, Diamler of Germany, a customer of AlfaBank chooses to transfer 10 million Roubles to it’s German Bank to pay for items imported into Russia. AlfaBank notifies the Russian Ex-Im Bank of the international transfer to DeutchBank, DeutschBank confirms receipt of the 10 million Rouble notes, The Russian ExIm Bank notfies the RCB, which adds the transaction to the history, recalculates the Security Code, and reissues the notes, which are recorded on the ExIm Banks Transaction Log as held outside Russian Territory.

Still later NYMEX receives an order to sell 10 million Rouble ER(s) from DeutschBank. NYMEX sends the serial numbers to the Russian ExIm Bank, which verifies ownership, and authenticity. If the owner is selling and the notes are authentic, the Russian ExIm Bank so notifies NYMEX. If not, the notes are listed as stolen or counterfeit, as appropriate. Should NYMEX choose to conduct Sales of Rouble Notes without verifying their authenticity, RCB can seize the collateral NYMEX put up to become authorized to trade Roubles, according to the volume of unauthorized trades conducted.

Via this mechanism, embezzlement of Roubles is eliminated, and illegal movements of Roubles abroad are also eliminated, and the RCB ExIm Bank knows the exact volume of Roubles held abroad, the daily/annual demand for Roubles by foreign firms who trade goods and services with Russia, and the identity of those firms. Furthermore, this mechanism makes impossible naked short sales of the Rouble, because all Roubles offered for sale, must be authenticated by the RCB – ExIm Bank, who reserves the right to buy them. This specifically means that Futures Contracts in the Rouble must specify the notes offered for sale, and the notes in question must be authenticated before the contract position is opened, because the RCB can at any time challenge the contract, demanding forfeiture of collateral, should the contract be for non-existent/conterfeit/stolen notes. This will essentially eliminate Futures Trading of Roubles.

via: The Vineyard of The Saker