Will Russia create another financial crisis?

Will Russia Light the Fuse On 'Paper H-Bomb' of World Debt? by Rachel Douglas

Something like the "explosion of the universe," projected by Russian economist Tatyana Koryagina, when she forecast an August escalation of the U.S.-centered financial and economic crash (EIR, July 20 and 27, 2001), could be triggered by policy decisions adopted by the Russian government on gold and currency. The setting is an international confluence of debt defaults, corporate losses, layoffs, tumbling stock indexes, and rumored hedge-fund catastrophes, which only the self-deluded could fail to recognize as a global systemic crisis.

The Russian actions have a twofold effect. On the strategic policy level, Russia is a heavyweight among nations inclined to seek new, more stable economic arrangements, likely including the remonetization of gold, in place of the now-imploding post-1971 world monetary system. Moreover, at a time when masses of implicitly worthless financial paper are piled high into every nook and cranny of the planet, major financial players' sensitivity to sudden Russian moves in the domain of gold and raw materials is high, as was plain when Russia abuptly suspended the export and import of precious metals on Aug. 25.

Think of the potential of "a Russian fuse, burning on the global paper H-bomb," recommends EIR Founder and Contributing Editor Lyndon LaRouche, and you'll begin to grasp the potential dimensions of the events reported here. Or, as LaRouche remarked about the positive side of this potential, look at the Russian moves toward replacement of the dollar standard of recent decades, and realize that their impact can be comparable with that of the Dec. 7, 1941 events at Pearl Harbor. The escalating implications of Russia's reintroduction of the gold chervonets coin, and related policies, can be understood only in the context of LaRouche's own work in creating the conditions for a new monetary system, employing the sound principles of the original Bretton Woods system.

Russian Central Bank Chairman Viktor Gerashchenko's decree, making the gold chervonets and silver "Sable" coins legal tender, was signed June 18 and went into effect on July 3. Kommersant-daily immediately dubbed the chervonets "Russia's alternative to the dollar." The daily Nezavisimaya Gazeta headlined, "Central Bank Attacks the Dollar with the Chervonets," explaining that the coin will not be valued at its face value of 10 rubles or strictly according to its gold content of 7.742 grams, but will be subject to a regular price-fixing by the Central Bank, based on the price of gold on the London exchange, the ruble exchange rate of the dollar, and "the interests of the Central Bank itself, and of the retail network." The first gold coins were to be received by commercial banks, authorized to conduct sales and purchases of chervontsy.

Interviewed by Nezavisimaya about the Bank of Russia move, senior liberal reformer Yevgeni Yasin said that he thought that "the gold chervontsy will not be used as a medium of exchange, but will be a means for savings and accumulation."

By the end of August, branches of the state-owned Sberbank in several regions of Russia had begun to sell chervontsy, acquired by them in the 1970s and 1980s when ten tons of the coins were minted as prospective souvenirs of the 1980 Moscow Olympic Games. On Aug. 23, the monthly supplement of Kommersant devoted its front-page feature to Yelena Kiselyova's write-up of the highly liquid and tax-exempt chervonets, and its prospects for becoming popular. When the Central Bank makes the official price-fixing, she reported, it will likely be in the range of 2,000 rubles (nearly $70 at the current exchange rate). "Such investments will be profitable only in the event that world gold prices rise. But, that will apparently happen soon, in view of the crisis tendencies on global financial markets, and pessimistic forecasts about the U.S. dollar," concluded Kiselyova.

The Russian government has moved also in other ways, to soak up a portion of the $100 billion-some, circulating as dollar cash inside Russia. An article called "Bush's Nightmare," by Georgi Osipov in Izvestia of Aug. 27, declared that "Russian monetary authorities seem to have started the de-dollarization of the economy," by encouraging Russian banks to replace the dollar in financial operations. During the first five months of this year, Russian banks' ruble-denominated lending increased by 23.7%, while foreign-currency-denominated lending rose only 15.1%. The share of loans denominated in foreign currencies, declined from 38.5% to 36.8%. Some of the loans are denominated in rubles, but repayments are due in dollars, a process that pulls the dollars from circulation. Sberbank, meanwhile, is allowing customers to open euro accounts in the European "single currency," the euro, and to convert their dollar accounts to euro accounts in a matter of two minutes.

Izvestia's Osipov recalled that the dollar achieved its recent world status after being separated from gold-the abandonment of "a basic principle of the Bretton Woods conference." Since then, since 1971, "our green friend" has been "based upon trust in God, as is written on the notes, as well as on the belief in the development of the U.S. economy. But prospects for this are now highly dubious," wrote the Russian journalist.

The Russian chervonets has its roots in Count Sergei Witte's gold-backed ruble policy of the 1890s and Soviet Foreign Minister Georgi Chicherin's 1922-24 gold chervonets, of which today's coin is a replica. Each of those precedents was associated with a battle for Russian economic development, against the preferences of London-centered international finance. The more recent history of the chervonets revival may be dated from late 1998, after Russia's default on GKO government bonds and the devaluation of the ruble. It should be viewed in tandem with shifting Russian evaluations of global economic conditions and their implications for who has political clout.

During the eight-month tenure of Yevgeni Primakov as Russian premier, various maverick economists proposed an international role for the ruble, and for gold. Proposals circulated at that time included Monya Kantov's "The Ruble as a World Reserve Currency," and Artur Sazonov's plan for a "gold-backed ruble," linked to the euro.

Upon election as President of Russia in June 2000, Vladimir Putin announced that he would seek economic policies that were consistent with national security. While far from firing every monetarist on his team, Putin instituted a new State Council that Autumn, which marked an institutional shift from the hegemony of the "radical liberals" under Boris Yeltsin. Putin began to draw on the expertise of economists like Dr. Sergei Glazyev and Academician Dmitri Lvov, who previously were strictly opposition figures. They contributed to the so-called Ishayev Report (see EIR, March 2, 2001), commissioned by Putin as a formulation of national development strategies, alternative to the one drafted by the liberal Minister of Trade and Economic Development German Gref.

Also during the second half of 2000, a group working under Yuri Maslyukov began to investigate the weakness of the U.S. dollar as a world reserve currency. Maslyukov had been first deputy premier under Primakov, and now heads the State Duma Committee on Industry, Construction, and Science-Intensive Technologies. Two members of his circle, Oleg Grigoryev and Mikhail Khazin, produced and published a celebrated forecast of U.S. financial disintegration, due to the demise of the so-called New Economy (EIR, Aug. 20, 2000). In May 2001, Maslyukov's committee published a book in Russian, The Collapse of the World Dollar System: Near-Term Prospects.

On March 6-7, 2001, LaRouche's associate Jonathan Tennenbaum was a featured speaker at a conference on "The Threat of a Crisis of Global Reserve Currencies," held near Moscow, also addressed by several contributors to the Maslyukov book. Two months later, on May 15, Tennenbaum took part in another Moscow seminar on the global financial crisis, held in the Diplomatic Chamber of the Kremlin Palace in Moscow. The future role of the euro currency, and potentially even of a gold-based Chinese yuan, as alternative reserve currencies in the context of a threatened crash of the dollar, was discussed by several Russian speakers, including an expert from the Central Mathematical Economics Institute. At that time, it was indicated that Russian investors had already begun a quiet diversification out of the dollar, into other currencies as well as hard physical assets. The Malaysian Ambassador to Russia also addressed the seminar, speaking of his country's experience in adopting capital controls and reasserting national economic sovereignty against the dictates of the International Monetary Fund.

Lyndon LaRouche presented his policy for the institution of a New Bretton Woods system, as the guest of State Duma Committee on Economy Policy Chairman Sergei Glazyev, first at a June 28 press conference in Moscow, and then at Duma hearings the next day. At both events, speakers Glazyev and Dmitri Mityayev, head of the Center for Systemic Forecasting, called for the diversification of Russian gold and currency reserves, to deemphasize the dollar.

Indeed, according to an article by Armen Munayan in the Aug. 20 issue of the Russian weekly Ekspert, the gold reserves of the Bank of Russia have increased by 48 tons in the past nine months. Finance Minister Aleksei Kudrin stated Aug. 17 that during approximately the same period, since the beginning of 2001, total Russian gold and currency reserves have risen from $28 billion to $37 billion. Their composition has changed, in favor of gold; Ekspert specified that "the long-term tendency for the share of gold in the gold and currency reserves to fall," has now been reversed. Munayan wrote that this development was of concern to the International Monetary Fund, because "no other country in the world has registered such a steep increase of its gold reserves."

The Ekspert article went on to discuss the potential strategic weight of the gold holdings of a number of nations: "The increase in Russia's reserves of 'the yellow metal' is cause for concern in certain circles of the 'gold' community. The reason is that Russia, with its 391 tons of reserve gold, along with China (which has approximately the same quantity of the precious metal) is among the countries, whose intentions regarding the use of gold are unclear."

On July 17, Malaysia became the 12th country in the world to issue gold coins. Bank Negara, the national bank, issued the Kijang Emas Gold Bullion Coin in 1 oz., @c4 oz., and ? oz. sizes, valued according to the international market price of gold. Bank Negara promoted the coin as an investment safe from inflation. In Kazakstan, press articles appearing in August called for a buildup of the nation's gold reserves. Kazakhstanskaya Pravda editorialized, "The higher the gold reserve is, the higher is the authority of the state, and the harder is the national currency."

The prime ministers of China and of Malaysia will visit Moscow during September.

What do these economists and leaders of state in Russia, Kazakstan, or Malaysia know, that citizens and politicians in the United States or Western Europe don't know? In a July 12 interview with Pravda, elaborating her forecast of ther U.S. and worldwide crash, Tatyana Koryagina said, "I am closely watching the measures taken by the President and the Central Bank. >From the standpoint of pre-crisis measures, they are acting properly. It is possible that after Aug. 19 [the date Koryagina named as a time-frame for the next crisis phase], the ruble may become a rather good currency."...

This article appears in the Sept. 7, 2001 issue of Executive Intelligence Review, and was originally web-posted at http://www.larouchepub.com/other/2001/2834chervonetz.html

I see Lyndon LaRouche's latest incarnation is as a financial economist. Notwithstanding that the man is a xenophobic screwball, some observations:

Russia should be applauded, not condemned for a heroic effort to restore value to her currency. To the extent she it is able to do so, this can only be considered an "attack" on the dollar to the same extent that a well made pair of Levi's are an "attack" on Toughskins.

People have long realized that the dollar is steadily eroding in value, so they eschew liquid investments for equity in the hope that these assets will appreciate faster than the dollar depreciates. Historically, once this is no longer the case, the currency and the government which purports to back it are doomed and the citizens break out the tar and feathers.

Hey kitten:

The issue is whether or not the facts presented in this article are true or not.

I am not surprised that Miss Kitty calls herself a journalist (in New York!no less). Most modern journalists evaluate the messenger, not the message. Name calling and labeling never help us find out whether or not facts are true--but that's all some modern journalists are trained to do: name-call and label. I think it's fair to call that kind of intellectually empty and irrational analysis "kooky".

The currency may eventually become doomed, but I think this government showed us what it is capable of at Waco. It won't go down without taking the rest of us out as well.

I daresay there are now more people dependent on the machinery of the federal, state and local governments in one way or another than there are productive citizens in the private sector.

All of the former will be rooting for the tanks against those of us still in the latter segment.

I confess I've always heard LaRouche described as a "nut" or a "kook". I don't know anything about him. But speaking of fraud, unsound money is the largest fraud being perpetrated on the planet. Printing an infinite amount of electronic dollars is a fraud. Inflation always benefits big money, and hurts the poor, fixed income people least able to deal with it. So I'm always interested when principles of sound money are practiced. Sorry about your folks--to have to deal with credit card fraud and the Fed too!

"Most modern journalists evaluate the messenger..."

True, but even a stopped clock is right twice a day.

Let's take a look at the title of one of the messenger's works:

"Kissinger: The Politics of Faggotry"

Ooohh..that was fun- what about some assorted quotes by the messenger:

Jazz was foisted on black Americans by the same oligarchy which had run the U.S. slave trade, with the help of the classically trained but immoral George Gershwin and the Paris-New York circuit of drug-taking avant-garde artists.

Zionism is the state of collective psychosis through which London manipulates most of international Jewry.

The Beatles had no genuine musical talent, but were a product shaped according to British Psychological Warfare Division (Tavistock) specifications, and promoted in Britain by agencies which are controlled by British intelligence.

This one is my favorite:

The inner hierarchy of the Episcopagan church is properly viewed not merely as something within the established Church of England, but as a coordinating agency for an array of forces with arms not only among Catholic, Protestant, and Eastern autocephalic denominations....It controls, with complicity of Venice, Libya's psychotic Colonel Khadafy...

there comes a time when, after foaming at the mouth and baying at the moon for decades, no-one will listen to what you say. This time came a long time ago for Lyndon LaDouche.

While it is true that LaRouche is a questionable character, the article is not about him, it is about Russian, Chinese, and Maylaysian activity in the currency and gold markets.

It is true that Putin wants to get the dollars out of Russia. It is true that he has created the gold Chervonets as an alternative. It is true that there is approximately $100 billion in cash in Russian hands. If this money is replaced by Euros and gold, it will cause a decline in the value of the dollar. That is what the story is about.

If you are a 70 year old widow, set up to receive x dollars per year, and the currency loses half its value, the widow pays twice as much for food, clothing, rent, transportation.

The rich can usually outrun inflation--because they are net lenders and their material assets (homes, factories, land) inflate as well. When you are sick or retired, you can't outrun inflation.

If you are paying off a debt with cheaper dollars inflation can give you the illusion of getting something for nothing. And that's always an illusion, cause there is no free lunch.

As I suspected I might, I got back a bunch of slogans wrapped around some economic gibberish. I suppose if the whole economy collapses, as happened in Russia, your scenario with the old lady might actually occur... but I suspect the currency collapse in that case has more to do with the general economic failure associated with the death throes of a communist economy than it does with "inflation" as we usually use the term.

The largest inflation we've ever seen here was a little over 10% during the Carter years, and the Congress made sure that the folks on Social Security got their COLA raises to keep pace. The people on "fixed incomes" were a staple of Democratic Party propaganda for a decade after that, but of course their incomes were not fixed at all. That was just the Democrats making sure to take credit for increasing the benefits.

Your entire second paragraph is gibberish. You go from the rich being "net lenders" (which causes them to be hurt by inflation) to talking about the material assets on their balance sheets, which may or may not reverse the harm done to their financial assets. Then you associate being "sick or retired" with having no assets, as though a retired person could not have a fully paid-off house appreciating in price along with everything else in an inflationary economy, or a rich person could not get sick. Basically what you're trying to do here is leave the economics in the corner while you wave around Flag Words like "the rich" and "the retired" and "the sick." I find that tactic less than persuasive. In fact, it sets off my snake-oil detector.

You claim that the advantages to borrowers of paying with cheaper dollars is an "illusion," and for evidence you cite the shibboleth "There's no free lunch." Meanwhile, in your previous paragraph, the rich were out-running inflation by having their material assets inflate. Back when the rich were doing it, it was not an illusion. It was "the rich getting richer." But when the same effect happens to the poor, all of a sudden it's an illusion. This causes the snake-oil detector to buzz loudly and flash its lights.

If you wish to posit the theory that it is better to be rich and healthy than to be sick and poor, I will agree with that. Using such a statement to explain the effects of changes in currency valuation, however, is not too effective.

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