Why Can Putin’s Cryptocurrency Strategy Be Successful?
In response to the sanctions imposed on Russia after the Ukrainian war, Russia’s play of the energy weapon caused the effects of the war to become globalized, leading to a serious increase in inflation and energy prices. With the war, we are witnessing that Russia has made moves that could have a much greater impact on global economic system, especially on the position of the USD. The most important of these moves was Russia’s economic policies turned to hard assets such as commodities with limited supply and excess demand. Announcing that it would use cryptocurrencies in international payments in this direction, Russia might have made the biggest move for this new system that it has established its infrastructure so far. Because, the system to be established is far from the US hegomony, and it also enables trade in the local currency. The CBDC or crypto-friendly moves made by countries such as India, China and Iran together with Russia show that other countries have already built their infrastructures for this system.
In this article, we will compile and interpret what all these news mean together with the foundations of the current economy and the system planning by Russia. Wish you an enjoyable read
Artificial Wealth
A summary of Russia’s criticisms and suggestions for the global economy can be seen directly from Putin’s speech above. Let’s look at the highlighted points:
- Putin draws attention to the fact that developing countries question why they sell their own goods for USD and Euro, while underlining that the currencies of these countries are constantly depreciating.
- He states that the artificial wealth created by USD and Euro replaces hard assets.
- He underlines that the US and EU may impose restrictions on the use or access of USD and Euro in a country’s reserves, if they do not approve of that country’s policy, which the Russian Central Bank has already experienced due to the war. For this reason, it is stated that developing countries question why they keep their reserves in USD and Euro.
- It is predicted that countries will turn to hard assets (commodities, etc.) again in the future and will stop holding fiat money as reserves.
In the ideology of Bitcoin, the unlimited printing of fiat money completely in line with the request of central banks is one of the most heavily criticized elements and that make BTC valuable. It can be said that Putin’s criticism of fiat money has similar grounds. Here, of course, it will come to mind that the Ruble is a fiat money and Russia is also in a similar position. However, Russia’s requiring oil and natural gas payments in Rubles ensures that the Ruble is secured with oil and natural gas not only in theory but also in practice. The indexation of a high-demand commodity with fiat money can be shown as the most important reason for the serious appreciation of the currency of Russia at war. Thus, from this aspect, it can be said that the Ruble has differed from other fiat money.
In theory, every fiat money is actually secured by every kinds of assets of that country, but in practice, this is not the case. Putin’s emphasis on artificial wealth is especially important. Because the most important policy of the US to protect the global demand for USD is related to the image of the country.
We have seen several times that the US did not hesitate to start major wars in the Middle East in order to keep the oil trade under its control whenever the petrodollar system, which initially stipulates oil trade to be made in USD, start to deteriorate in the region. Therefore, the first image is the “iron fist” image created on the fact that the US army will not allow a system disruption over oil. However, since oil trade alone will not be sufficient for a country like the USA, the media value of the country is also important. Especially with the internet, the US’s globalization of its own culture in every field always keeps the country’s attraction at the top. In addition, the emergence of the most important technological developments in the US and the country’s ability to create brands are important factors that keep the attraction high. In conclusion, all these factors reveal that the US is strong with both iron fist and image policy, and thus ensure the continuation of the belief that the hegemony of the USD will continue. The fact that Europe is also one of the biggest attraction centers ensures a similar image policy for the Euro.
Russia is currently creating instability, which the United States does not allow in the Middle East, through itself by disrupting natural gas and oil shipments. The US is unlikely to intervene directly in this instability, as the possibility of two countries going to war is very low due to the mutual deterrence of nuclear weapons. The most effective solution will be the policies towards the collapse of the Russian economy with the economic damage that Russia will incur by stopping oil and gas shipments. At this point, Russia needs a trade infrastructure independent of the US hegomony, and the decision to make international payments with cryptocurrencies serves exactly this need.
Whether Local Money or Bitcoin
Russia’s decision to use cryptocurrencies in international trade indicates that the Russian Central Bank and the Ministry of Economy have reached a common ground after a long break and the urgency of the issue has increased. It can be said that the system is extremely flexible since it is stated, ‘trade can be made with friendly countries such as China and Turkey in local currencies and if desired cryptocurrencies such as BTC can also be used ’. As the system will include cryptocurrency, it is likely to rely on tokenization infrastructure. For this reason, the countries that will become members should also focus on CBDC developments so that trade can be made in local currency.
Let’s take a look at the cryptocurrency news from other countries in parallel with Russia’s cryptocurrency statement.
- China has hit the Petrodollar system by announcing that Yuan and Ruble would be used in natural gas trade with Russia. China can trade with Russia in CBDC in the most comfortable way. Because China’s Digital Yuan project has already started to be tested with pilot applications in the largest cities.
- Iran announced for the first time on 9 August that it made $10 million payment in cryptocurrencies in return for an import. Later, the semi-private newspaper Tasnim announced that the legal infrastructure related to cryptocurrency payments in imports and exports has been prepared, and that even the private sector could now pay with cryptocurrency in car imports. Iran has recently become an attractive center for BTC miners because of the cheap electricity. In the system to be established by Russia, Iran is likely to trade in BTC, maybe not in CBDC.
Reinstating Iran sanctions during the Trump era, which had been softened during the Obama era, had attracted the reaction of the EU and a special payment infrastructure called INSTEX had been developed for use between the EU and Iran at that time. Thus, considering that the EU is also disturbed by US sanctions against Iran, it is possible that the EU would like to join this system after the end of the Ukraine war. - The Central Bank of India met with 4 public banks to request tests for CBDC. Since India’s cryptocurrency policies are extremely uncertain, it is very difficult to classify the country as crypto-friendly. However, considering India’s close relations with Russia, it can be assumed that Russia has an influence on the progress made on CBDC.
- Finally, Turkey, which is known to seek trading with Russia in local currency, can be expected to focus on CBDC in the future and follow relatively more crypto-friendly policies.
Population Problem and Gain from Demand
The probability of a successful return to economic fundamentals, which Putin based on real assets such as commodities in the video at the beginning of the article, is actually directly based on the rapid growth of the global population. Let’s look at how population growth can affect raw materials, labour and image control.
With the end of the Second World War, the world population size started to explode. Although it took 118 years and 37 years respectively to reach 1 billion population increase before the war, after the war, it is seen that there is a population increase of one billion in every 13–14 years. Together with medical technology development, the fact that global powers cannot directly intervene with each other due to the deterrence of nuclear weapons reduces the war risk , thus the post-World War II period is called postwar prosperity.
As the population increases, personal consumption also increases. Every 13–14 years, production must increase in response to the increase in consumption of 1 billion people and sufficient money must be provided for the new population. First of all, if we start with the increase in production,increasing the production capacity by 1 billion people every 13–14 years, causes the quality of the products to decrease and the policy of gaining from the demand. However, there is a limit of raw materials reserves used in production and if there are no new reserves found or if the existing reserves are depleted, it may become gradually impossible to meet the needs of the new population. This includes not only industrial products, but also food products, and food problems have already begun to show themselves. Consequently, raw material-rich Russia’s hand is getting stronger as regular population growth makes raw materials even rarer and more valuable. Therefore, no matter how successful fiat money is supported by iron fists or image policies, it is not surprising that commodities turn into reliable reserve products in the event of a raw material crisis.
Secondly, the money supply needs to be increased when population increases, which causes inflation. However, this inflation can be controlled, since growth in population also provides growth in countries’ trade, and labor costs decrease due to participation in the labor force. That is, although the value of money decreases, a value can be created in return because demand increases. However, factors such as the coronavirus, the 2008 crisis and the Ukrainian War make it necessary to print surplus money. As a result, the sharp decline in purchasing power affects the people with the low level of income the most, and it is difficult to say that the additional money printed reaches these people. In terms of number of people, it can be said that low-income group is quite dominant compared to high-income group. In the circumstances, the attractiveness of the USD and Euro decrease, and we mentioned at the beginning of the article that this was one of the most important image management works used to protect the value of their money. Along with the impoverishment of low-income group, the accelerated brain drain to rich countries significantly changes the demographic structure and culture of these countries, causing them to gradually lose their position as attraction centers.
Finally, we live in a time when the flow of information is extremely high in the internet age, but it is equally difficult to access the right information. Although perception management through social media is currently dominated by Western countries, China has shown that this dominance could be shaken with the example of Tiktok. Therefore, with the emergence of popular social media platforms from the Eastern bloc as well, it may be possible to create a perception against the USD and the Euro and damage the image policy. For all these reasons, it seems possible that an economic policy based on commodities will be successful with the increase in population.
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So far, we have seen that countries with large economies have always taken a distant stance against cryptocurrencies, although they have positive moves on CBDC. For the first time, Russia announced that it wanted to use Bitcoin in trade by classifying it as a digital commodity or currency. With this move of Russia, it is extremely likely that cryptocurrency policies of developing countries such as Iran, India and Turkey will be shaped positively.
Since the basis of the issue is raw material, it can be expected that this system will carry out commodity tokenization, and implement functions such as borrowing and reserve holding over commodity tokens. All these developments can be actualized much sooner than expected, since Ivan Chebeskov, who is in charge of the Financial Stability Department of the Russian Ministry of Finance, explained that payments with cryptocurrency could start in 2023. Thus, the foundation of a future in which our perception of money will change with an economy built on tokens and where BTC gains reserve asset status does not seem far away.
Prepared By: Berkay Aybey
The opinions and comments expressed here belong to BV Crypto. BV Crypto cannot be held responsible for any financial transactions made on the basis of this post. Every investment and trading move involves risk. When making your decision, you should do your own research.
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