Ive here. Economists and political commentators alike expressed keen interest in Putin’s announcement that Russia would only accept rubles for gas payments from “unfriendly countries”. As we discussed, there are strong and weak ways in which Russia demands these payments, and Putin called on his banks and financial institutions to work out the details next week.

Some countries, such as Germany and Italy, say no, although there are possible implementation paths that won’t be disruptive. We’ll soon see how demanding Russia’s demands actually are.

Meanwhile, Russia has at least been badly burned by the West using its banking system steal Freeze Russia’s $300 billion foreign exchange reserves, eager to reduce its risk of more mischief.

Michael Hudson reviews some of the broader implications in a Q&A with Saker.

Originally Posted in Wine Hunter’s Vineyard

I decided to contact Michael Hudson and ask him (my level, original) questions after Putin announced that he would only sell gas in rubles to hostile countries. Here’s our full email exchange:

Andre: Russia has announced that she will only sell gas to “hostile countries” for the ruble. This means that for non-hostile countries, she will continue to sell in USD/EUR. Can these hostile countries still buy gas from Russia through third countries?

Michael Hudson: There appear to be two ways for rival countries to buy Russian gas.One seems to be to use Russian banks no Banned by SWIFT. The other way does seem to be through what appears to be a formal or informal third country bank or exchange. India and China seem best suited for this role. U.S. diplomats will urge India to impose its own sanctions on Russia, which has a strong pro-American constituency. But even Modi sees clear advantages to benefiting from India’s geopolitical position with Russia and China’s Belt and Road Initiative over whatever the US has to do.

Back in the 1960s, the West dealt with the Soviet Union through barter. Arranging such barter transactions became a large banking business. Barter transactions are the typical “final stage” of a credit economy deteriorating into a monetary economy collapse. In the medium term, a new international financial organization needs to be created to replace the dollarized IMF to handle such intra-group transactions in today’s new multipolar world.

Andre: These hostile nations will pay extra for the service, but they don’t have to get rubles. Is this even possible?

Michael Hudson: Presumably, Russia will not bear the added cost to banks of avoiding U.S. sanctions. After setting the price it hopes to eventually reach, it just adds them to the price – preferably the original “old” ruble/euro or ruble/dollar rate, not the rate that depreciated after the attack.

Andre: Question: Do you think the EU will agree to pay the ruble, or will it cover 40% of the entire lost energy?

Michael Hudson: They’ll pay — or get elected. If they were to reduce energy imports from Russia, the distressed price of natural gas would soar and severe shortages would disrupt the economy. Energy is productivity and GDP. Of course, for Russia, this is an opportunity to rest now, not later – to hold NATO responsible for supply disruptions. So if I were Russia, I wouldn’t rush to help with foreign payments. The same goes for non-petroleum raw materials, from neon to palladium to titanium, nickel and aluminum.

Andre: So far this has only worked for natural gas. Do you think Russia will expand it to oil, wheat and fertilizers, and if so, what impact will this have on the world economy?

Michael Hudson: All Russian exports are affected by these currency controls, as all bank transfers are sanctioned in the manner described above. Russia has no use for dollars or euros, because those are available for grabs. Since past norms of international law and financial policy no longer apply, it needs to have full control over any monetary assets it receives.

Andre: Russia has a lot of natural resources and a lot of technology/commodities. If she succeeds in getting paid in rubles, then the ruble could become a major “sanctuary” currency that would be a natural resource/commodity backed currency.

Michael Hudson: I’m not sure what a “sanctuary” currency is, but the ruble will be a self-sustaining currency. If its trade and balance of payments improve, the problem could be preventing it from rising. If that happens, the question will be whether a stronger ruble will force buyers of Russian exports to pay more in their own currency. As we discuss, a new multilateral financial system is being constructed. Will there be speculation? Forward sales? A brief squeeze and a Soros-style raid? Who will be the participants, according to what rules…?

Andre: How much of a blow might this Russian decision hit the dollar? MBS is negotiating with China over RMB oil sales. Do you think China and Russia will pull down the petrodollar and will we see the commodity-backed ruble and commodity-backed renminbi replace the dollar?

Michael Hudson: The petrodollar will remain between the US and its allies. But in addition to this, there will be Saudi and Indian dollar arrangements for trade in oil, minerals, industrial products and possible international investment. Trading of these products will be able to take place in multiple currencies, possibly on multiple exchanges. It is unclear whether some formal or informal arbitrage will develop between these areas. This is part of the design. To monitor and regulate the resulting financial and trade arrangements, an alternative to the International Monetary Fund is needed. The U.S. will not join any organization that does not have a veto, so we will see the world divided into different areas of trade and currency. The result was less of a conflict than of two very different business philosophies, as the non-American world developed an alternative to financialized neoliberalism.

Andre: The US basically stole gold and foreign exchange from Russia. The Russians claim that the US is humiliating itself, which will destroy the reputation of the dollar, do you agree?

Michael Hudson: Absolutely: Iran after the overthrow of the Shah, Afghanistan’s foreign reserves earlier this year, Venezuela’s gold in the Bank of England, and now Russia. Even timid Germany is asking for planes to start shipping back to Germany its gold deposited at the Federal Reserve Bank of New York!

Andre: Do you think Russia will retaliate against the US/UK/EU and nationalize/confiscate its assets in Russia or even Russia-friendly countries (China?)?

Michael Hudson: Russia is very careful to do everything in accordance with international law — of course, international law has all kinds of precedents and pretexts, and its courts are often dominated by U.S. judges who support the U.S. version of the law no matter what it declares to be legal. “Everyday order based on rules”, not the “rule of law” of the UN. If NATO investors give up their assets in Russia, those assets could be sold to buyers who promise to keep the business — perhaps at a discount. Russia can impose hefty fines for abandonment, such as when a landlord abandons a building resulting in local clean-up costs. Abandonment results in “nuisance”.

This will result in immediate forfeiture of current taxes, rent and salaries, or non-payment of current supplies, including electricity and fuel. Think about what would happen if the gas bill wasn’t paid and the pipes froze and flooded the property. There are penalties that the whole world can apply.

International law provides for the recovery of some wrongfully confiscated assets — just like the U.S. confiscated Russian-owned reserves and personal property. Russia really has nothing to lose at this point. It doesn’t look like there will be much Russian-European crossover investment for quite some time. After 1991, Russia finally gave up hope of “turning to the West”. The dream turned into a nightmare, with Presidents Putin and Lavrov both expressing their distaste for Europe acting on something so uncivilized. So for Russia – and a growing number of others – NATO Europe and North America are the new barbarians.Russia is turning

This is certainly the goal of US policy – locking Europe into its own dollarized neoliberal order, preventing any shared prosperity through trade and investment with Russia or, behind it, China. It looks like today’s sanctions are permanent for years to come. So, of course, Russia needs to keep formerly NATO-owned businesses operating. Let NATO investors recoup what the U.S. grabs. (Hint: The U.S. may just start grabbing reserves in China or Latin America or the Near East to pay NATO investors who lost out in Russia. That’s using Afghan money to pay the victims of the 9/11 attacks in Saudi Arabia two decades ago mode.)

Andre: Finally, if there is a question I forgot to ask, how would you answer it?

Michael Hudson: Your question is about specific problems and solutions. But the overall resolution needs to be system-wide, not patchwork. These specific issues cannot truly be resolved without a far-reaching institutional reorganization of the international financial system, world trade, world courts, and the United Nations without the U.S. veto. Such institutional reform requires an economic theory to provide its basic principles. The new international economic order will be based on non-neoliberal principles – along the lines of what used to be called socialism, when it was expected that industrial capitalism would evolve into this.

Andre: Thank you so much for your time and expertise! !