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Russian Geoeconomics Tzar Introduces The New Global Financial System

https://thecradle.co/Article/interviews/9135

by Pepe Escobar

The world's new monetary system, underpinned by a digital currency,
will be backed by a basket of new foreign currencies and natural
resources. And it will liberate the Global South from both western
debt and IMF-induced austerity.

Sergey Glazyev is a man living right in the eye of our current
geopolitical and geoeconomic hurricane. One of the most influential
economists in the world, a member of the Russian Academy of Sciences,
and a former adviser to the Kremlin from 2012 to 2019, for the past
three years he has helmed Moscow’s uber strategic portfolio as
Minister in Charge of Integration and Macroeconomics of the Eurasia
Economic Union (EAEU).

Glazyev’s recent intellectual production has been nothing short of
transformative, epitomized by his essay Sanctions and Sovereignty and
an extensive discussion of the new, emerging geoeconomic paradigm in
an interview to a Russian business magazine.

In another of his recent essays, Glazyev comments on how “I grew up in
Zaporozhye, near which heavy fighting is now taking place in order to
destroy the Ukrainian Nazis, who never existed in my small Motherland.
I studied at a Ukrainian school and I know Ukrainian literature and
language well, which from a scientific point of view is a dialect of
Russian. I did not notice anything Russophobic in Ukrainian culture.
In the 17 years of my life in Zaporozhye, I have never met a single
Banderist.”

Glazyev was gracious to take some time from his packed schedule to
provide detailed answers to a first series of questions in what we
expect to become a running conversation, especially focused to the
Global South. This is his first interview with a foreign publication
since the start of Operation Z. Many thanks to Alexey Subottin for the
Russian-English translation.

The Cradle: You are at the forefront of a game-changing geoeconomic
development: the design of a new monetary/financial system via an
association between the EAEU and China, bypassing the US dollar, with
a draft soon to be concluded. Could you possibly advance some of the
features of this system – which is certainly not a Bretton Woods III –
but seems to be a clear alternative to the Washington consensus and
very close to the necessities of the Global South?

Glazyev: In a bout of Russophobic hysteria, the ruling elite of the
United States played its last “trump ace” in the hybrid war against
Russia. Having “frozen” Russian foreign exchange reserves in custody
accounts of western central banks, financial regulators of the US, EU,
and the UK undermined the status of the dollar, euro, and pound as
global reserve currencies. This step sharply accelerated the ongoing
dismantling of the dollar-based economic world order.

Over a decade ago, my colleagues at the Astana Economic Forum and I
proposed to transition to a new global economic system based on a new
synthetic trading currency based on an index of currencies of
participating countries. Later, we proposed to expand the underlying
currency basket by adding around twenty exchange-traded commodities. A
monetary unit based on such an expanded basket was mathematically
modeled and demonstrated a high degree of resilience and stability.

At around the same time, we proposed to create a wide international
coalition of resistance in the hybrid war for global dominance that
the financial and power elite of the US unleashed on the countries
that remained outside of its control. My book The Last World War: the
USA to Move and Lose, published in 2016, scientifically explained the
nature of this coming war and argued for its inevitability – a
conclusion based on objective laws of long-term economic development.
Based on the same objective laws, the book argued the inevitability of
the defeat of the old dominant power.

Currently, the US is fighting to maintain its dominance, but just as
Britain previously, which provoked two world wars but was unable to
keep its empire and its central position in the world due to the
obsolescence of its colonial economic system, it is destined to fail.
The British colonial economic system based on slave labor was
overtaken by structurally more efficient economic systems of the US
and the USSR. Both the US and the USSR were more efficient at managing
human capital in vertically integrated systems, which split the world
into their zones of influence. A transition to a new world economic
order started after the disintegration of the USSR. This transition is
now reaching its conclusion with the imminent disintegration of the
dollar-based global economic system, which provided the foundation of
the United States’ global dominance.

The new convergent economic system that emerged in the PRC (People’s
Republic of China) and India is the next inevitable stage of
development, combining the benefits of both centralized strategic
planning and market economy, and of both state control of the monetary
and physical infrastructure and entrepreneurship. The new economic
system united various strata of their societies around the goal of
increasing common wellbeing in a way that is substantially stronger
than the Anglo-Saxon and European alternatives. This is the main
reason why Washington will not be able to win the global hybrid war
that it started. This is also the main reason why the current
dollar-centric global financial system will be superseded by a new
one, based on a consensus of the countries who join the new world
economic order.

In the first phase of the transition, these countries fall back on
using their national currencies and clearing mechanisms, backed by
bilateral currency swaps. At this point, price formation is still
mostly driven by prices at various exchanges, denominated in dollars.
This phase is almost over: after Russia’s reserves in dollars, euro,
pound, and yen were “frozen,” it is unlikely that any sovereign
country will continue accumulating reserves in these currencies. Their
immediate replacement is national currencies and gold.

The second stage of the transition will involve new pricing mechanisms
that do not reference the dollar. Price formation in national
currencies involves substantial overheads, however, it will still be
more attractive than pricing in ‘un-anchored’ and treacherous
currencies like dollars, pounds, euro, and yen. The only remaining
global currency candidate – the yuan – won’t be taking their place due
to its inconvertibility and the restricted external access to the
Chinese capital markets. The use of gold as the price reference is
constrained by the inconvenience of its use for payments.

The third and the final stage on the new economic order transition
will involve a creation of a new digital payment currency founded
through an international agreement based on principles of
transparency, fairness, goodwill, and efficiency. I expect that the
model of such a monetary unit that we developed will play its role at
this stage. A currency like this can be issued by a pool of currency
reserves of BRICS countries, which all interested countries will be
able to join. The weight of each currency in the basket could be
proportional to the GDP of each country (based on purchasing power
parity, for example), its share in international trade, as well as the
population and territory size of participating countries.

In addition, the basket could contain an index of prices of main
exchange-traded commodities: gold and other precious metals, key
industrial metals, hydrocarbons, grains, sugar, as well as water and
other natural resources. To provide backing and to make the currency
more resilient, relevant international resource reserves can be
created in due course. This new currency would be used exclusively for
cross-border payments and issued to the participating countries based
on a pre-defined formula. Participating countries would instead use
their national currencies for credit creation, in order to finance
national investments and industry, as well as for sovereign wealth
reserves. Capital account cross-border flows would remain governed by
national currency regulations.

The Cradle: Michael Hudson specifically asks that if this new system
enables nations in the Global South to suspend dollarized debt and is
based on the ability to pay (in foreign exchange), can these loans be
tied to either raw materials or, for China, tangible equity ownership
in the capital infrastructure financed by foreign non-dollar credit?

Glazyev: Transition to the new world economic order will likely be
accompanied by systematic refusal to honor obligations in dollars,
euro, pound, and yen. In this respect, it will be no different from
the example set by the countries issuing these currencies who thought
it appropriate to steal foreign exchange reserves of Iraq, Iran,
Venezuela, Afghanistan, and Russia to the tune of trillions of
dollars. Since the US, Britain, EU, and Japan refused to honor their
obligations and confiscated wealth of other nations which was held in
their currencies, why should other countries be obliged to pay them
back and to service their loans?

In any case, participation in the new economic system will not be
constrained by the obligations in the old one. Countries of the Global
South can be full participants of the new system regardless of their
accumulated debts in dollars, euro, pound, and yen. Even if they were
to default on their obligations in those currencies, this would have
no bearing on their credit rating in the new financial system.
Nationalization of extraction industry, likewise, would not cause a
disruption. Further, should these countries reserve a portion of their
natural resources for the backing of the new economic system, their
respective weight in the currency basket of the new monetary unit
would increase accordingly, providing that nation with larger currency
reserves and credit capacity. In addition, bilateral swap lines with
trading partner countries would provide them with adequate financing
for co-investments and trade financing.

The Cradle: In one of your latest essays, The Economics of the Russian
Victory, you call for “an accelerated formation of a new technological
paradigm and the formation of institutions of a new world economic
order.” Among the recommendations, you specifically propose the
creation of “a payment and settlement system in the national
currencies of the EAEU member states” and the development and
implementation of “an independent system of international settlements
in the EAEU, SCO and BRICS, which could eliminate critical dependence
of the US-controlled SWIFT system.” Is it possible to foresee a
concerted joint drive by the EAEU and China to “sell” the new system
to SCO members, other BRICS members, ASEAN members and nations in West
Asia, Africa and Latin America? And will that result in a bipolar
geoeconomy – the West versus The Rest?

Glazyev: Indeed, this is the direction where we are headed.
Disappointingly, monetary authorities of Russia are still a part of
the Washington paradigm and play by the rules of the dollar-based
system, even after Russian foreign exchange reserves were captured by
the west. On the other hand, the recent sanctions prompted extensive
soul searching among the rest of the non-dollar-block countries.
western ‘agents of influence’ still control central banks of most
countries, forcing them to apply suicidal policies prescribed by the
IMF. However, such policies at this point are so obviously contrary to
the national interests of these non-western countries that their
authorities are growing justifiably concerned about financial
security.

You correctly highlight potentially central roles of China and Russia
in the genesis of the new world economic order. Unfortunately, current
leadership of the CBR (Central Bank of Russia) remains trapped inside
the intellectual cul-de-sac of the Washington paradigm and is unable
to become a founding partner in the creation of a new global economic
and financial framework. At the same time, the CBR already had to face
the reality and create a national system for interbank messaging which
is not dependent on SWIFT, and opened it up for foreign banks as well.
Cross-currency swap lines have been already set up with key
participating nations. Most transactions between member states of the
EAEU are already denominated in national currencies and the share of
their currencies in internal trade is growing at a rapid pace.

A similar transition is taking place in trade with China, Iran, and
Turkey. India indicated that it is ready to switch to payments in
national currencies as well. A lot of effort is put in developing
clearing mechanisms for national currency payments. In parallel, there
is an ongoing effort to develop a digital non-banking payment system,
which would be linked to gold and other exchange-traded commodities –
‘stablecoins.’

Recent US and European sanctions imposed on the banking channels have
caused a rapid increase in these efforts. The group of countries
working on the new financial system only needs to announce the
completion of the framework and readiness of the new trade currency
and the process of formation of the new world financial order will
accelerate further from there. The best way to bring it about would be
to announce it at the SCO or BRICS regular meetings. We are working on
that.

The Cradle: This has been an absolutely key issue in discussions by
independent analysts across the west. Was the Russian Central Bank
advising Russian gold producers to sell their gold in the London
market to get a higher price than the Russian government or Central
Bank would pay? Was there no anticipation whatsoever that the coming
alternative to the US dollar will have to be based largely on gold?
How would you characterize what happened? How much practical damage
has this inflicted on the Russian economy short-term and mid-term?

Glazyev: The monetary policy of the CBR, implemented in line with the
IMF recommendations, has been devastating for the Russian economy.
Combined disasters of the “freezing” of circa $400 billion of foreign
exchange reserves and over a trillion dollars siphoned from the
economy by oligarchs into western offshore destinations, came with the
backdrop of equally disastrous policies of the CBR, which included
excessively high real rates combined with a managed float of the
exchange rate. We estimate this caused under-investment of circa 20
trillion rubles and under-production of circa 50 trillion rubles in
goods.

Following Washington’s recommendations, the CBR stopped buying gold
over the last two years, effectively forcing domestic gold miners to
export full volumes of production, which added up to 500 tons of gold.
These days the mistake and the harm it caused are very much obvious.
Presently, the CBR resumed gold purchases, and, hopefully, will
continue with sound policies in the interest of the national economy
instead of ‘targeting inflation’ for the benefit of international
speculators, as had been the case during the last decade.

The Cradle: The Fed as well as the ECB were not consulted on the
freeze of Russian foreign reserves. Word in New York and Frankfurt is
that they would have opposed it were they to have been asked. Did you
personally expect the freeze? And did the Russian leadership expect
it?

Glazyev: My book “The Last World War” that I already mentioned, which
was published as far back as 2015, argued that the likelihood of this
happening eventually is very high. In this hybrid war, economic
warfare and informational/cognitive warfare are key theaters of
conflict. On both of these fronts, the US and NATO countries have
overwhelming superiority and I did not have any doubt that they would
take full advantage of this in due course.

I have been arguing for a long time for replacement of dollars, euro,
pounds, and yen in our foreign exchange reserves with gold, which is
produced in abundance in Russia. Unfortunately, western agents of
influence which occupy key roles at central banks of most countries,
as well as rating agencies and key publications, were successful in
silencing my ideas. To give you an example, I have no doubt that
high-ranking officials at the Fed and the ECB were involved in
developing anti-Russian financial sanctions. These sanctions have been
consistently escalating and are being implemented almost instantly,
despite the well-known difficulties with bureaucratic decision making
in the EU.

The Cradle: Elvira Nabiullina has been reconfirmed as the head of the
Russian Central Bank. What would you do differently, compared to her
previous actions? What is the main guiding principle involved in your
different approaches?

Glazyev: The difference between our approaches is very simple. Her
policies are an orthodox implementation of IMF recommendations and
dogmas of the Washington paradigm, while my recommendations are based
on the scientific method and empirical evidence accumulated over the
last hundred years in leading countries.

The Cradle: The Russia-China strategic partnership seems to be
increasingly ironclad – as Presidents Putin and Xi themselves
constantly reaffirm. But there are rumbles against it not only in the
west but also in some Russian policy circles. In this extremely
delicate historical juncture, how reliable is China as an all-season
ally to Russia?

Glazyev: The foundation of Russian-Chinese strategic partnership is
common sense, common interests, and the experience of cooperation over
hundreds of years. The US ruling elite started a global hybrid war
aimed at defending its hegemonic position in the world, targeting
China as the key economic competitor and Russia as the key
counter-balancing force. Initially, the US geopolitical efforts were
aiming to create a conflict between Russia and China. Agents of
western influence were amplifying xenophobic ideas in our media and
blocking any attempts to transition to payments in national
currencies. On the Chinese side, agents of western influence were
pushing the government to fall in line with the demands of the US
interests.

However, sovereign interests of Russia and China logically led to
their growing strategic partnership and cooperation, in order to
address common threats emanating from Washington. The US tariff war
with China and financial sanctions war with Russia validated these
concerns and demonstrated the clear and present danger our two
countries are facing. Common interests of survival and resistance are
uniting China and Russia, and our two countries are largely symbiotic
economically. They complement and increase competitive advantages of
each other. These common interests will persist over the long run.

The Chinese government and the Chinese people remember very well the
role of the Soviet Union in the liberation of their country from the
Japanese occupation and in the post-war industrialization of China.
Our two countries have a strong historical foundation for strategic
partnership and we are destined to cooperate closely in our common
interests. I hope that the strategic partnership of Russia and the
PRC, which is enhanced by the coupling of the One Belt One Road with
the Eurasian Economic Union, will become the foundation of President
Vladimir Putin’s project of the Greater Eurasian Partnership and the
nucleus of the new world economic order.