INSTEX, gold, (crypto)currencies and geopolitics. WHAT IF?

Bijgewerkt: 6 aug 2019

What if the world decides to weaponize the dollar as the World Reserve Currency? During the first American Economic War Games in 2010 at the Ministry of Defense, a scenario was simulated in which Russia decides to introduce a gold-covered ruble while demanding that Russian oil can only be paid with this new ruble. What if Iran is making it real? Six months ago the PayMon cryptocurrency has been launched by a consortium of Iranian banks and a second Iranian cryptocurrency is on it’s way to serve against the US sanctions. It’s value will be covered by the gold reserves in the country and mining the crypto is just legalized by the Iranian government. What if they call it the Hawala coin? Iran relies upon its oil sales to China, to ensure its fiscal well-being. What if Asia decides to buy oil with PayMon? According to the “Dollar Milkshake” theory, the dollar is going to strengthen and this dollar strength will lead to all kinds of trouble in the global market place, specifically in the international and emerging markets. What if it reacts in a currency crisis?

In response to the Parliament questions about EU measures to counter the US sanctions against Iran, the Dutch government announced to invest and join the financial mechanism of Instrument in Support of Trade Exchanges (INSTEX) to do business with Islamic Republic of Iran. Based in Paris, INSTEX is a state-owned company established by France, Germany and the United Kingdom. It aims to ease Europe-Iran trade by developing a netting mechanism that eliminates the need for cross-border financial transactions. In this model, INSTEX will coordinate payment instructions between companies engaged in bilateral trade between Europe and Iran, enabling European exporters to receive payment for sales to Iran from funds that are already within Europe. The counterpart entity, Special Trade & Finance Institute (STFI) will then mirror those transactions, allowing Iranian exporters to get paid with funds already in Iran. INSTEX is designed to facilitate humanitarian trade, especially in food and medicine, by providing additional confidence to banks and companies seeking to participate in these exchanges, but ultimately it’s about oil. As the situation has escalated, Tehran has demanded that INSTEX be expanded to include oil trade, which is a key aspect of the existing sanctions regime.

Per Fischer, a former Commerzbank executive, is stepping down as the president of INSTEX, and will be replaced by career diplomat and Middle East expert Bernd Erbel. The change in leadership comes as Erbel will have a different mission. He will leave key commercial responsibillities to the new managers, focusing instead on ensuring a constructive working relationship between INSTEX and STFI. In a push to process transactions more quickly, INSTEX is rolling out a new factoring service for European exporters and plans to expand their operations in the coming year. Such factoring service doesn’t require the direct participation of its Iranian counterpart. INSTEX will charge a 5 percent fee as part of its factoring service. This fee will vary based on the transaction. Such costs are not negligible for European exporters, especially when considering that INSTEX will require each transaction to undergo third-party due diligence at the exporter’s expense. Yet they are in line with the transaction fees typically charged by banks in those cases in which the bank is willing to accept funds originating in Iran. Moreover, for European companies burdened with unpaid invoices, the certainty of payment from INSTEX, a state-owned European company, is inherently attractive. In other words, INSTEX is not only a political message, it’s very much about war.

Iranian cryptocurrencies, legal mining, INSTEX and the current price increase of gold seem to be an early phase of monetary depreciation. With the recent change of leadership at the European Central Bank, the euro likely has a bright future ahead of itself, and the US has no reason to oppose a strong and stable Eurozone. Even if it comes at some cost to the dollar’s role in international transactions, the dollar remains the US government number one policy tool. So what if the “Dollar Milkshake” theory is really happening? The monetary system is not designed for a strong dollar. What if bonds will break and equities are going up? Chaos makes people seeking a safe haven, so gold will certainly benefit from this. But the US has every interest in opposing the “flight to gold” so that the monetary system introduced in 1944, with the dollar as the main currency, continues to exist as long as possible. That’s why tempering the gold price is beneficial for maintaining the role of the dollar as an international reserve currency.

Gold pricing is currently achieved through futures trading, during US trading hours on the Chicago COMEX stock exchange and during the digital Globex market that is operational almost 24 hours a day. As most transactions are speculators which don’t seek physical delivery and are satisfied with paper profits, the market can be manipulated by offering large quantities of paper gold. In this way, the one with the most paper gold can easily move the market in a certain direction. This happens regularly according to an attack technique in which American market parties simultanuously withdraw all their sales orders and bombard the market with a stream of sales orders. This sales strategy is only used to undermine the price of gold. In 1933, the US President Roosevelt used his special power to prohibit civilians from owning gold. In 1934, Roosevelt devalued the value of the dollar with 69% by raising the gold price from USD 20.67 to USD 35. What if the saga continues?

Last year, Riksbank the Swedish Central Bank, announced to experiment with a Central Bank Digital Currency (CBDC): the e-Krona. Super Mario locked the door for such experiment, which means that Draghi has implicitly opted the status quo of an unstable monetary system. Will Christine Lagarde come up with political solutions? What if the e-Euro will follow? What if the nuclear deal falls?

In the end, everything comes down to cashflow. Everything. Even war.

Feel free to comment and create discussion. Sofiah van Maanen

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