Last week Russian officials said that the country would consider taking payment in bitcoin for its oil. The gravity of this news should not be understated. Bitcoin is 13 years old and is already being used by countries to circumvent economic sanctions. Two implications come to mind here.
Bitcoin is large enough and mature enough to handle country sized transactions ($ millions/tx)
Economic sanctions may no longer be an effective means of damaging the economy of adversarial states
In this letter, I will be exploring the two above implications in detail and giving my thoughts on what this means for bitcoin (and the global economy) moving forward.
Bitcoin is Growing Up
It is one thing to have a tiny nation such as El Salvador declare bitcoin as legal tender. It is another for the second largest exporter of oil in the world to start accepting payments in bitcoin.
Needless to say, Bitcoin is growing up and becoming a global currency, more so out of necessity of the context, rather than outright desire to adopt it for its properties.
Russia giving other nations the choice between purchasing oil in the Ruble or bitcoin ends up being a win-win for Russia, and a lose-lose for Russia’s adversaries.
The Win-Win
Vladimir Putin said that they would continue to export oil to “friendly” countries that wish to buy their oil as long as they pay in Rubles. This makes complete sense for Russia because the price of the Ruble fell 33% in the days following the Ukrainian invasion.
By making countries pay them in Rubles for oil, those countries must first purchase Rubles. In this situation, Russia gets to sell oil, and benefit from the fact that they can dictate that the customer pay in Rubles.
The other situation is if the customer pays in bitcoin. In this instance, Russia still gets to sell their oil, but instead they’re acquiring large quantities of bitcoin. The reason why they would want to start doing this is to hold something that cannot be sanctioned.
As I pointed out in an earlier letter, the economic sanctions placed on Russia is incentivizing them to start building economic relationships and financial infrastructure that is not subject to censorship by their adversaries.
The Lose-Lose
On the other side is NATO and Europe. The cards have already been dealt and I think Russia is holding a better hand.
Russia has oil that Europe needs to survive. One country in particular is worth focusing on; Germany.
In the last 20 years, the price of energy has been increasing in Germany. It now sits at $0.35/KwH (December 2021). In comparison, Canadians pay about $0.10 - $0.12 per KwH. USA pays about $0.15. Obviously the prices vary quite a bit from region to region within the respective countries.
The reason why this is worth exploring deeper is because of a series of decisions made by Germany. In the past decade, Germany has been progressively closing their nuclear power plants. As of January 2022, the total number of operational facilities is down to 3.
The plan is to make Germany a greener nation by switching entirely to renewables by 2035. The problem is that they still have a large reliance on fossil fuels, and have put themselves in a rather difficult geopolitical situation.
By shutting down their power plants, they’ve increased their dependence on Russia. Now Germany has its hands tied and is forced to deal with Russia if it wants to continue to acquire oil and gas to keep its own economy and energy infrastructure afloat.
The lose-lose here is that Germany has to now buy Rubles, and is forced to do so. They can import the oil from other countries, but this would only further increase the already skyrocketing energy costs.
They have to choose from buying Russian oil with Russian currency (or Bitcoin), or further increase the cost of energy within their own borders.
Now, Russia is even offering a discount on oil, only increasing the incentive for countries to continue doing business with them.
The Lesser of Two Evils
I surmise that western nations and European countries are going to begrudgingly do business with Russia. But they will be forced to choose between purchasing oil with Rubles, or Bitcoin.
I think they’ll choose whatever they perceive to be the lesser of two evils.
If they purchase with Rubles, then this ultimately ends up strengthening the Ruble and Russian economy. If they choose to purchase with bitcoin, then they’re inadvertently giving credit to this nascent internet money that Western nations maintain “Is NOT money”.
Different countries will end up choosing the option that serves them best.
The Most to Lose, the Most to Gain
If we try to make sense out of which countries will choose paying in Rubles, and which will choose bitcoin, we can use the heuristic “Who has the least to lose and the most to gain”. Let’s take Turkey for example.
It doesn’t make sense for them to use their own currency to buy Rubles, because their currency is already well on their way to full collapse and failure. They have already lost so much, and so they stand to gain quite a bit by opting to acquire and use bitcoin for international trade.
When Turkey isn’t using the bitcoin to trade with Russia, they can hold it long term to increase the buying power of their country’s reserves. The same cannot be said for holding excess Rubles.
On the other hand, a country like Germany has a lot to lose and not as much to gain by using bitcoin. For example, they are still a part of the European union, and using bitcoin to purchase Russian oil might be counter to the wishes of the European union. Adopting an internet currency such as bitcoin for international trade runs counter to the objectives of having and keeping a strong Euro.
Despite what Germany might want as a country and how they see bitcoin, they might be locked into using Euros to buy Russian oil. They have a mutual interest along with other European countries to continue giving utility to and support to the Euro.
So I predict that the countries that are closer to economic ruin will be the first to switch over to transacting in bitcoin (Turkey, Lebanon, El Salvador, Venezuela).
The countries that are bureaucratically top heavy, or otherwise relatively strong economically will continue to use their own currency (Germany, United States, United Kingdom).
Talking Numbers
In 2021, Europe imported a total of $108 billion worth of energy from Russia. That is $29.5 million worth of energy per day. Again, the two options here is Europe needs to buy $29.5 million worth of Rubles or BTC per day only to use it to purchase energy from Russia (Assuming 2021 energy trends continue).
This sort of buying pressure on the bitcoin market is obviously positive news in the short term. It is not like Russia can turn around and spend their bitcoin with any other nation.
Russia would either hang onto their bitcoin and back the Ruble with it, or develop trade partnerships wherein the currency of choice is Bitcoin.
An ideal trade partner in this regard would be Turkey, as the Turkish Lira fell by 37% by the end of 2021. Again, Turkey has more to gain from using bitcoin than they have to lose.
A Threat to the Petrodollar System
If you’re unfamiliar with the petrodollar system, I recommend first listening to any podcast (there are many) wherein Alex Gladstein breaks down how the petrodollar system works.
It’s a heavy geo-political discussion, but one worth understanding if you’re interested in figuring out the power struggle between oil and money.
In a nutshell, the petrodollar system is one wherein Saudi oil can only be purchased with the USD.
This forces countries buying Saudi oil to first buy dollars. This is one of the major contributing factors that has solidified the USD as the global reserve currency for the last 50 years.
Russia Selling Oil at a Discount
The fact that Russia is now selling oil at a discount for Rubles is a massive threat to the petrodollar system. America has gone to war in the past to protect their monopoly on world oil markets.
As outlined earlier, one of the advantages that Russia has is that Europe is dependent on Russian oil. My question here is, what lengths will America (NATO?) go to in order to protect their precious petrodollar system? I speculate that there is more going on than what meets the eye.
Changing World Order
I shared this video in an earlier newsletter, but I’m sharing it again in case you haven’t watched it.
We’re in the middle of a paradigm shift right now. Our old systems are breaking down, giving rise to new systems. As America declines as the current world superpower, new powers such as China are rising with an unprecedented amount of momentum.
The methods (guns & steel) for maintaining power no longer work in 2022. Economic sanctions can be evaded and our wars are fought with money and information instead of exclusively guns and steel.
I am still holding my breath to see how this all plays out. I maintain that the wild card in this whole situation that is unfolding is bitcoin. It is the thing that no country could or would predict play as large of a role as it is.
With each passing day, it seems like Bitcoin is a more relevant card in the deck. It’s all just a matter of how each country plays their hand.
Regards,
Keegan
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