Esquire Editor Fined for Promoting Silk Road

From this March 15th, 2012 Russia Today broadcast, it is amusing to watch the news anchors struggle around trying not to mention something that they are not allowed to mention.



According to realhuman on the Reddit site, "Police called it 'promotion of drugs'. The magazine published buyers' reviews about different sellers and how to log in with tor and buy with bitcoin. The fine was about $1300."

For further reading:
"Russian Esquire magazine fined for writing about Silk Road", Amir Taaki, Bitcoin Media, March 15, 2012
"Silk Road: A Vicious Blow to the War on Drugs", The Austin Cut, January 2, 2012
"Bit Coins for Black Markets", Virginia Prescott, New Hampshire News, November 16, 2011
"Using Silk Road", gwern.net, June 2011

China, Russia Quit Dollar

By Su Qiang and Li Xiaokun
China Daily
Wednesday, November 24, 2010

http://www.chinadaily.com.cn/china/2010-11/24/content_11599087.htm

St. Petersburg, Russia - China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

"About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.

"That has forged an important step in bilateral trade and it is a result of the consolidated financial systems of world countries," he said.

Putin made his remarks after a meeting with Wen. They also officiated at a signing ceremony for 12 documents, including energy cooperation.

The documents covered cooperation on aviation, railroad construction, customs, protecting intellectual property, culture and a joint communiqu. Details of the documents have yet to be released.

Putin said one of the pacts between the two countries is about the purchase of two nuclear reactors from Russia by China's Tianwan nuclear power plant, the most advanced nuclear power complex in China.

Putin has called for boosting sales of natural resources - Russia's main export - to China, but price has proven to be a sticking point.

Russian Deputy Prime Minister Igor Sechin, who holds sway over Russia's energy sector, said following a meeting with Chinese representatives that Moscow and Beijing are unlikely to agree on the price of Russian gas supplies to China before the middle of next year.

Russia is looking for China to pay prices similar to those Russian gas giant Gazprom charges its European customers, but Beijing wants a discount. The two sides were about $100 per 1,000 cubic meters apart, according to Chinese officials last week.

Wen's trip follows Russian President Dmitry Medvedev's three-day visit to China in September, during which he and President Hu Jintao launched a cross-border pipeline linking the world's biggest energy producer with the largest energy consumer.

Wen said at the press conference that the partnership between Beijing and Moscow has "reached an unprecedented level" and pledged the two countries will "never become each other's enemy".

Over the past year, "our strategic cooperative partnership endured strenuous tests and reached an unprecedented level," Wen said, adding the two nations are now more confident and determined to defend their mutual interests.

"China will firmly follow the path of peaceful development and support the renaissance of Russia as a great power," he said.

"The modernization of China will not affect other countries' interests, while a solid and strong Sino-Russian relationship is in line with the fundamental interests of both countries."

Wen said Beijing is willing to boost cooperation with Moscow in Northeast Asia, Central Asia and the Asia-Pacific region, as well as in major international organizations and on mechanisms in pursuit of a "fair and reasonable new order" in international politics and the economy.

Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

Wen arrived in the northern Russian city on Monday evening for a regular meeting between Chinese and Russian heads of government.

He left St. Petersburg for Moscow late on Tuesday and is set to meet with Russian President Dmitry Medvedev on Wednesday.

For further reading:
"Currency settlement benefits Sino-Russia traders", China Daily, November 25, 2010
"China-Russia currency agreement further threatens U.S. dollar", International Business Times, November 24, 2010
"Official promotes yuan in place of reserve currencies", China Daily, November 15, 2010

Suiting Up for a Post-Dollar World

By John Browne
Euro Pacific Capital, Inc.
Friday, June 25, 2010

http://www.europac.net/externalframeset.asp?from=home&id=18958&type=browne

The global financial crisis is playing out like a slow-moving, highly predicable stage play. In the current scene, Western governments are caught between the demands of entitled welfare beneficiaries and the anxiety of bondholders who fear they will be stuck with the bill. As the crisis reaches an apex, prime ministers and presidents are forced into a Sophie's choice between social unrest and bankruptcy. But with the "Club Med" economies set to fall like dominoes, the US Treasury market is not yet acting the role we would have anticipated.

Our argument has always been that the US benefits from its reserve-currency status, allowing it to accumulate unsustainable debts for an unusually long period without the immediate repercussions of inflation or higher borrowing costs. But this false sense of security may be setting us up for a truly monumental crash.

There is fresh evidence that time is running out for the dollar-centric global monetary order. In fact, central banks outside the US are already making swift and discrete preparation for a post-dollar era.

To begin, the People's Bank of China has just this week decided to permit a wider trading range between the yuan and the dollar. This is the first step toward ending the infernal yuan-dollar peg. While the impetus behind this abrupt change remains a mystery, I have a sneaking suspicion that, as my colleague Neeraj Chaudhary explained in his commentary last week, the nationwide labor strikes were a prime motivator.

In response to the 2008 credit crunch, the Fed printed so many dollars that the People's Bank of China was forced to drive Chinese inflation into double digits to maintain the peg. The pain has fallen on China's workers, who have seen their wages stagnate while prices for everything from milk to apartments have skyrocketed. This week's move indicates that, regardless of its own policy motives, the Communist Party can no longer afford to keep pace with the dollar's devaluation. The result will be a shift in wealth from America to China, which may trigger a long-anticipated run on the dollar, while creating investment opportunities in China.

Just days before China's announcement, Russian President Dmitry Medvedev rattled his monetary sabre by telling the press of his intention to lead the world toward a new monetary order based on a broad basket of currencies. Giving strength to his claim, the Central Bank of Russia announced that it would be adding Canadian and Australian dollars to its reserves for the first time. Analysts suggest that the IMF may follow suit. While Russia floats in the limbo between hopeless kleptocracy and emerging economy, it does possess vast natural resources and a toe-hold in both Europe and Asia. In other words, it will be a strategically important partner for China as it tries to cast off dollar hegemony.

Speaking of Europe, the major powers there are moving toward a post-dollar world by rejecting President Obama's calls to jump on America's debt grenade. The prescriptions coming from Washington translate loosely to: our airship is on fire, so why don't you light a candle under yours so that we may crash and burn together. Given that dollar strength is largely seen as a function of euro weakness (as Andrew Schiff discussed in our most recent newsletter, debt troubles in the eurozone's fringe economies have created a distorted confidence in the greenback. However, as you might imagine, Europe has higher priorities than being America's fall guy. Led by an ever-bolder Germany, the European states are wisely choosing not to throw themselves on our funeral pyre, but to wisely clean house in anticipation of China's rise.

In another ominous sign for the dollar, the Financial Times reported Wednesday that after two decades as net sellers of gold, foreign central banks have now become net buyers. What's more, more than half of central bank officials surveyed by UBS didn't think the dollar would be the world's reserve in 2035. Among the predicted replacements were Asian currencies and the euro, but - by far - the favorite was gold. This is supported by Monday's revelation by the Saudi central bank that it had covertly doubled its gold reserves, just about a year after China made a similar admission. There is no reason to assume these are isolated incidents, or that the covert trade of dollars for gold doesn't continue. To the contrary, this is compelling evidence that foreign governments are outwardly supporting the status quo while quietly preparing for the dollar's almost-inevitable devaluation. What people like Paul Krugman believe to be a return to medieval economics may, in fact, be the wave of the future.

In peacetime, hardened troops will likely tolerate a blowhard general for an extended period; but when the artillery opens up with live ordnance, an ineffectual leader risks rapid demotion. The newspapers are now riddled with hints that foreign governments have lost faith in Washington and the dollar reserve system. It seems to me only natural that after a century of war, inflation, and socialism, the next hundred years would belong to those people who hold the timeless values of hard money and fiscal prudence. Unfortunately, our policymakers are not those people.

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Reprinted with permission.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

Medvedev Promotes Ruble as World Reserve Currency

By Paul Abelsky
Bloomberg
Saturday, June 19, 2010

http://www.bloomberg.com/news/2010-06-18/medvedev-talks-up-russia-s-ruble-as-global-reserve-currency-of-the-future.html

Russia wants the ruble to be one of the world’s reserve currencies as President Dmitry Medvedev renews his push to reduce the dollar’s dominance and make Moscow a global financial hub.

“Only three, five years ago it seemed like a fantasy” to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. “Now we are seriously discussing it.”

Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said.

“It’s something that’s obviously needed,” he said at the St. Petersburg International Economic Forum. “Developing a financial center in Moscow will considerably help to strengthen the ruble’s position as one of the reserve currencies.”

Reasserting Power

Medvedev’s comments underline Russia’s ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging.

If a country wants to alter the world economic order, including the number of reserve currencies, it must become an international financial center, Bank of Israel Governor Stanley Fischer said in an interview yesterday.

“For a currency to be a reserve currency, you have to have capital markets in which you can sell it and buy it very easily,” Fischer said. “New reserve currencies don’t emerge by fiat. They emerge as countries change.”

The ruble and the yuan may by 2015 be added to the basket of currencies that set the value of International Monetary Fund units called special drawing rights, Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill said. O’Neill coined the BRIC term in 2001 to describe the four nations -- Brazil, Russia, India and China -- that he estimates will collectively equal the U.S. in economic size by 2020.

Free Float

The ruble “has as many reasons to be in it as the pound,” he said today in an interview in St. Petersburg. “If Russia really wants to be in it, it’s got to allow people to use it all over the world.”

Allowing the ruble to trade freely is “very important,” O’Neill said.

“Inflation targeting is key,” he said. Without a shift to an inflation targeting regime, the ruble “isn’t going to be part of the SDR. You can’t have it both ways, really, unless the Chinese change the rules, which they might do by the end of this decade. China is going to be so big.”

Russia may “come very close to floating the ruble” in the course of one year to 18 months, Bank Rossii Chairman Sergei Ignatiev said in April. Even so, the central bank doesn’t need to take on legal obligations to stop intervening in the currency market, he said.

Yuan Flexibility

The People’s Bank of China today said it will allow more yuan exchange rate flexibility and reform of the exchange-rate mechanism as the nation’s economic recovery has “cemented” after the global financial crisis.

Medvedev said he envisages a new economic hierarchy allowing emerging-market giants such as Russia and China to drive the global agenda as the world emerges from the first global recession since the 1930s.

“We really live at a unique time, and we should use it to build a modern, prosperous and strong Russia, a Russia that will be a co-founder of the new world economic order,” he said.

Read the rest of the article.

For further reading:
"Russia Backs Stronger Rivals to Dollar", The Wall Street Journal, June 19, 2010
"Medvedev sees single currency dream in G8 coin gift", Breitbart, July 10, 2009

Thriving E-Money Industry Puzzles Regulators

By Irina Filatova

The Moscow Times
Wednesday, May 5, 2010

http://www.themoscowtimes.com/business/article/thriving-e-money-industry-puzzles-regulators/405368.html

Veronika Moiseyeva, 24, a broadcast journalist, loses no sleep over holiday gifts because she knows she can always send her friends a virtual bouquet of flowers on Vkontakte.ru, Russia's leading social network.

"The last time I sent flowers to my friends was on March 8. But there are different occasions. It's a new way to communicate," Moiseyeva said.

Vkontakte.ru offers a variety of inexpensive virtual gifts that can be purchased through an instant cell phone message, a credit card or an electronic payments terminal.

Buying virtual gifts is one of the most popular types of electronic payments, major players on the electronic money market said. But legal regulations remain a matter of concern for many operators as the presidential administration considers two versions of a bill to create a new National Payment System aimed at uniting players in the electronic payment market.

The e-money market was worth 40 billion rubles ($1.3 billion) in 2009 and may double this year "if a proper law is approved and the current dynamics remain," said Viktor Dostov, chairman of the Russian E-Money Association, an industry group.

Industry players said regulation is needed but should be compatible with the current market model. The government, however, is caught in an inner struggle over the legal status of e-money operators.

The Finance Ministry was supposed to prepare the legislation by April 1, but its proposals were rejected by the Central Bank, which is set to be the regulator for e-money operators.

The bank said it would not be entitled to oversee the operators if they retained their current status of payment organizations, and it has drafted its own version of the bill, changing their status to that of credit organizations, which makes them similar to banks.

Extended discussions between the ministry and the Central Bank resulted in them sending two separate versions of the bill to the presidential administration on April 1.

Market players support the Finance Ministry proposal, which defines the status of electronic market operators without turning them into credit organizations.

The industry does not object to being regulated by the Central Bank, but it fears that turning e-money operators into credit organizations would lead to excessive regulations from the Central Bank and might cause commission fees to increase, said Dostov of the Russian E-Money Association.

"We do not want to restrict the power of the Central Bank. We clearly see that the power of the Central Bank should be expanded to noncredit organizations involved in payment operations," Dostov told The Moscow Times.

E-money operators should not be turned into credit organizations because their income is significantly less than that of other segments of the financial market, said Yevgenia Zavalishina, chief executive of Yandex.Dengi, one of Russia's leading electronic money operators.

"We think that the regulations must be proportional to the risks. An electronic money operator cannot give loans, which removes most of the risks that banks are bearing," Zavalishina said in an e-mailed statement.

Another option is to turn electronic money operators into nonbanking credit organizations, said Sergei Barsukov, head of the Finance Ministry's financial policy department, which was in charge of drafting the bill.

In that case, the Central Bank could set more flexible rules for e-money operators than for other nonbanking credit organizations, he said.

He promised that the e-money market would not be damaged regardless of the future status of the operators.

Electronic money operators keep simpler accounting records than banks because they handle small payments requiring no bank accounts, which removes credit risks that banks need to manage.

The average one-time payment handled by e-money operators amounts to 500 rubles ($17), but there is also a segment for small payments less than 100 rubles ($3.50), Dostov said.

"Electronic money operations are very cheap, the commission is very low, and their cost price is very low," he said. "Therefore, it is profitable to make not only 1,000 ruble or 500 ruble payments. This operation remains profitable for payment system operators even with payments of several rubles."

Electronic money is attracting consumers since it is a very convenient payment instrument, Dostov said.

"To open an electronic wallet … it is enough to have a computer with Internet access or a cell phone," he said.

An electronic wallet, as defined by Investorwords.com, is an encrypted storage medium holding financial information that can be used to complete electronic transactions without re-entering the stored data at the time of the transaction.

Electronic wallets, available on the web, pay terminals and cell phones, currently have 20 million active users in Russia, according to the Russian E-Money Association. The number of web wallets alone amounted to 2.3 million last year, 1.2 million of them with Yandex.Dengi and about 1 million being WebMoney accounts.

The work on the new e-money legislation began in December, when President Dmitry Medvedev ordered the Finance Ministry to draft a bill regulating the electronic payments market and modernizing the financial system.

In March, Medvedev chaired a meeting on the National Payment System, which he called "a strategic issue" that would make the economy more stable.

Creating a legal basis for the National Payment System, which will also introduce electronic payments for state-provided services, and determining its major participants is a priority for the government, Medvedev said.

The industry is cautiously optimistic of the new legislation. "The rules of the game in the market will be clearer. That usually results in improving the quality of services and, in many cases, in decreasing their cost as well," Zavalishina of Yandex.Dengi said of the bill.

"If we all are lucky and the law is approved without sophisticated restrictions and requirements, consumers will benefit," she said.

The new bill on the e-money market will define consumer rights and expand the range of services provided by operators, Dostov said.

E-money is hardly a vital economic tool for its current users.

Moiseyeva, the broadcast journalist who sends virtual gifts to her friends on Vkontakte.ru, said she never deposits more than 100 rubles a time into her account at the site.

After depositing money through one-time payments, users of Vkontakte.ru can buy “voices,” the social network's currency used to purchase gifts, the number of which indicates popularity of the user.

"When you visit someone's page and see many gifts, you think, 'Wow!'" Moiseyeva said.

E-money Use on the Rise in Russia

By RT.com
Monday, April 5, 2010

http://rt.com/Business/2010-04-05/e-money-use-rise.html?fullstory

The use of E-money is becoming more popular in Russia, but as the government begins to call for more regulation, that growth could be stalled. Using web money is not the same as making an electronic payment from a bank account. The service it provides is primarily intended for people who don't have a bank account or wish to keep a transaction entirely secret.

The customer essentially buys credits in the form of Web Money by wiring or depositing cash to any participating vendor. These credits can then be spent over the internet or given to another individual.

The amount of money in Russian e-wallets reached more than a billion dollars last year and the government thinks it needs regulation according to Finance Minister, Aleksey Kudrin.

“I met with the companies which are issuing electronic money, providing web-payments and the so-called e-purses. So far, these web services have not been recognized as using electronic money. According to the draft bill, the central bank will take over regulating the system.”

The Central Bank proposes to classify electronic money operators as non banking credit organizations. This would imply strict regulation which Boris Kim, Head of the Association of Electronic Trade, believes will harm the development of the sector.

“Payment systems are not credit organizations. They don’t take long-term deposits and don’t issue loans. So their risks are much lower then those of banks and they don’t need to be so strictly regulated."

But some control would be welcome, especially if it inspires greater confidence in the services on offer.

Clear legislation would help attract new customers and, therefore, more investment. It will also bring the whole system into the light, making it harder to use web money as a convenient means to finance crime or launder money.

Russian Banks on the Offensive to Stop E-Money Issuers

By Daniel Gusev

Retail Banking in Russia: Innovation Unfolded
Monday, February 8, 2010

http://valuedrivenbanking.blogspot.com/2010/02/banks-are-on-offensive-to-stop-emoney.html

The bill on national payments system was leaked to the press - where it became clear that banks want to take away the emoney issuance function away from emoney operators. What gives?

Emoney was and is pretty much the single factor developing ecommerce and motivating "web entrepreneurship" between uninstitutionalized agents. Cost effective clearing mechanism enabled new "grey merchants" to launch into business and promoted trade - since most emoney schemes, i.e. Yandex Money, in Russia are part of search engines. Emoney was a tool of content monetization. From here, how strong can the anti-emoney movement be?

According to the bill - only credit money institutions can be held liable against money issued - so emoney issuance should be their exclusive prerogative. The institution may then establish relationship with a payment agent who will on his part be able to offer operational and clearing services to the end users. In fact - the whole emoney will likely be rendered into prepaid schemes - where liabilities would be issued by banks and emoney will become agents "connecting the dots". Ability to pay without KYC principles will be kept for sums lower than RUB 15 000.

It's hard to say, whether the whole idea will work - it may kill illegitimate and illiquid emoney schemes and promote the use of major virtual currencies - since the operators would still be in control of the dots - no matter they will act more like agents than issuers. The bill still proves a major conclusion: banks see a big business in emoney.

Daniel Gusev is the publisher of Retail Banking in Russia: Innovation Unfolded. Reprinted with permission.

For further reading:
"Emoney in Russia - the Dark Side of the Moon for (most) banks", Retail Banking in Russia: Innovation Unfolded, January 18, 2010
"Emoney iPhone apps win over banking - but are not on the top 100 list", Retail Banking in Russia: Innovation Unfolded, December 27, 2009
"Banks are scared of emoney - because they will end up with loosing contact with customers", Retail Banking in Russia: Innovation Unfolded, December 24, 2009
"Non Bank Payments with Webmoney Transfer (part 1)", Mark Herpel, October 16, 2009
"Non Bank Payments: America vs. Russia (part 2)", Mark Herpel, October 16, 2009
"Non Bank Payments: Pay Pal or WebMoney (part 3)", Mark Herpel, October 19, 2009
"Webmoney Russian Non Bank Products & Services (part 4)", Mark Herpel, October 19, 2009
"Non Bank Payments: Webmoney & Plastic Cards (part 5)", Mark Herpel, October 19, 2009
"The Webmoney Purse, One Size Does Not Fit All (part 6)", Mark Herpel, October 19, 2009

Russia's Central Bank Buys 30 Tonnes of Gold

By RIA Novosti, Moscow
Thursday, November 19, 2009

http://en.rian.ru/russia/20091119/156903575.html

MOSCOW -- Russia's Central Bank said on Thursday it is ready to buy 30 metric tons (965,000 troy ounces) of gold at market prices from the country's precious metals depositary, Gokhran, by the end of the year.

Central Bank First Deputy Chairman Alexei Ulyukayev said the means of payment for the gold will depend on the requirements of the Finance Ministry and will probably be denominated in rubles.

Ulyukayev played down fears that the timing of the purchase could prove unfavorable given the current high price of gold, currently over $1,000 per troy ounce on global markets.

"They are at the peak levels relative to the previous period, but predictions of price dynamics vary," he said.

The Central Bank's announcement to buy up gold comes amid increasing international assets held by the bank, which grew by $7.8 billion in the week of November 6-13 to $441.7 billion. The cash paid for the gold will be used by the Finance Ministry to cover next year's state budget deficit, predicted at 6.8% of GDP.

This year Russia is running a deficit of 7.7% of GDP.


For further reading:
"Russia to sell 30 tonnes of gold to central bank", Reuters, November 19, 2009
"Russia's Central Bank ready to buy up gold from State Depository", RIA Novosti, November 16, 2009

Developing Countries Grabbing Up Gold

By Dan Weil
NewsMax.com
Thursday, November 5, 2009

http://moneynews.newsmax.com/streettalk/china_india_gold_buys/2009/11/05/282070.html

Gold purchases by emerging market nations have combined with inflation fears to send the precious metal to record highs.

The latest emerging market acquisition news was India’s agreement to buy 200 million metric tons of gold from the International Monetary Fund (IMF) for $6.7 billion. That amounts to half of what the IMF has put up for sale.

Already in April, China revealed that it almost doubled its gold reserves — to 1,054 metric tons from 600 tons in 2003.

And traders tell the Financial Times that more purchases are coming from emerging market central banks as they seek safe haven investments after the financial crisis.

Source: Deutsche Bank, "Global Commodities Daily", Michael Lewis, 4 November 2009

The central banks are expected to buy gold from the IMF to diversify their reserves away from the dollar. Analysts see China, Russia and Middle East sovereign wealth funds as likely purchasers.

China’s gold reserves now account for only about 1.6 percent of its total foreign reserves, despite recent purchases, far below the global average of 10.5 percent.

India’s acquisition means that governments as a whole may be net buyers of gold this year for the first time since 1998. That would mostly come from IMF sales.

"Central banks in India and China will be happy to accumulate gold at these levels. I will not be surprised to see even some Southeast Asian banks buying gold," Aaron Smith, Asia head of the $1.65 billion Superfund, told Reuters.

For further reading:
"Gold comfort", The Hindu Business Line, November 6, 2009
"Sri Lanka central bank buying gold to diversify reserves", Reuters, November 5, 2009

Crashing Russia's All-Cash Culture

By Julia Ioffe
Fortune Brainstorm Tech
Tuesday, October 27, 2009

http://brainstormtech.blogs.fortune.cnn.com/2009/10/27/crashing-russias-all-cash-culture/

Electronic money purveyors make it easy for Russian consumers to make micropayments. Now they’re seeking legitimacy.

Because building an entire banking sector from scratch in 20 years makes for some wild swings, Russians put their trust in cash. In Russia, the first thing you do when you get your monthly salary is withdraw it all, and pay for everything with tangible, fungible cash.

You buy your groceries with cash, pay for your winter boots with cash; heck, you even pay for real estate in cash. But how do you use cash for amorphous things like Internet service or to prepay your cell phone?

In the last ten years, a rapidly growing shadow banking system has sprouted up in Russia to service these small payments by turning cash into electronic currency, or e-money. And now that this sector has reached the $1 billion mark – and this in a crisis – and has expanded to include 10 million customers, e-money business owners are getting antsy about government regulation.

Their problem? There isn’t any. However paradoxical, this is an understandable fear in a country where government pressure on businesses is becoming more and more suffocating, and where legal gray areas can be used to bring a business to its knees. (Often, this also depresses the market valuation of these companies.)

And now that the Kremlin and the Russian Central Bank have noticed these legal blind spots, the need to mold regulation right is even more urgent for the various e-money players. This month, they have banded together to form the Electronic Money Association (AED) in order to lobby the Russian parliament (the Duma) for clear – and favorable – legal definitions of their business.

The association’s goal is regulation based on the flexible and nuanced European model, which outlines six types of e-commerce entities. To date, Russia has zero.

In fact, e-commerce is barely described in the Russian legal system, partially because of the natural lag time before law catches up to fast-moving technology, partially because there is no consensus here on how to regulate this industry. For instance, because e-commerce uses the language of banking – checks, currency – some in Russia have suggested that it be brought under the preexisting banking framework. But these companies are no banks.

Here’s how it works: Say you want to pay your web provider for a month’s worth of service. You take your cash and feed it into one of 200,000 ATM-like terminals scattered all over the country. (Qiwi, which owns the largest network of these, is a member of AED.) Then, depending on which company you use, you either direct your money for an on-the-spot payment to your provider (WM Transfer Ltd.’s WebMoney service is popular in Russia), or fill up a virtual “wallet” from which the funds can be distributed later to merchants of your choosing. (Search engine Yandex operates a digital wallet called Yandex.Money payment system. For more on Yandex, see "Google's Russian Threat.")

WebMoney and Yandex.Money account for more than 90% of the e-money market and account for hundreds of thousands of daily transactions, some for sums as low as $7, to, say, play a round of World of Warcraft.

These are small transactions, usually topping out at $250 for bigger-ticket items like air or train tickets, but the need for them is evident: WebMoney, which controls 54% of the Russian e-money market and deals with several currencies (including a gold-based one), has doubled in size every year since its creation. Overall market growth rates have slowed a bit but given that Russian internet penetration is still low and growing faster than anywhere in Europe, it only means there’s room to expand.

And as more Russians get online, they’re bound to turn to the web to handle some of their basic transactions. First, there are the convenience and trust factors. Banks in Russia have been known to vanish overnight with the savings of millions, yet opening an account in one is extremely difficult. (“My 18 year-old son tried to open an account and the bank demanded to see a real-estate deed – for a debit card!” says Peter Darahvelidze, an executive with WebMoney.)

Furthermore, in a country sprawling across six time zones and bound together with an infirm infrastructure, even getting to a bank might be difficult. E-money services, points out Mikhail Mamuta of the National Partnership of Microfinance Market Participants, “are also a form of economic development and fighting poverty.”

E-money has also become extremely popular with Russian and international merchants (Telecom company Skype gets most of its Russian payments through Yandex.Money) because it cuts down on fraud and false “charge-backs” (when a customer declares a credit-card purchase to have been made without his knowledge), which are rampant in Russia.

E-money companies have put in place various measures to deal with this. Yandex.Money, for example, does not allow a charge back if there was no technical problem with the transaction. (Some players in this business – like some terminal operators and mobile micropayment companies — are less than legitimate and have raised suspicions of money laundering. It is yet another reason that the bigger players are looking for careful regulation.)

But as the sector continues to grow, some natural foes have started to trouble the waters. Many banks, for example, are reluctant to see any inroads made into their market share yet who are too unwieldy and uninterested to build any e-commerce interfaces of their own. The Association of Russian Banks, for instance, viciously fought recent reforms targeting payment terminals.

And certain conservative members of parliament have begun speaking openly about the illegality of e-money, demanding that these companies apply for banking licenses – which means would require them to have at least 5 million euros in assets.

Rather than wait for the anvil to fall, however, the Electronic Money Association has taken a proactive approach, pushing for legislation that will spell out, exactly, what kinds of legal entities companies like WebMoney are. To that end, they have formed a working group in the Duma to hammer out legislation and to resolve some key dilemmas. Who, for example, will be allowed to participate in this sector: just banks? Just internet companies? Both? And who will regulate the industry: an industry association or the Russian Central Bank? What kind of documentation will a virtual system need to provide this regulator? Will the new regulation significantly raise operating costs?

The law is rumored to be passed before the new year, but, “so far, there is no ready text,” says Maria Panferova, a member of the Duma working group. “The goal at this stage is to work out the conceptual framework of the legislation.”

Victor Dostov, an e-money pioneer and head of the Association, hopes that this legislation will pass more smoothly this time and that banks recognize that this is not a natural niche for them.

“These companies collect all the crumbs, make a roll out of them, and then put it in the bank,” Dostov says. “The bank still gets the money.” He points out that Deutsche Bank and Citibank tried to get in on this business in the United States and then quickly figured out that it wasn’t worth the hassle. “No one is interested in killing the hen that lays – well, maybe not the golden egg, but the little silver eggs,” he says, adding. “At the end of the day, we just want to sleep soundly at night.”

Julia Ioffe is a freelance writer living in Moscow.

The Explosive Dynamics of the Gold and Silver Markets

By Adrian Douglas
Gold Anti-Trust Action Committee
Saturday, October 10, 2009

http://www.gata.org/node/7887

This week gold closed above $1,000 per ounce for the fourth consecutive week and made another all-time weekly high close. But the top-callers have come out in their droves declaring that gold is in a bubble that is about to burst and that because the recession has been declared as over there is no reason to hold such a safe-haven asset.

All that is nonsense and I will explain why. The dynamics unfolding in the gold and silver markets are nothing short of explosive.

The dynamics are different for gold and silver so I will start by discussing gold.

Gold is a unique substance. It is about the only thing on the planet that is bought and stored and never consumed. Almost all the gold ever mined still exists above ground. The purpose of gold is to act as a store of wealth. This singularity of gold makes it susceptible to a scam that was first perpetrated by goldsmiths in the 16th century. The goldsmiths realized that customers would buy gold and leave it for safekeeping in their vault. This meant that they could show the same gold bar to many customers and sell it many times over. This was the early form of fractional reserve banking, where banks retain only a fraction of the money on deposit, gambling that no more than 10 percent of the money will ever be called upon to be paid out.

This scam is at the center of modern gold market manipulation. Paper substitutes for gold are sold, instead of real gold, through derivatives, futures, pooled accounts, exchange-traded funds, gold certificates, etc. I estimate that each ounce of gold has been effectively sold 20 times over or more. To maintain this Ponzi scheme, some real gold is required, because some investors or jewelers demand to take possession of real gold. For the scam to be sustained there must always be plentiful physical gold for those who want it.

This physical supply has been met from mine supply and central bank leasing and selling.

The market is in effect a giant inverted pyramid with a huge paper gold market being supported above a small amount of physical gold at the tip of the inverted pyramid. The scam can continue until there are indications of a shortage of physical gold. If the 20 or so so claimants of each ounce of real gold demand their gold, there is the potential for a squeeze such as never been seen before.

To lend support to the idea that all the gold in the world has been sold several times over I cite the case of Morgan Stanley, which was sued in 2005 for selling imaginary precious metals to its customers. The firm had the audacity to charge storage fees for metal that didn't exist. Morgan Stanley settled the suit out of court but no criminal charges were ever filed against the firm. If Morgan Stanley was doing this, you can bet that it is the tip of the iceberg.

As further evidence just look at the monster over-the-counter derivatives market. Standing at approximately $1,000 trillion, it is multiples of the liquidated value of all the assets and currency in the world. Clearly derivatives must be selling some sort of claims to assets that cannot be fulfilled because there are not enough underlying assets.

The price discovery of gold has been achieved almost exclusively through the shuffling of paper gold promises between investors and bullion banks on the New York Commodities Exchange with very little real gold ever changing hands. But the situation is changing. Some big entities are now demanding physical gold. These entities are almost certainly countries, not individuals, such as China, Russia, India, Venezuela, Iran, and the Gulf states, to name but a few. This demand for real gold, instead of paper substitutes, is putting a strain on the gold market.

Paul Walker, CEO of the metal consultancy GFMS, recently said the price of gold was going up because of "large lumpy transactions in a market with a degree of illiquidity." Roughly translated, this means that there are large demands for physical metal that the market is struggling to meet. That is a cartel apologist's limp-wristed reference to the explosive dynamics I am defining.

The supply that feeds the bottom of the inverted pyramid to support the gold price suppression via a paper market is drying up. Mine supply has been declining for almost a decade and this year central banks became net buyers of gold for the first time in 20 years. The stress in the physical market is starting to show to those who are paying attention.

For example, the London PM fix of the gold price is coming in at historic highs day after day, the contango in the futures market has contracted dramatically, and the U.S. mint is routinely suspending production due to shortages of metal. But most importantly we are seeing astute investors display a growing preference for real bullion. A couple of months ago Greenlight Capital, the large hedge fund, switched $500 million of investment in the exchange-traded gold fund GLD to physical gold bullion. The supposed gold holding of GLD has not grown to a record high despite a record high gold price.

Apparently Germany has asked that its sovereign gold held by the New York Federal Reserve Bank be returned to Germany. Hong Kong has requested the same of the Bank of England, which stores Hong Kong's gold.

Robert Fisk, a respected journalist for Britain's Independent newspaper, reported this week that the Arab oil-producing states, Japan, Russia, and China have been holding secret talks to replace the dollar as the international reserve currency and as an accounting unit for the oil trade. The Independent reports that the basket of currencies they propose instead of the dollar would include gold.

If gold is going to regain its monetary role, you can understand why those in the know want real bullion. There are some significant signs that a run on the bank of the anti-gold cartel for physical gold is commencing.

Meanwhile most investors and analysts are focused only on the net short position of the commercial traders on the Comex, which has reached a record level and has in the past signaled the onset of a major correction. But such market observers are watching only a side show of the main event. The main event is all about a growing tightness in supplies of gold in the physical market.

I don't think the commercial net short position of 800 tonnes is that important. What is important is that the world's stockpile of 140,000 tonnes of gold may have been sold several times over. In all likelihood half of the supposed 30,000 tonnes of central bank stockpiles have been sold at least 20 times over. The gold short position could well be 300,000 tonnes (15,000 times 20) against a total world inventory of only 140,000 tonnes, much of which is not available to the market.

Could there be a more bullish scenario for gold?

If you think that such business practices could not be tolerated, I can hold up the example of the airlines, which regularly and knowingly oversell the seats on their flights, expecting that not all passengers will show up. Bullion bankers oversell their inventory of gold knowing that only 10 percent of customers will ever ask for it, just as the goldsmiths figured.

One cannot discuss the gold market in isolation, as it is linked to the U.S. dollar and Treasury debt. The major impetus behind the suppression of the gold market was to maintain a strong dollar despite massive overissuance of the currency. This has allowed the United States to live beyond its means because the rest of the world accepts the funny money as payment for goods and services. In a study he did when he was a professor of economics at Harvard titled "Gibson's Paradox and the Gold Standard," former U.S. Treasury Secretary Lawrence Summers showed that in a free market gold and real interest rates move inversely to each other. But since 1995 the United States has had low gold prices and low interest rates. In the absence of a gold standard this could have been achieved only by surreptitiously fixing the gold price through market manipulation. This was the essence of the "strong dollar policy" of Robert Rubin, the mechanism of which was never explained to the public.

The dynamics of the silver market are different. About 90 percent of silver production is used for industrial applications. Only 10 percent is purchased for investment. Clearly paper substitutes for silver cannot be used in industrial processes. The investment market is suppressed by paper silver substitutes as described above with respect to the gold market. It is this market, specifically the Comex futures exchange, that controls the price of silver.

The very low price of silver over the last 30 years has encouraged large holders of silver to dishoard it. After all, who wants to pay costly storage fees for something that is of low and declining value and bulky to store? This dishoarding has filled the gap between silver production and industrial demand, which runs at more than 200 million ounces annually.

Much of the investment demand has been met with paper substitutes and scams that are variations on the one that was perpetrated by Morgan Stanley. Because of the suppression of the price of silver it has been uneconomic to recycle most industrially used silver, with the exception of silver used in photography. This has meant that most industrially used silver finds its way into landfills. All the above-ground silver is now less than 1 billion ounces. Considering that the exchange-traded fund SLV alone claims to have more than 250 million ounces of silver, it is reasonable to estimate that investors have been sold something of the order of 5 billion ounces of silver. But how much is supported by real metal?

If the same ounce of silver has been sold 20 times over, as with my estimate in gold, then only 250 million ounces of investment silver bullion exist. This means that 4.75 billion ounces of silver could potentially be demanded in a market where only 1 billion ounces of stockpile exist and mining supply is already oversubscribed to the tune of 200 million ounces annually. One can probably add to this picture that investors who cannot easily find physical gold will come looking to buy physical silver. What is even more bullish is that the industrial users will not sit idly by watching a manic silver grab. They will join in the fray because they cannot remain in business unless they have silver inventory. They will try to stockpile silver at a time of acute shortage.

So the dynamics of the gold and silver markets are wildly bullish. This is no longer about whether the commercials will knock down the price by selling more contracts short. This is about a lot of market participants who have been content to hold precious metal paper substitutes but who now increasingly will want to own real bullion. This has been happening slowly but will gather pace. Because in the last 30 years most investors have trusted the brokers, dealers, and bullion banks to have the metals that have been sold, there has been no "run on the bank." This is changing. Many indications point to significant supply stress building.

Why are the entities that hold the largest short positions on the planet custodians of the bullion depositories for the largest ETFs? That's like putting a sex offender in charge of the day care center or Bernie Madoff in charge of your company pension fund.

The argument against holding physical bullion yourself has always been the risk it might get stolen while in your possession. But the risk of holding bullion substitutes is that it already has been stolen or never existed.

The precious metals market is now akin to a game of musical chairs with perhaps only one chair for every 20 players. It might be prudent to follow in the footsteps of Germany, Hong Kong, China, and Greenlight Capital and get your chair before the music stops.

If the physical markets for precious metals lock up due to shortages, then the short squeeze will be of epic proportions; it will be something to tell your grandchildren about. It will be a far better story for your grandchildren if you are on the right side of the trade.

Adrian Douglas is a member of GATA's Board of Directors and editor of the Market Force Analysis letter. Reprinted with permission.

For further reading:
"The Game Changer?", Ted Butler, July 14, 2009
"Did the ECB Save COMEX from Gold Default?", Avery Goodman, April 2, 2009
"The Future of Gold", Naufal Sanaullah, January 26, 2009
"The Manipulation of Gold Prices", James Conrad, December 4, 2008