Is Russia Planning a “Gold Ruble”?

April 26th, 2016 by

Over the past five-to-seven years, there has been a consistent flow of gold bars out of Western vaults in New York and London. The destination of this gold bullion has been the East—especially China, Russia, and Russia’s closest Eurasian allies.

Source: Merk Investments

One question that the past several years’ maneuvers by the Russian Central Bank brings to mind is whether or not the country’s Finance Ministry is eyeing a gold-backed currency in the future.

Far more public questions of this kind have been asked about the People’s Bank of China (PBOC). With its ascending position in global affairs, it makes sense that China would want to diversify away from the dollar and stake its own claim to economic supremacy. Its ambitions to make the yuan (AKA renminbi) a global currency have been well-telegraphed and continue to take shape. Beyond receiving approval as a component of the IMF’s Special Drawing Rights (SDR or XDR), China’s currency strategy centers on gold.

Does Russia have similar plans in mind?

“De-Dollarization”

russia-flag-oilSince the price of oil has plunged in the last two years, the Russian economy has faced serious economic turmoil. Most notably, the value of the ruble has sunk right along with crude oil. In many ways, Russia’s economy is heavily reliant upon exports of energy to Europe and its neighbors in the form of oil and natural gas.

The crashing value of the ruble reached crisis levels late last year as the Russian currency touched all-time lows against the dollar. Luckily, the Russian Central Bank had wisely been stockpiling gold reserves for several years. When the IMF is excluded, Russia ranks sixth among countries around the world in official gold reserves with over 1,400 metric tonnes.

russia-goldThis not only helps buffer the ruble’s foreign exchange rate; it also gives the central bank the freedom to “de-dollarize,” or begin to deleverage its foreign reserves in dollars and U.S. Treasurys. For example, Russia cut its foreign debt by 14% last year, a decrease of nearly $84 billion.

Moreover, Russia continues to purchase gold at a breakneck pace.  In a single week during mid-March, the country’s central bank added $5.8 billion to its gold reserves. Russia has progressively increased its official gold holdings at an increasing rate since about 2010. It has also given indications that it would like to grow its stockpile of gold to at least a half-trillion dollars in the coming three-to-five years.

It would seem that there’s at least some potential for Russia’s monetary strategy to aim at introducing a gold-backed ruble currency sometime down the road, perhaps 10 years from now. The more that gold bullion continues to flow from West to East, the more this becomes a possibility.

Other Developments

gold-nuggetIt’s worth bearing in mind that the source of these news reports is the pro-Russian media, so they have their own spin on geopolitics and other international economic events. Nonetheless, the facts of Russia’s aggressive gold-buying and gradual shift away from the dollar are accurate no matter which way you slice it.

Interestingly enough, the Russian Finance Ministry threw a bit of a curveball today by auctioning off about 25 troy ounces of gold nuggets to the public. While 25 oz is not an especially large amount compared to the central bank’s reserves, it’s somewhat unusual that these raw nuggets will be sold rather than processed and added to domestic production totals.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

4 thoughts on “Is Russia Planning a “Gold Ruble”?

  1. James Anderson

    The world has moved on since the gold standard; financial and monetary instruments are now far more sophisticated than they were three or four decades ago. Pegging your currency to gold is as nonsensical as pegging it to any other commodity. I’ve no doubt that if Russia pegged the ruble to gold then smart traders would use complex arbitrage mechanisms to both relieve Russia if its gold and crucify its currency. Having said that, Putin is just about dumb enough to attempt this. What is the ratio of gold reserves to, say, M1 in Russia?

    1. Everett Millman Post author

      There are also plenty of rumors about a “gold yuan” and a Pan-African “gold dinar”; I suppose the East rejects the shift toward financialization and simply won’t let go of the idea of a gold standard.

      Any opinions on the notion of economic stimulus through massive gold purchases by the Fed? A PIMCO expert recently floated the idea, somewhat tongue-in-cheek: https://www.pimco.com/insights/viewpoints/viewpoints/rumpelstiltskin-at-the-fed

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