Russia Continues Effort To Revert Back To Gold Standard
MOSCOW - Russia is continuing its efforts to revert back to the 'gold standard' for the first time in over a hundred years, purchasing gold at a fixed price of 5,000 rubles ($59) per gram until June 30th, according to both Russian state news RT and Pravda.ru.
Back in April, the Bank of Russia began purchasing gold at the fixed price of 5,000 rubles, or $59.00 per gram. RT had reported that the purchases began March 28th, and will continue on through to June 30th, 2022.
RT quoted BullionStar Singapore precious metals analyst Ronan Manley saying that the moves could have "huge implications for the ruble, the US dollar, and the global economy".
"Back on March 25, the ruble was traded at 100 rubles per one US dollar. Now the Russian ruble has gone up to 80 rubles per dollar. This is because gold is traded on international markets at about 62 dollars per gram, which is equivalent to (5,000/62) = about 80.5. Both the markets and arbitrage traders have taken note of this, and the RUB/USD rate has increased" Manley was quoted to have said.
RT said that "The ruble was trading at around 100 to the US dollar at that time, but has since strengthened and is nearing 80 to the US dollar. Why? Because gold has been trading on international markets at about US$62 per gram which is equivalent to (5,000 / 62) = about 80.5, and markets and arbitrage traders have now taken note, driving the RUB/USD exchange rate higher" RT had reported in April.
"So the ruble now has a floor to the US dollars, in terms of gold. But gold also has a floor, so to speak, because 5,000 rubles per gram is 155,500 rubles per troy ounce of gold, and with a RUB/USD floor of about 80, that’s a gold price of around $1,940. And if the Western paper gold markets of LBMA/COMEX try to drive the US dollar gold price lower, they will have to try to weaken the ruble as well or else the paper manipulations will be out in the open" the report continued.
The Russian state news agency also said "with the new peg of gold to the ruble, the strengthening of the Russian currency will affect the price of gold".
"The same can now be done with Russian oil. If Russia begins to demand payment for oil exports with rubles, there will be an immediate indirect peg to gold (via the fixed price ruble — gold connection). Then Russia could begin accepting gold directly in payment for its oil exports. In fact, this can be applied to any commodities, not just oil and natural gas" Manley was quoted as saying.
Pravda quoted Manley saying "By playing with both sides of the equation, that is, by pegging the ruble to gold and then pegging energy payments to the ruble, the Bank of Russia and the Kremlin fundamentally change all the working assumptions of the global trading system, accelerating changes in the global monetary system".
"Demanding that natural gas exports are paid for in rubles (and possibly oil and other commodities down the line) will again act as stabilization and support. If a majority of the international trading system begins accepting these rubles for commodity payments arrangements, this could propel the Russian ruble to becoming a major global currency. At the same time, any move by Russia to accept direct gold for oil payments will cause more international gold to flow into Russian reserves, which would also strengthen the balance sheet of the Bank of Russia and in turn strengthen the ruble."
Pravda also said that according to Manley, we are 'witnessing the birth of a new monetary system" backed by gold and raw materials rather than the "supremacy" of the US dollar.
On May 27th, CBS News had put out a report saying that the Russian ruble has become the "strongest currency in the world" this year, jumping up 40% against the dollar after the ruble had fallen to under a penny right after the "toughest" economic sanctions "in modern history" had been placed on the country collectively by the West.
The reasons given in that report were that Russia had taken 'unusually aggressive measures' in order to prevent money from leaving the country, along with the fact that sanctions from the West are actually creating demand for the ruble and driving its value up further. The CBS report however, said that it is unknown how long the ruble's 'resiliency' will last.
CBS news quoted Tatiana Orlova, who is an economist at Oxford Economics as saying "Commodity prices are currently sky-high, and even though there is a drop in the volume of Russian exports due to embargoes and sanctioning, the increase in commodity prices more than compensates for these drops".
The report said that Russia is still raking in $20 billion per month in energy exports, and that since the end of March many of the foreign buyers have given in to Russia's demand to purchase energy in rubles, which has increased the value of the currency.
Sanctions from the West, CBS quoted Orlova as saying, along with all of the businesses that have left Russia has led to a drop in the amount of imports into the country. Russia's account surplus, or the difference between exports and imports increased to $37 billion in the month of April. "We have this coincidence that, as imports have collapsed, exports are soaring" he said.
The Central Bank of Russia has also 'propped up' the ruble with 'strict capital controls' according to the CBS report, making it more difficult to convert into other currencies. There has also been a ban on 'foreign holders' of Russian bonds and stocks from taking dividend payments out of Russia.
"That used to be quite a significant source of outflows for currency from Russia — now that channel is closed" Orlova stated in the report.
Exporters however within Russia must convert half of their excess revenue into rubles which is also contributing in a higher demand for the ruble. The conversion had been 80% but it has since dropped to 50%.
Orlova also noted the difficulty that foreign companies have trying to sell their Russian investments. "Although we are seeing these announcements that Western companies are leaving Russia, quite often they simply have to hand over their stakes to their local partners. It doesn't actually mean they are being paid a fair price for their stakes, so they are not moving large amounts of cash from the country".
All of these variables have played a part in increasing demand for the Russian ruble, and thus increasing the value of the currency.
Elina Ribakova, who is an economist at the Institute of International Finance told CBS News in an email that "While this is not a free market-determined exchange rate, ruble stability is at the same time 'real,' in the sense that it's driven by Russia's all-time high current account inflows".
"Russia's central bank is trying to loosen capital controls because it feels the ruble is too strong. But the central bank is in a rough spot. If they continue loosening, they may open the floodgates of capital flows out of the country. In previous crises, $200 billion left the country in a matter of months".
Ribakova told CBS that the temporary bounce back of the ruble, as well as the factors with Russian oil exports, it's likely not going to last as countries in Europe have said that they plan on putting an end to their reliance on Russian energy by cutting Russian gas imports by two thirds this year, which will likely cripple Russia due to how much its economy depends on energy exports.