A note on the new Russian “Gold Standard”

Ten days after it offered to buy gold for a certain number of rubles, Russia’s central bank announced that it would pay a negotiated price to buy gold in rubles in the future.

On Friday, March 25, 2022, the Bank of Russia announced that it would set a fixed price for buying gold in rubles, starting Monday, March 28, and June 30, 2022. (Also on March 28, the Russian government announced that purchases of international goods could no longer be made in dollars or euros, but that everything from oil and natural gas to grains and industrial metals must be traded in rubles.)

At that time, the Bank of Russia was willing to buy gold from Russian banks at a fixed rate of 5,000 rubles per gram, which sets an effective “floor” over the ruble. At 31.1 troy ounces per gram, with the Russian central bank bidding for 5,000 rubles per gram of gold, one ounce of gold will be bought at 155,500 rubles.

The Kremlin’s goals are clear: they want to force countries to trade in their currencies, which, due to the widespread and growing format of Western sanctions, have been severely devalued. Also, they are trying to increase the demand for their currency by rejecting trade through the known US dollar, demanding payment in rubles.

Markets in London have been refusing to accept Russian bullion for weeks now. Nevertheless, the ruble recovered from 13 138.93 to 78 78 to 82 82 on March 7, 2022 in the last few days. The exchange rate is now roughly where it was when the Ukrainian invasion began on February 24, 2022. The impossibility of NATO intervention is also controlling the ruble exchange rate.

RUBUSD exchange rate (2020 – present)

(Source: Bloomberg Finance, LP)

The decision of the Bank of Russia to raise interest rates above 20 percent, by stopping the flow of savings from Russian banks, has additionally stabilized the financial system.

Bank of Russia key interest rate (2020 – present)

(Source: Bloomberg Finance, LP)

But today’s change or the original ‘5,000 rubles per gram’ purchase measure does not constitute a gold standard despite the encouragement of some media pundits. A Truthful The Russian central bank will be required to purchase both gold standard And Sell ​​gold and rubles (that is to say, exchange); And to do so according to a certain weight or quantity of gold per unit of currency.

Under the previous arrangement, the effective gold purchase price was much lower than the world (dollar) price of an ounce of gold, according to the Shanghai Metals Market, China’s leading integrated Internet platform provider of ferrous and ferrous metals.

Two weeks ago, Russia’s central bank announced that it would stop buying official gold from local banks due to rising demand from ordinary customers. Russia’s central bank said in a statement on Friday [March 25] That it will pay a fixed price of 5000 rubles ($ 52) per gram from this week, March 28 to June 30. This is less than the current market price of around $ 68.

Most companies that sell gold at this price to the Russian central bank can only do so if they are desperate for the ruble or do not want to reach out to gold traders on the top board by offering the prevailing world gold price in dollars. In the meantime, Russians have become more interested in buying gold.

One would imagine that the rate of purchase of new, bargaining gold would allow the Russian authorities to set a rate consistent with the motivation of sellers, a discount for the time being. Further, politically friendly countries with the Kremlin will receive more favorable terms of purchase. It additionally seems to be an entity taking advantage of a rare opportunity to provide confidential liquidity among gold sellers, including elements of organized crime, terrorist groups, individuals with hidden assets, and especially the rogue state. There are already indications that Russia is increasingly organizing some trade issues in line with the operations of other Paris states.

Despite the misleading headlines about Russia’s acceptance of gold, it remains a positive step. Gold is being sensitively used to make an existing meaning more sound. It is most unfortunate that these measures are associated with a horrific event like the Russia-Ukraine war, but it may motivate other countries in less difficult situations, and indeed give them the courage to shore up their troubled currencies.

Peter C. Earl

Peter C. Earl

Peter C. Earle is an economist and author who joined AIER in 2018. He has previously spent more than 20 years as a trader and analyst at a number of security firms and hedge funds in the New York metropolitan area, as well as running a gaming and cryptocurrency consultancy.

His research focuses on financial markets, cryptocurrency, monetary policy issues, game economics, and economic measurement issues. He has been quoted in the Wall Street Journal, Bloomberg, Reuters, CNBC, Grants Interest Rate Observer, NPR and numerous other media outlets and publications.

Pete holds an MA in Applied Economics from American University, an MBA (Finance) and a BS in Engineering from the United States Military Academy at West Point. Follow him On Twitter.

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