Is Russia Planning A Gold-Based Currency?

Tyler Durden's picture




 

Submitted by Marcia Christoff-Kurapovna via The Mises Institute,

The “perfect-storm” of geopolitical instability, diplomatic isolation, severe currency depreciation, and economic decline now confronting Russia has profoundly damaged Moscow's international standing, and possibly for the long-term. Yet, it is precisely such conditions that may push the country’s leadership into taking the radical step that will secure its world-player status once and for all: the adoption of a gold-exchange standard.

Though a far-fetched idea at first glance, many factors suggest that remonetization in gold may be a logical next step for Moscow.

First, for years Moscow has been expressing its unwillingness to remain at the monetary mercy of the US and its NATO allies and this view has been most vehemently expressed by President Putin’s long-time economic advisor, Sergei Glazyev. Russia is prepared to play strategic hardball with the West on the issue: the governor of Russia’s central bank took the unusual step last November of presenting to the international media details of the bank’s zealous gold-buying spree. The announcement, in sharp contrast to that institution’s more taciturn traditions, underscores Moscow’s outspoken dismay with dollar hegemony; its timing suggests coordination with the top rungs of government to present gold as a possible currency-war weapon.

Second, despite international pressure, Russia has been very wary of the sell-off policies that led the UK, France, Spain, and Italy to unload gold over the past decade during unsuccessful attempts to prop up their respective ailing economies — in particular, of then-Prime Minister Gordon Brown’s sell-off of 400 metric tons of the country's reserves at stunningly low prices. Moscow’s surprise decision upon the onset of the ruble’s swift decline in early December 2014 to not tap into the country’s gold reserves, now the world's sixth largest, highlights the ambitiousness of Russia’s stance on the gold issue. By the end of December, Russia added another 20.73 tons, according to the IMF in late January, capping a nine-month buying spree.

Third, while the Russian economy is structurally weak, enough of the country's monetary fundamentals are sound, such that the timing of a move to gold, geopolitically and domestically, may be ideal. Russia is not a debtor nation. At this writing in January, Russia’s debt to GDP ratio is low and most of its external debt is private. Physical gold accounts for 10 percent of Russia’s foreign currency reserves. The budget deficit, as of a November 2014 projection, is likely to be around $10 billion, much less than 1 percent of GDP. The poverty rate fell from 35 percent in 2001 to 10 percent in 2010, while the middle class was projected in 2013 to reach 86 percent of the population by 2020.

Collapsing oil prices serve only to intensify the monetary attractiveness of gold. Given that oil exports, along with the rest of the energy sector, account for 45 percent of GDP, the depreciation of the ruble will continue; newly unstable fiscal conditions have devastated banks, and higher inflation looms, expected to reach 10 percent by the end of 2015. As Russia remains (for the foreseeable future) mainly a resource-based economy, only a move to gold, arguably, can make the currency stronger, even if it does limit Russia’s available currency.

In buying as much gold as it has, the country is, in part, ensuring that it will have enough money in circulation in the event of such fundamental transformation. In terms of re-establishing post-oil shock international prestige, a move to gold will allow the country to be seen as a more reliable and trustworthy trading partner.

The repercussions of Russia on a gold-exchange standard would be immense. Above all, it would mean the first major schism in the world's monetary order. China would quite likely follow suit. It could mean the threat of a severe inflation in the United States should rafts of unwanted dollars make their way back across the Atlantic — the Fed's ultimate nightmare. Above all, the country will avoid the extreme debt leverages which would not have happened had Western capitals remained on gold.

“A gold standard would be politically appealing, transforming the ruble to a formidable currency and reducing outflows significantly,” writes Dr. Enrico Colombatto, economics professor at the University of Turin, Italy.

He notes that the only major drawback would be that the imposed discipline of a gold standard would deprive authorities of discretionary political power. The other threat would be that of a new generation of Russian central bankers becoming too heavily influenced by the monetary mindset of the European Central Bank (ECB) and the Fed.

As Alisdair MacLeod, a two-decade veteran of off-shore banking consulting based in the UK, recently wrote, Russia (and China) will “hold all the aces” by moving away from any possible currency wars of the future into the physical gold market. In his article, he adds that there is currently a low appetite for physical gold in Western capital markets and longer-term foreign holders of rubles would be unlikely to exchange them for gold, preferring to sell them for other fiat currencies.

Mr. Macleod cites John Butler, CIO at Atom Capital in London, who sees great potential in a gold-exchange standard for Russia. With the establishment of a sound gold-exchange rate, he argues, the Central Bank of Russia would no longer be confined to buying and selling gold to maintain the rate of exchange. The bank could freely manage the liquidity of the ruble and be able to issue coupon-bearing bonds to the Russian public, allowing it a yield linked to gold rates. As the ruble stabilizes, the rate of the cost of living would drop; savings would grow, spurred on by long term stability and lower taxes.

Foreign exchange also would be favorable, Mr. Butler maintains. Owing to the Ukraine crises and commodities crises, rubles have been dumped for dollar/euro currencies. Upon the announcement of a gold-exchange, demand for the ruble would increase. London and New York markets would in turn be countered by provisions restricting gold-to-ruble exchanges of imports and exports.

The geopolitics of gold also figure into Russia’s increasingly close relations with China, a country that also has made clear its preference for gold over the dollar. (Russia recently edged out China as the world's top buyer of the metal.) In the aftermath of the $400 billion, 30-year deal signed between Russian gas giant Gazprom and the China National Petroleum Company in November 2014, China turned its focus to the internationalization of its own gold market. On January 15, 2015, the Shanghai Gold Exchange, the largest physical gold exchange worldwide, and the World Gold Council, concluded a strategic cooperation deal to expand the Chinese gold market through the new Shanghai Free Trade Zone.

This is not the first time the gold standard has been seen as the ultimate cure for Russia’s economic problems. In September 1998, the noted economist Jude Wanninski predicted in a far-sighted essay for The Wall Street Journal that only a gold ruble would get the the country out of its then-debt crises. It was upon taking office about two years later, in May 2000, that President Putin embarked upon the country’s massive gold-buying campaign. At the time, it took twenty-eight barrels of crude just to buy an ounce of gold. The gold-backed ruble policy of those years was adopted to successfully pay down the country's external debt.

As a pro-gold stance is, essentially, anti-dollar, speculation about how the US would react raises the question of whether an all-out currency war would follow. The West would have to keep Russia regionally and militarily marginalized, not to mention kept within the confines of the Fed, the ECB, and the Bank of England (BOE).

Nor is that prospect too far-fetched. As Dutch author Willem Middelkoop has written in his 2014 book The Big Reset: War on Gold and the Financial Endgame,

A system reset is imminent. Even before 2020 the world's financial system will need to find a different anchor. ... In a desperate attempt to maintain this dollar system, the United States waged a secret war on gold since the 1960s. China and Russia have pierced through the American smokescreen around gold and the dollar and are no longer willing to continue lending to the United States. Both countries have been accumulating enormous amounts of gold, positioning themselves for the next phase of the global financial system.

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Thu, 02/12/2015 - 17:38 | 5777741 willpoi
willpoi's picture

Yes. Who will stop them?

Thu, 02/12/2015 - 17:42 | 5777773 knukles
knukles's picture

No.  Why bother.  Why not just keep the economic war afront of the enemy and simply demand payment for gas and oil in gold?

Thu, 02/12/2015 - 17:48 | 5777810 angel_of_joy
angel_of_joy's picture

Russia is buying gold with its saved dollars. It's the same thing, except it can do it cheaper this way...

Thu, 02/12/2015 - 18:10 | 5777922 kaiserhoff
kaiserhoff's picture

Hmmm.  Russia lost about 75% of its Forex purchasing power in the last few months,

  so no, with 17% interest rates, and all hell breaking loose to their South, this is not a time for bold currency moves.

Thu, 02/12/2015 - 18:15 | 5777948 BandGap
BandGap's picture

Bold moves, no, but desparate moves might find it's way to the front before too long. They are in a slow choke hold with oil prices.

Thu, 02/12/2015 - 18:24 | 5777998 kaiserhoff
kaiserhoff's picture

Good point.  We should always lead with our strong suit.

AK-47 based currency?

Thu, 02/12/2015 - 18:47 | 5778107 maskone909
maskone909's picture

you could do that but it wouldnt be as accurate as the ar15 currency.  ;-)

 

edit

 

i really dont know if any major power would implement a gold back currency.  most of TPTB got to where they are by stepping on the little guys.  the temptation of the toner cartridge is just too great for these cats.  i really hope i am wrong as this currency war will harm millions of hard working families.

Thu, 02/12/2015 - 18:48 | 5778124 tailgunner
tailgunner's picture

Just redeem it in gold or a gold backed currency.  Fiat be damned.

Thu, 02/12/2015 - 18:51 | 5778139 Tao 4 the Show
Tao 4 the Show's picture

These ideas about a gold backed currency are flawed IMO. What happens when some country does this? If there are problems anywhere in the world (there are problems everywhere now), funds will go pouring into the country with the gold backed currency. This would be like the problem that Switzerland is fighting, except times 10 or 100. And if gold demand really went up, that currency would be a simple way to purchase gold. People would pile in until the the gold-backed currency just exploded.

Thu, 02/12/2015 - 18:58 | 5778163 maskone909
maskone909's picture

yeah like what happens when you are the only gold backed currency in the basket, and the countries that dont import much devalues to boost exports? 

 

edit

 

and the funny thing would be countries like zimbabwe(who are large gold producers) would be the new saudi arabia lmfao

Thu, 02/12/2015 - 19:12 | 5778219 kaiserhoff
kaiserhoff's picture

I love the idea of a market basket of PMs as a currency base, but you should make changes from perceived strength, not from obvious weakness.  Russia has a lot on its table now, and not much depth of field.  The Oligarks have to be nervous, if not plotting.

Thu, 02/12/2015 - 19:29 | 5778291 Squid-puppets a...
Squid-puppets a-go-go's picture

a little OT, but "Let them eat chocolate" seems to be apt

 

"While many Ukrainians in the capital Kiev are facing food shortages from soaring prices, one product seems more than abundant in the shops – the Roshen brand of chocolates that made Poroshenko a billionaire in his former business life. "

http://www.informationclearinghouse.info/article40977.htm


Fri, 02/13/2015 - 00:07 | 5779249 Richard Chesler
Richard Chesler's picture

"Yes. Who will stop them?"

Greedy fucking jew scum and their Mossad Killing squad.


Fri, 02/13/2015 - 05:48 | 5779710 Bokkenrijder
Bokkenrijder's picture

The blatant anti-semitism here is very illustrative of the low IQ redneck farmers on this site. The same kind of dumb idiots and traitors that can easily be lured into left/right wing extremism, "Russia/China are our saviours" and ponzi schemes.

Fri, 02/13/2015 - 06:27 | 5779747 USisCorrupt
USisCorrupt's picture

It sure beats a Nuclear War, why not win the war without firing a SHOT.

 

What a novel idea.

 

Russia's debt is 10% of GDP

 

While the US's debt is 110% of GDP.

 

You can't make this SHIT up.

 

Who has the Blunt and Koolaid?

Fri, 02/13/2015 - 08:50 | 5779918 doctor10
doctor10's picture

A very interesting exercise is to google "debt-GDP" ratio of  countries around  the world.  The central bankers appear to get really agitated whenever a country with real assets gets under about 15% or so. (The Argentinian president's current problems would "disappear" if she were just a little smarter about this)  I think Putin's too smart to risk nuclear raining down on Moscow-at least at the moment

Thu, 02/12/2015 - 19:35 | 5778315 goldsaver
goldsaver's picture

That is precisely why now is the time to do it. The RBL has lost so much value that turning it into a gold exchangeable currency would return it to its former value.

Thu, 02/12/2015 - 19:41 | 5778333 BigJim
BigJim's picture

 These ideas about a gold backed currency are flawed IMO. What happens when some country does this? If there are problems anywhere in the world (there are problems everywhere now), funds will go pouring into the country with the gold backed currency. This would be like the problem that Switzerland is fighting, except times 10 or 100. And if gold demand really went up, that currency would be a simple way to purchase gold. People would pile in until the the gold-backed currency just exploded.

This is true if commercial banks are allowed to issue the national currency (ie, rubles) with partial gold backing; in other words, if the banks can issue a ruble that is supposed to be redeemable at some official rate (say, 10,000 rubles per ounce) but they have less than 1/10,000 of an ounce per ruble to back them with... which is what would happen with gold in a central banking system.

To have a working gold standard in a loan (as opposed to deposit) banking regime, banks have to issue their own currencies, backed by gold and other collateral, and allow the market to decide on their value. In other words, Russian banks' currencies would float relative to each other. Otherwise you could indeed arbitrage rubles for cheap gold and drain Russia's reserves, as the US' foreign creditors did before Nixon closed the gold window in 1971.

Fri, 02/13/2015 - 01:25 | 5779429 jez
jez's picture

So honest money is a bad idea?

Fri, 02/13/2015 - 01:47 | 5779453 Lost My Shorts
Lost My Shorts's picture

I am Pootin.  I redeem your roobles for gold any time you want.  Heh heh heh ... friend.

A gold-backed currency is just a new form of paper gold, worth as much as you trust the backer.  It's little different than buying GLD, at which all the gold bugs scoff and snort.  But you will buy Putin's paper gold without hesitation.  OK, whatever.

Fri, 02/13/2015 - 03:44 | 5779628 pendragon
pendragon's picture

i love the smell of hypocrisy in the morning

Thu, 02/12/2015 - 18:27 | 5778022 Citxmech
Citxmech's picture

The big questions are:

1.  Would the new gold-backed currency be redeemable?; and

2.  Would the gold reserves be auditable?

 

If yes to 1, Russia wouldn't have its gold for very long.

If no to 1, but yes to two, I'm not sure that would be enough to secure the faith in Russia's new paper. . .   

 

Thu, 02/12/2015 - 18:57 | 5778165 Anusocracy
Anusocracy's picture

Make it redeemable with a premium on it - like when you buy gold with dollars.

Make a profit on redemption.

Thu, 02/12/2015 - 20:05 | 5778403 Citxmech
Citxmech's picture

That could work with a stable valuation, but how would you make that work if/when the value of gold starts to fluctuate (ie appreciate rapidly when physical is scarce and folks are willing to pay the premium)?  If the premium were too high - it would be the same as fractional backing (only 20% backed by gold, or whatever), which might not do much to stabilize the currency.

Sun, 02/15/2015 - 17:11 | 5787823 Anusocracy
Anusocracy's picture

Good point.

Maybe you could calculate a stable price range for gold based on a manipulation-free market (hypothetical) and increase premiums the more it exceeded that range. Or have backup commodities, like oil, to replace gold if someone is seriously manipulating gold.

Obviously, not so friendly countries would want to pay Russia back for derailing their fiat gravy train.

Thu, 02/12/2015 - 19:12 | 5778220 TheReplacement
TheReplacement's picture

3.  No gold/ruble, no oil/gas.

Thu, 02/12/2015 - 23:20 | 5779074 JRev
JRev's picture

The IMF's plans for the SDR (as well as Chatham House) give a resounding NO.
http://redefininggod.com/2015/01/globalist-agenda-watch-2015-update-12-d...

Which begs the question, why are Russia and China in the IMF at all? Why do their leaders give lip service to using globalist, multitinational entities for their supposed salvation?

Why did Goldman motherfucking Sachs coin the term "BRICs" all the way back in 2003?
http://www.goldmansachs.com/our-thinking/archive/archive-pdfs/brics-drea...

Are "alternative" media blogs like ZH leading us down the primrose path? Questions worth asking. 

Fri, 02/13/2015 - 01:27 | 5779433 JustUsChickensHere
JustUsChickensHere's picture

Yes to 1...  but not at the current LME or COMEX rates .... at a rate set by the Russian govt, and adjusted every month. (or even daily) .. and always tied to exactly back their M1  ..

See Mike Malone http://hiddensecretsofmoney.com/videos/episode-3 

at about 24:20 onwards.

 

Fri, 02/13/2015 - 09:55 | 5780155 mtl4
mtl4's picture

Gold backed currencies are a question of confidence so those questions you ask are really lrrelevant in the general market........US will continue to keep the reserve currency until we see a confidence tipping point where alternatives are found.  China and Russia are positioning themselves for the eventual shift in reserve currency but it could be 20 years or more before that actually took place.

Thu, 02/12/2015 - 19:02 | 5778045 Charles Wilson
Charles Wilson's picture

"No.  Why bother.  Why not just keep the economic war afront of the enemy and simply demand payment for gas and oil in gold?"

 

Knukles--

I think you are wrong but for all of the right reasons.  You cannot run a Total War Economy on a Gold Standard.  Putin et.al. can see beyond the next election and to a future where Russia is running the crossroads of the Euro-Asian Economy.  "Let the West fall on its own sword.  We'll survive this and build on the debris that's left".

 

CW

Fri, 02/13/2015 - 05:23 | 5779697 Bokkenrijder
Bokkenrijder's picture

Oh god, here go all the ZH conspiracy thinkers again! Just when the gold price is deflating again, what a coincidence...

I definitely agree with everyone here that the main problems of too much debt and fiat currency have not been solved, but I highly highly highly doubt that Russia will go at it alone.

More wishful/conspiracy thinking of people who have been catching the falling knife all the way down from $1900...

Thu, 02/12/2015 - 20:06 | 5778406 Consuelo
Consuelo's picture

'All Hell breaking loose to their south' is solely a situation of Putin's discretion - to be dealt with in any manner he sees fit; be it long and protracted, or overwith in 48 hours, with the Eurozone wondering what just happened...   All in good time.

Thu, 02/12/2015 - 21:47 | 5778549 angel_of_joy
angel_of_joy's picture

... Russia lost about 75% of its Forex purchasing power in the last few months.

Really ? By the same measure, did Euro lose 15% of its "Forex purchasing power" too, over the last months ? What is that Forex purchasing power that you are talking about ? Power to purchase USD ? Maybe the Russians don't need those USD, hence the reason why they exchange them for gold. They have plenty of bilateral commercial agreements with other countries, for which they use other currencies.

The point is, what do you keep you SAVINGS into ? I know that the entire concept of "savings" sounds like extra-terrestrial talk for most Americans and West Europeans (including ALL their bankers & politicians), however other countries do have savings AND (oh, the horror) commercial surpluses...

Fri, 02/13/2015 - 05:05 | 5779688 capitallosses
capitallosses's picture

Simply just a race to the bottom.

Fri, 02/13/2015 - 06:19 | 5779739 Kotzbomber747
Kotzbomber747's picture

"Is Russia planning a gold-based currency?"

No, sorry to disappoint you. Off to the next conspiracy theory I guess...

Thu, 02/12/2015 - 17:59 | 5777865 winchester
winchester's picture

all you says are already past, check oil prices, i announced raise 3 months ago... you cant hold so low prices anymore... ( usa ).

gold very stable in non usd money... ( eur )

 

greece ? pffffff.... negociations......

ukraine ? like september treaty... what will be respected...nothing... fucking decoy for eu to NOT ASSUME they do not follow USA anymore...?

wait for TTIP.... like a tong deep in pussy....

 

circus.

Thu, 02/12/2015 - 18:25 | 5778009 sun tzu
sun tzu's picture

Why do you think oil prices are low? US production has increased by 600,000 bpd since last August. Seems like the producers are happy to sell at more oil these prices.

Thu, 02/12/2015 - 20:01 | 5778393 chairman of the...
chairman of the bored's picture

Damn,tongue deep in pussy sounds good to me....fuck Russia!!

Thu, 02/12/2015 - 18:01 | 5777874 IronShield
IronShield's picture

Ding Ding Ding

That game has already been played and cost the US significant tonnage before it was shut down.  Russians might be fools, but they aren't damn fools.  ;-)

Thu, 02/12/2015 - 18:02 | 5777876 IronShield
IronShield's picture

Dupe

Thu, 02/12/2015 - 18:03 | 5777884 Stoploss
Stoploss's picture

See, ya fix this by selling gold...

 

Oh, wait.

Thu, 02/12/2015 - 18:10 | 5777919 Never One Roach
Never One Roach's picture

I hope I don't wake up one Monday morning only to find the dollar has been devalued 40%, either purposely by the fed in these currency wars, or by the "Invisible Hand" of the market.

Thu, 02/12/2015 - 19:14 | 5778227 TheReplacement
TheReplacement's picture

How much was a dollar worth in 2000?

Thu, 02/12/2015 - 19:33 | 5778307 chubbyjjfong
chubbyjjfong's picture

$1.50

Thu, 02/12/2015 - 17:43 | 5777777 nope-1004
nope-1004's picture

Already happening, just on the hush.  That's why sanctions have been so "damaging".

lmao

Thu, 02/12/2015 - 18:38 | 5778077 escapeefromOZ
escapeefromOZ's picture

In December 2014 , the so called damaged economy of Russia , bought 20 tons of gold , in November 600,000 OZ of gold which equal to 18,7 tons of GOLD . So those so called " experts " that talk about the " damage " to Russia   by the sanctions and Isolation , should see a Shrink urgently ! All of their predictions and assessment are BS !

Thu, 02/12/2015 - 17:59 | 5777863 Bossman1967
Bossman1967's picture

super obozocare and his crony cocksuckers mc Cain and boener

Thu, 02/12/2015 - 20:00 | 5778388 Alternate Skiffy
Alternate Skiffy's picture

Central Bank of Russia: Russia's foreign debt decreased by 18 percent from 728.9 billion to 599.5 billion dollars in 2014. Say hallo to S&P idiots

Thu, 02/12/2015 - 20:16 | 5778433 zerocash
zerocash's picture

Russia is ready for "voen" (war in Russian). https://www.youtube.com/watch?v=HcsgIjoTC-E

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