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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smacker's picture

If the US did what you say, it would immediately bring re-energised calls from countries who store their gold in the US for its return, eg: Germany. Since the US is believed not to have much gold, that would pull the plug on the BS. The US shoots itself in the foot again.

...just saying.

Joebloinvestor's picture

It is already happening, the gold owning rest of the world doesn't want to be left out.

The US would not be shooting itself in the foot if it renewed trust in its' currency and prevented politicians from printing it like no tomorrow.

 

prefan4200's picture

$40 per ounce gold?  Suuuuuurrreee..... that'll happen.

Rusputin's picture

Fiat peg to a value based commodity? And for big economies intending to move outside the petrodollar world?

The change will be much quicker than people imagine, the Pound lost reserve status within a relatively short period, the dollar will be even quicker.

RaceToTheBottom's picture

Barbaric relics cannot be priced more than 40$.  

Just not possible...

 

Clowns on Acid's picture

Hit yourself over the head with a spanner, after that comment.

Joe Tierney's picture

Fact: Various gold standard scenarios are being studied by top-rung Russian leaders.

Fact: Same is true for China.

Fact: Amerika's dollar-based global dictatorship is being abused to the point that Russia-China absolutely must act, sooner rather than later.

Fact: On geopolitical issues, Russia crosses the Rubicon, China follows.

 

Something big is imminent....

Bighorn_100b's picture

I need more time! I'm not done stacking yet!

lakecity55's picture

Me, too! I have to wait for the ole paycheck.

But, if we get wind ahead of time, I will Max Out the CC!!!!

Rusputin's picture

Yes I think the fiat rug is about to be pulled from under our feet!

Clowns on Acid's picture

JoJo T - Agreed. But I don't think it will be a Big Bang (I could be wrong) but it will be negotiated after a the Fx markets break down. China trade today takes place in USD and EURO largely. China is an exporter of low cost goods , so they do not have an immediate strategic advantage to "strenghten the Yuan with a gold backed formula. Russia on the other hand, as a commodity exporter certainly does. 

China is going to play it tight to the vest, but will be on the side of the Russians presently because the US still dominates. Once the USD gets shaky then China beomes a negotiating partner for all.  

nuke ISIS now's picture

Homo Joe

 

FACT...Gold price is FALLING...does that not compute in your vacnt cranium ? hunh fuckhead?? you stupid fuck...if your pipe dream was really happening dont you think Gold would be appreciating? huunh fuckhead??

 

You stupid fucking Russian fairy fuck

JAFAH's picture

Dude, this is fight club, but out of common decency, no one will engage you if you just stepped off the short bus. Ooops

John McCloy's picture

I'm sure China and Russia are losing sleep over the suppression of these gold prices...cheaper to accumulate. Gold would go right over 5k an ounce if it is ever made into a backing for a currency...with the short squeeze in the paper markets...who knows maybe higher..it would be like an H-Bomb dropped on Wall Street financially.

Rusputin's picture

This is exactly why they would go for 1% gold exchange and even if gold 'values' increase they cannot blow their currency exchange rates; even Greece has enough gold to cover a gold exchange Drachma - they only need 2 of their 122 tonnes to do it. Countries with insufficient gold would likely be loaned it by Russia, India or China at zero or low fee interest.

In some unstable countries a variable gold rate currency would be appropriate, where the gold exchange percentage acts as the interest rate. This however, is a very fiat-esk way to run your currency.

lakecity55's picture

Going to gold-backed trading would certainly free them from diluted fiat notes...but it would incur the Wrath of TPTB. And, how much freedom do both countries have from "The Banks?"

Does the Red Shield own both of their State Banks? That is the Qestion!

They are I bet giddy about the price suppression!

Great post.

Thalamus's picture

The Russians, in the spirit of being thugs and criminals, would have all their gold drained if they offered an exchange option of Rubles for Gold.  They don't have the reputation, military, economy, etc. to pull off a successful gold backed currency.  Now combine China, Germany and Russia, and there you have everything you need for a successful gold backed currency.  Resources, geography, manufacturing, military, desires for global domination.  What more could you ask for on one team?

Rusputin's picture

They only need 1% gold exchange, and this means they are 1% better than fiat.

Karl von Bahnhof's picture

Noo. Not yet. They are not stupid.
Gold as reserve.
Paper for business.

MEFOBILLS's picture

A new gold standard?  Will imbalance in trade be satisfied by Gold exchange?

That was tried already.  During WW1 the U.S. sent doughboys and goods over to Europe on credit.  The books became unbalanced, and to satisfy the imbalance, Gold flowed toward America.  Since fractional reserve credit was 10:1 on top of gold that levers a 10 X destruction in loan creation ability.

Prior to WW2, Gold flowed back to England due to machinations between American (FED) and British bankers.  Part of the reason for keeping private credit money cheap, was to lower Gold Price, so England could reclaim its gold lost in WW1.  These low interest rates caused people to take out cheap loans and then gamble in stock market.  Ultimately stock market collapsed, and people had huge private debts.  Sound familiar to today, where the housing bubble caused large private ‘credit” debts to be formed?

The country and world then entered into a Great Depression.  International trade required gold, and people wanted to hoard it.  After all, it is shiny and doesn’t degrade, and therefore must be a store of value. 

Germany cannot pay Versailles debts, and of course the West has depleted Germany’s stock of Gold.  So, ultimately Hitler goes on a non-gold economy.  Between 1933 and 1939 Germany goes from being one of the poorest (due to hyperinflation) to richest country in Europe.  Germany does not suffer the depression like other Gold based economies.  This cannot stand, and is one (the?) major reason why Germany was continually attacked, starting with International Jew declaration of economic war against Germany in 1933.  This was non- trivial as Germany needed to export in order to acquire dollars/Francs/Pounds to pay Versailles debts.

With a Gold Standard, especially for international trade, countries become mercantile.  That is, they try to export in order to grab gold from other economies.  This pits economies against each other, ultimately leading to war.

If you have private banks with their credit riding on top of Gold, then you get another perversion.  During their engineered depressions, bankers will harvest Gold out of the money supply.  Gold money pays debt ledgers, because credit as money has disappeared from money supply.  People are desperate to pay their debts, so they pull out their shiny gold coins and pay banker.  Gold pays credit but not vice versa.  To repeat:  Gold pays credit but not vice versa.

There were only two gold systems in history that sort-of worked.  That would be Venice, which forced gold money to be put into their state bank.  From there it got paid out to bank workers.  Later, it was recalled from overseas as Venice had an efficient exporting economy.  The other one was Hanseatic League.  This gold as money was forced into movement by taxing it out of the supply, and then melting and re-issuing; there was no credit as money in the league. 

Anytime you have private credit banks/credit and gold money, you will get serious problems.  Russia may put gold in a FX basket along with other commodities, but anything more than that would be seriously retarded.

Rusputin's picture

It would not be gold trading again and anything like the past...

The domestic currencies will be backed by a small percentage gold exchange to provide popular confidence. Also other commodity based currencies will be introduced, depending on a nation's resources.

The system would be created rationally, not some speculative nonsense - the whole process is to reduce large speculative influences, ie the paper system and remove the electronic markets that exist, for new electronic resource-based instruments in a multi-polar world. Markets will exist, but it will be opposite to the big-bang.

That is my reading, perhaps I'm wrong.

lakecity55's picture

So, could you take X amount of Rubles and redeem them for Au?

Clowns on Acid's picture

lakecity - In theory (and I suppose in practice) the answer would be Yes. However with a verifiable collateral system, one would not be inclined to do so because of the inconvenience of handing the physical versus paper or digital. So gov'ts would have t be seen as financially prudent or have people attack their currencies demanding gold. hmmm... kinds like Degaulle started when Pres. Johnson expanded the Vietnam war and also the Great Society thievary. That should have set off alarm bells within the US financial system ... but defense contractors and fabian socialists formed an unholy union to influence the beginning of the end of the USD. We are just seeing it play out now.   

Clowns on Acid's picture

MEFO - I agree with your analysis to a certain extent, but... methinks that you are approaching the issue from a western bank perspective in your narrow definition of the characteristics of credit. If one approaches it from a Russian / Chino perspective, a gold standard makes perfect sense as a next step i the development of their fledgling 21st century economies. The term "gold standard" is generic and the actual permutation that is adopted by Russia / China is certainly up for discussion and refinement. But gold certainly will be a large part of the accepted benchmark. 

But if one steps back and approaches the terrain as if one was looking in from Mars ( and that might be happening as we speak..ahem) the western bankers have absolutely destroyed their own system. The level of debt is unsustainable without major socio-economic upheavel. This Greece situation is just a harbinger.  The people that control the crazy, low IQ mulatto occupying the WH, certainly know this. Putin, knowing the people who are pulling the puppet strings on the mulatto, knows it. So lets use Game Theory to try and forecast relative policies going forward.

Given the technology advances of today versus when the Gold Standard was last used, presents an opportunity to refine a permutation of a Gold Standard to where paper currencies (digital) cab be used representationally for physical gold (in a basket or otherwise) as long as one can verify that the counterparties (sovereigns) are mainatining their relationship to gold backed standards of their currency. The collateral / Clearing House concept immediately comes to mind. Trust of counterparties that they will be paid oin the value that they expect is an absolute constant in any efficient tarding system.

Credit as money, becomes possible as long as "collateral' terms are verifiable. Production and efficiencies of relative countries become more apparent, but that would encourage increased productivity in competing economies.

Credit as money has failed monumentally using pure fiat. So if credit as money is the key variable of a civilized world, then the trust behind the digital currency payments have to be verifiable colateral (gold.. silver ... maybe some other commodities).        

 

 

Smiley's picture

Doubtful.

I think the announcement of a gold backed currency by Russia would instantly start WWIII at full broil.

Dickweed Wang's picture

I think the announcement of a gold backed currency by Russia would instantly start WWIII at full broil.

Preceded by a major false flag event to frame the Russians (and Chinese??) - yeah buddy . . . . think the Maine incident, the Lusitania sinking, Pearl Harbor, the Golf of Tonkin, 9/11. Virtually every major war the USA has been involved in for the last 100+ years was preceded by a false flag event to embroil the masses.

Otrader's picture

It won't be the bankers or their kids going to war.  Sooo, Why not!

Saucy-Jack's picture

We have a US$ IMF system.

Russia won't go all gold. It could not work.

Freegold is coming, so just prepare for that.

authorized user's picture

Endless gold price manipulation has helped Putin amass a sizeable gold hedge against the western fiat currencies.

He will be happy to sell any & all the weapons anyone wants of they can pay in gold.

tailgunner's picture

I can't believe this final statement" "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)." If Russia goes to gold, so will China, and maybe others of the BRICS nations. Fiat currency would collapse as only the gold backed currencies would have true intrinsic value. The fiat currencies would collapse into toilet paper. Also, it is known that China and Russia have several times the gold that are stated by the "official" records. They would have the most. The records show the US as leader in the volume of gold held, but there is no evidence of that, so let them audit it independently. Also how do you keep Russia in the confines of the bankrupt Fed, the beyond bankrupt ECB, and the disaster of the BOE. There is no real value in anyone of them, much less confidence of those who paid attention to them.  

This needs to be rethought.

 

Dickweed Wang's picture

EVERY fiat currency in the history of the planet has eventually fallen to ZERO in value - no exceptions! Gold and silver have kept their value over the same time because the PM's are true MONEY, not just an alternative currency.  Some form of PM based monetary system is coming because they will be the only money/currency with any validity once the fiat currency scam runs its course world wide.

JuliaS's picture

If for every ZH article about a country switching to gold standard the country actually did so, there'd not be a single fiat regime left in the world. Instead we get more of the same old.

Russia switching to gold? Why? Is their government allergic to the idea of inflating away deficits and obligations? Had they not suffered re-denomination after re-denomination to the point where the value of their Ruble compared to one from 100 years ago is much lower than that of the much criticized Fed dollar?

Russia switching to gold? Bullshit! Banks and oligarchs will continue to trade PM's amongst eachother as they did for hundredes of years. The general population will keep the monopoly play-money.

I'm a gold bug myself, but this article and its carbon copies showing up regularly at ZH are pure bullshit.

gwar5's picture

Maybe they're tired of getting paid monopoly money for oil and having their assets held in the West inflated away. Kinda like the rest of us.

DIGrif's picture

AMEN

and of course

Aloha Snackbar !!!! (I think I said that right, any Muslims around to check it for me)?

KansasCrude's picture

Think several including Jim Willie are talklng Gold coming in thru trade via Gold Trade Settlement.  Modified Barter then perhaps a weighting with the Ruble or a BRICs currency, maybe the Yuan,  at say 20-30% backing.  They are all tired of trading goods for NOTHING aka unbacked fiat either electronic or paper created from keyboards.  Something is going to happen on this front before much longer IMO.

BTW have you seen the withdrawals on the SGE lately they are showing deliveries of 70-80 tons a DAY!.  How much longer is gold going to be physically available at that drawdown rate?

Shitgum Suicide's picture
Shitgum Suicide (not verified) Feb 12, 2015 5:50 PM

The best way to implement a gold standard would be for each nation to melt their gold and recast it into a hand flipping the bird. Whoever has the biggest statue with the most purity has the stronger valuation over the other gold standards.

DIGrif's picture

You're crazy............but in a good way.

Kilobar's picture

For a gold standard to truely work, the paper needs to be measured by WEIGHT not fiat equivalents.

Aleedsfella's picture

 All Europe and the American fuck ups can offer is financial war, Putin offers real war! 

lakecity55's picture

Vlad has real weapons that work.

We have those F35's or whatever that don't do too well.

Also, his troops are tanned, rested and ready. Chalky has fucked our guys up, but we need not fight at all unless Russia invades the USA.

basho's picture

hahaha, you won't even see it coming, homeboy.

Rusputin's picture

I think Russia prefer mutual trade to war, but it would seem they are good at both!

screw face's picture

.......stand by for the Nuclear Ruble.

lasvegaspersona's picture

In the way the Euro is gold based (ie gold marked to market on it's balance sheet) Russia may be looking to the same structure. If one country had a gold standard currency gold would have to be at a VERY high level or it would get all bought up on day one. Imagine Russia trying to defend the ruble if it was not. Big entities cannot get large quantities of gold now, that is why they must settle for unallocated paper product.

Think of China. They have no extra cost to adding gold to their vaults and yet with trillions in reserves they are only able to buy a few billion in gold. They alone could Hoover™ up Russia's entire stash right now!

Rusputin's picture

Gold exchange currencies would not be tradable on markets, only with other commodity based currencies, in specific markets, volumes and price discovery, with similar pairings - exchange controls effectively.

Russia would not try to float a Gold Rouble on the open forex market, as you say, it would get killed.

DIGrif's picture

I disagree with that statement. I think a gold backed currency would cause a monumental skyrocketing of the currency, so better not be an exporting country. But I do believe that the split second one country does this, a vast majority of others will also. Now, I don't propose that the currency be exchangable for gold, that would be crazy and reslut in the empty vaults others have pointed out. But it could be BACKED by gold and exchangable at the national level. In other words, the gold reserves of say France could exchange currency with Germany for gold, but not the individual. That is the way it was from 1933 until we came off the gold standard in the USA.

Dickweed Wang's picture

Big entities cannot get large quantities of gold now, that is why they must settle for unallocated paper product.

Not true! Large orders of physical gold can be obtained from the eastern exchanges but at a 30% premium over the western "spot price" (AKA toilet paper/LBMA/CRIMEX price) of gold. 

Go to Dr. Jim Willie's web site at http://www.goldenjackass.com for definitive information on this issue.