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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MeelionDollerBogus's picture

Destroy all immigration laws and you destroy a fundamental structure of the Matrix. You can't people-farm (taxation, theft of property, imprisoning people just for existing) when there are no walls.

 

Planet-wide.

XXL66's picture

A gold backed currency created by a corrupt government, what's the point ? If ANY government would say it has created a gold backed currency, would you believe them ?

 

overmedicatedundersexed's picture

gold vs fiat: seems mr c bank would have sold off all it's gold long ago, as in the west we are told : it's useless. yet it is a secret how much we have and kinda tough for any citizen to even see it, why?

an idea for sec treasury: give any citizen a tour of the gold vaults for a price of oh $1000.per make money on that gold I know I would pay to see it.

freedom123's picture
freedom123 (not verified) Feb 13, 2015 7:56 AM

There is hope for Russia because all people are not brainwashed, these Russian students will rise against putin regime propaganda and will make a bridge to other world to get free from putin oligarch regime and their lies  & crimes.

http://youtu.be/VklUdwiiuGE

Thank you Russians who are still Russians and not putin zombies! :)

Bopper09's picture

Funny how anyone thinks that their government, east or west, is not lying through bullshit propoganda.  That's why I read this site.  Unless 'fuck our corrupt governments and central banks' is considered propoganda.  And if it is, I'll believe it.

bid the soldiers shoot's picture

freedom123

"There is hope for Russia because all people are not brainwashed,"

There isn't much hope for brainwashed Americans, who actually think that their economy, as evinced by the DJIA, has never been more robust.

You'll never have to worry about being brainwashed, freedom123.

You have to have a brain to be brainwashed.


Fix It Again Timmy's picture

All the naysayers towards a gold-backed currency should look at the track record of fiat before spouting off....

 

DonGenaro's picture

"Depriving authorities of discretionary political power" is not a "drawback" - it's the WHOLE FN POINT.

RushRoolz's picture

At some point, with some country, this will happen. Results will be positive for that country, leading others to follow suit and USD will be the emporer with no clothes. This position of USD being the least disease-ridden in the whorehouse is ripe for a fall.

Clowns on Acid's picture

As the probabiliy of the USD losing its "Global Reserve Currency " status increases the day of a gold backed standard (whatever the actual permutation is) arrives.  Go Obama! Go neo Bolsheviks !  

_SILENCER's picture

Maybe the Russians and the Chicoms are stacking like mad in order to prep for a post world war economy

Lanka's picture

The Ruble could not be redeemable for physical gold at the COMEX pricing, as it would be 100% redeemed the first week. A very high redeemable price would be required, say, Rubles 200,000/oz.  Each Russian would be able to redeem a % of his annual earned income, up to an maximum per person (adjusted annually).  The total amount redeemable in any year would be limited to the 80% of the gold mined in Russia during the previous year.  Only with controls, a level of redeemability could be maintained.  This would spawn a black market in earned income redeemability, but that is okay. 

gcjohns1971's picture

Men are not angels.

Men who desire to rule, whatever they think of their own morality, are never less than thugs.  Violence and coercion is their stock and trade, and the 'good' they justify it with is ephemeral at best, non-existent at worst. 

Rulership is all about delivering unrequited violence to force conformity with someone's idea of proper behavior. 

The main justification for government is to deter and punish malum in se crime.  Malum in se means crimes that are wrong in and of themselves, murder, theft, rape all come to mind.  The other kind of crime is malum prohibitum - bad because prohibited.

What distinguishes malum-in-se is that most everyone everywhere recognizes that it is wrong.

The degree to which no country anywhere, and no government ever in all history has been able to resist extending its rule-making into more-or-less arbitrary prohibitions 'malum-prohibitum' - EVEN FOR ONE YEAR - is the degree to which such personalities are dedicated to their personal lust for coercion.  It is simply a power for corruption that is beyond the ability of humans to resist.

How do these concepts apply to a gold standard?

Firstly, a gold exchange standard is not a gold standard as the US discovered in 1933, and again in 1971.  Under a gold-exchange standard the ratio of gold to paper can be and will be changed at no notice...and the change will not be changed to the currency holder's benefit.  Given that non-gold-exchange countries already hold gold to back the currency, the fact of a gold exchange is mainly paliative.  

A person would think that gold-exchange guarantees the value of their currency, because the currency manager must control the expansion of debt in order to prevent their gold from being drained resulting in a default.  A person who thought that would be wrong.  

There has never been an instance where a currency manager has preferred his own default to redefining the exchange rate.

Furthermore, an exchange standard places the currency manager - a central bank in this case, but in the past private banks also did this with script - into an impossible position.  To successfully prevent drainage of his gold, the currency manager must know precisely how much debt is being created.  If he doesn't know precisely then the degree of his uncertainty about debt creation is the degree to which gold will be drained...or local goods drained by artificially low prices.  Either instance will lead, once discovered to either high inflation or deflation.  

The fact is that so long as banks can use fractional reserves there is no way to precisely guage how much debt is being created at any given moment.  Hence an exchange standard is in many respects the worst of all worlds for a currency.

In this age of debit cards... what do you need an exchange standard for anyway?

Why can't the currency simply be a quantity of element 79?  If it were then why would there need to be a currency manager?  Why couldn't your debit card just draw from your Aurum deposit?  Why would this not totally eliminate the prospect of widespread inflation or deflation?  After all, if your bank defaults, it bankrupts and future depositors in other banks would be the wiser in their bank shopping - or take risks if that is their preference. 

The current system, and a gold-exchange standard, preserves the banks at the expense of the overall economy by corrupting the price system.

Finally, why would a government tolerate such a direct-currency system, when they can get something-for-nothing by clipping coins, or manipulating exchange rates?

Thus the current and historical lack of such a system is a litmus test for the honesty of politicians.  They would only tolerate such a system if they had no intentions to steal.  Hence the lack of tolerance for such a system exposes AN INTENT to steal.  If there was no intent to steal the politician could still get whatever money was needed through taxation.  Thus conclusively, the desire to have flexibility in the value of people's money is INHERENTLY a desire to steal regardless of what benefits people attribute to it.

People need to learn to recognize a criminal by what they do vice what they say.

KingOfMilwaukee's picture

Nathan Lewis, in his book, "Gold: The Once And Future Money", first mentioned Putin would oneday consider a "golden ruble." This was 6 years ago. 

Obviously, it would not be 100% backed, as all in the gold in the world would not be enought to do that. It would be run as a "currency board" where the ruble would float against gold within a narrow band. The central bank would buy and sell "base money" on the open market to keep the price of the ruble within the band.

He points out that this is what Britian did between 1717-1913. The British Pound was only 5% backed by gold the whole time but never flucuated more than $1.

It could be done.