fbpx
April 8, 2022 Reading Time: 4 minutes

After ten days of offering to purchase gold for a fixed number of rubles, the Russian central bank has announced that going forward it will pay negotiated rates in future purchases of gold in rubles. 

On Friday, March 25, 2022, the Bank of Russia announced that it would set a fixed price for gold purchases made with rubles beginning on Monday, March 28th through June 30th, 2022. (Also on March 28, the Russian government further announced that international commodity purchases may no longer be made in dollars or euros, but rather that everything from oil and natural gas to grains and industrial metals must be transacted in rubles.) 

At that time, the Bank of Russia stood willing to purchase gold from Russian banks at a fixed 5,000 rubles per gram, which set an effective “floor” on the ruble. At 31.1 grams per troy ounce, with the Russian central bank bidding for gold at 5,000 rubles per gram, one ounce of gold would be purchased for 155,500 rubles. 

The Kremlin’s goals are obvious: They seek to force nations to transact in their currency which, owing to a comprehensive and growing array of Western sanctions, had been steeply devalued. They also, by demanding payment in rubles, are attempting to increase demand for their currency while spurning trade in the familiar medium of US dollars. 

London markets have refused to accept Russian bullion for some weeks now. Nevertheless, the ruble has recovered from its lows of 138.93 to $1 on March 7, 2022 to between 78 and 82 to the US dollar over the last few days. The exchange rate now sits roughly where it was when the invasion of Ukraine began on February 24, 2022. Demand for the ruble to consummate energy and grain purchases, battlefield losses (most notably the Russian forces’ inability to seize Kyiv), and the growing improbability of NATO intervention are moderating rates of exchange for the ruble as well.

RUBUSD exchange rate (2020 – present)

(Source: Bloomberg Finance, LP)

The Bank of Russia’s decision to hike interest rates to over 20 percent, stemming the flow of savings out of Russian banks, has additionally stabilized the financial system.

Bank of Russia key interest rate (2020 – present)

(Source: Bloomberg Finance, LP)

But neither today’s shift nor the original ‘5,000 ruble per gram’ purchase measure constitutes a gold standard despite the enthusiasm of certain media pundits. A bona fide gold standard would require the Russian central bank to both purchase and sell (which is to say, exchange) gold and rubles; and to do so according to a fixed weight or quantity of gold per unit currency.

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

Two weeks ago, Russia’s central bank announced that it would stop buying official gold from local banks because of a surge in demand from ordinary consumers. Russia’s central bank said on Friday [March 25] that it would pay a fixed price of 5000 roubles ($52) per gram from March 28 to June 30, starting this week. This is lower than the current market value of about $68.

Most entities selling gold to the Russian central bank at those prices would only have done so if they were desperate for rubles or unwilling/unable to access above-board gold dealers offering the prevailing world gold price in dollars. Meanwhile Russian citizens have been far more interested in purchasing gold. 

One imagines that the new, negotiated gold purchase rates will permit Russian authorities to set rates in line with the motivation of sellers, discounting for immediacy. Further, that nations which are politically friendlier to the Kremlin will receive more favorable purchase terms. It additionally seems likely that among the gold sellers will be entities taking advantage of a rare opportunity for confidential liquidity provision, including elements of organized crime, terrorist groups, individuals with hidden assets and rogue states in particular. There are already indications that Russia is increasingly organizing certain commercial affairs in line with the operation of other pariah states

Despite the clamor of incorrect headlines regarding Russia’s embrace of gold, it remains a positive step. Gold is tangentially being utilized to make an existing money more sound. It is most unfortunate that these measures are tied to an event as awful as the Russia-Ukraine War, but it may give other nations in less dire circumstances the motivation, and indeed the courage, to shore up their battered currencies. 

Peter C. Earle

Peter C. Earle

Peter C. Earle is an economist and writer who joined AIER in 2018. Prior to that he spent over 20 years as a trader and analyst at a number of securities 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, monetary policy, the economics of games, and problems in economic measurement. He has been quoted by the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in 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.

Selected Publications

“General Institutional Considerations of Blockchain and Emerging Applications” Co-Authored with David M. Waugh in The Emerald Handbook on Cryptoassets: Investment Opportunities and Challenges (forthcoming), edited by Baker, Benedetti, Nikbakht, and Smith (2022)

“Operation Warp Speed” Co-authored with Edwar Escalante in Pandemics and Liberty, edited by Raymond J. March and Ryan M. Yonk (2022)

“A Virtual Weimar: Hyperinflation in Diablo III” in The Invisible Hand in Virtual Worlds: The Economic Order of Video Games, edited by Matthew McCaffrey (2021)

“The Fickle Science of Lockdowns” Co-authored with Phillip W. Magness, Wall Street Journal (December 2021)

“How Does a Well-Functioning Gold Standard Function?” Co-authored with William J. Luther, SSRN (November 2021)

“Populist Prophets, Public Prophets: Pied Pipers of Lucre, Then and Now” in Financial History (Summer 2021)

“Boston’s Forgotten Lockdowns” in The American Conservative (November 2020)

“Private Governance and Rules for a Flat World” in Creighton Journal of Interdisciplinary Leadership (June 2019)

“’Federal Jobs Guarantee’ Idea Is Costly, Misguided, And Increasingly Popular With Democrats” in Investor’s Business Daily (December 2018)

Books by Peter C. Earle

Get notified of new articles from Peter C. Earle and AIER.