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What in the World?

Gold undermining Russia’s ruble

Apr 20, 2022

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As historic sanctions taking aim at Russia’s currency, the ruble, the country is using gold in some unique ways. While some think the metal is backing the ruble, it’s the opposite, creating new challenges for Russia’s Central Bank and its citizens.

Typically, the Russian Central Bank exchanges currency internationally to facilitate trade, but that’s off limits because of extreme sanctions in response to the invasion of Ukraine. Instead, the central bank has issued capital controls to prevent the ruble from going into absolute free fall. 

So, if you’re a Russian exporter and you earn dollars or euros or won or anything else, the second your money comes back into the country for payment, you have to surrender it to the Russian Central Bank, which will then issue rubles at a rate they determine.

And every little bit of the Russian economy that is linked to the outside world, all the ability of the Russian system to earn hard currency, is now being sacrificed at the altar of saving the ruble from collapse.

This has a number of side effects, none of them good, but the most important one is if you are a Russian company and you have any assets around the world, you now have no hard currency to do anything with them. And in many ways, this was the goal: to make sure that Russian companies are focused entirely on the Russian economy itself. 

So how does gold fit in here? Well, it’s not too complicated. Normally, if you want to buy something from abroad, you have to pay for it in the local currency, which means you have to get some of the currency. So you sell some rubles. You get some, for example, South African rand. You pay the South Africans. Then the good comes to you. 

They can’t do that right now, but they still have to import. So, what they do is they literally fly a plane full of gold. You see gold is not backing the ruble, gold is for all intents and purposes the new Russian currency for participating in international exchange.

The ruble is still there, weak and crappy as it’s always been, sitting by itself–nobody wants any. In fact, there’s now a contest between the Russian Central Bank and the Russian citizens about who can get rid of their rubles and buy gold instead, ’cause nobody wants rubles.

So it’s the opposite of gold backing the currency. If anything, gold is undermining the currency because now it’s being presented as an option as an alternative.

Let’s talk about everybody’s favorite subject: gold. Now the Russians are using gold in some unique ways and some new ways. And some people mean that means the Ruble is now gold-backed and <laugh> no, no, if anything, it’s the absolute opposite.

So some quick backdrop: gold reserves in Russia are different than they are in the rest of the world. So most, most countries have some gold in their currency reserves and the idea being that they can buy or sell gold into in order to help regulate the availability and the value of their national currency. Now, Russia does this too, and it has about $135 billion in gold reserves, but that’s only the beginning of what it has. 

Russia officially is the world’s third largest exporter of gold. And, that comes out to about $17 billion of billion annually at current prices, but they’re definitely doing more than that because they have an unofficial state reserve of gold that they don’t share the numbers with. That’s independent from the currency reserves.

And they also have a partially processed reserve that the state manages, that would allow them to put the semi-processed gold ore into a purification process and very quickly get some more. 

They also use gold to kind of go behind people’s backs and stir up trouble around the world. 

That’s one of the ways, for example, they pay for the Wagner Group, and in doing so they can bribe militants or pay off governments in order to get their way. 

So there’s a lot more gold sloshing around in the Russian system than that third in the world. And the $135 billion would suggest. So start with that as background.

Let’s talk about this idea of gold currency. What has happened with the Ukraine war is that the sanctions on Russia are now the most extreme of any government in human history. In fact, you could easily make the argument that Russia is now under greater sanction than all other countries in history combined. It’s pretty intense. These do not just apply to things like their export.

It applies to the Russian Central Bank itself. So if the Russian Central Bank wanted to engage in normal operations and exchange currency back and forth to facilitate trade, they really can’t in the normal process now because they can’t access any transactions in US dollars, Canadian dollars, Australian dollars, Taiwanese dollars, Korean won, Japanese yen, European euros, Swiss franks, and British pounds. And I know I’ve left out a few. It’s pretty intense. It’s by far the most in history. 

So what the central bank has done in order to prevent the currency from going into absolute free fall is they’ve issued a series of capital controls that are very tight.  So if you’re a Russian exporter and you earn dollars or euros or won or anything else, the second your money comes back into the country for payment, you have to surrender it to the Russian Central Bank, which will then issue rubles at a rate they determine.

So Russia’s recovery in the ruble rate, we’ve seen it drop and then come back up almost to where it started, isn’t because it’s doing well or because it’s gold-backed, that’s asinine. No, it it’s doing it’s back to where it was because there’s no alternative. 

And every little bit of the Russian economy that is linked to the outside world, all the ability of the Russian system to earn hard currency is now being sacrificed at the altar of saving the Ruble from collapse.

This has a number of side effects, none of them good, but the most important one is if you are a Russian company and you have any assets around the world, you now have no hard currency to do anything with them. And in many ways, this was the goal: to make sure that Russian companies are focused entirely on the Russian economy itself. 

So how does gold fit in here? Well, it’s not too complicated. Normally, if you want to buy something from abroad, you have to pay for it in the local currency, which means you have to get some of the currency. So you sell some rubles, you get some, for example, South African rand, you pay the South Africans. Then the good comes to you. 

They can’t do that right now, but they still have to import. So they, what they do is they literally fly a plane full of gold. You see gold is not backing the ruble, gold is for all intents and purposes the new Russian currency for participating in international exchange.

The ruble is still there, weak and crappy as it’s always been sitting by itself, nobody wants any. In fact, there’s now a contest between the Russian Central Bank and the Russian citizens about who can get rid of their rubles and buy gold instead, cuz nobody wants rubles. 

So it’s the opposite of gold backing the currency.  If anything, gold is undermining the currency because now it’s being presented as an option as an alternative. And if you’re not in Russia and you wanna deal with Russia, gold is what you’re gonna get because you don’t want rubles. 

How long can the Russians sustain this? Maybe longer than you think. That $135 billion of gold they have in their currency, that’s enough to cover six months of normal import cover for them and imports are not normal anymore because of all the boycotts. So it can probably stretch twice as long and then the Russians can tap their emergency reserves. And we don’t know how long that’ll last. 

So bare minimum, the Russians can fly with this sort of system for a year. 

Now the sanctions may move that number around a little bit because they’re getting stricter and stricter by the day.

We now know from satellite photos that the Russian massacres in Bucha were not just in Bucha. They appear to have been in every single community that the Russians have occupied for the last five weeks. 

And to think that there won’t be a new sanctions regime or more country’s joining the sanction regime in that sort of environment, I think is a bit optimistic, but there’s also not a lot that people can do against gold if countries are still willing to trade because it’s untraceable.

This isn’t like conflict diamonds where you can put it under a microscope and look for unique chemical signatures. Gold is gold is gold. It’s a hundred percent pure or it’s not. 

 And that makes it really good for getting around sanctions as long as you’re dealing with a country with absolutely no moral compass of which there are a bunch, okay, that’s it from me.

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