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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.
