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.
via
Mises.org
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