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Is Russia's Gold Gambit Working?
Putin Has Bought Time, But Little Else
While Russia’s purported efforts to move the ruble to a “sound money” basis by backing it with gold are not likely to be successful any time soon, that is not to say their maneuvers regarding the ruble and gold have been entirely without economic benefit.
Even though the ruble had already been recovering from its post-invasion low against the dollar, the establishment of the Central Bank of Russia’s “gold peg” certainly appears to have helped strengthen the ruble against the dollar. Intriguingly, the ruble has also strengthened against China’s yuan, and by a greater percentage than against the dollar. As a result, the dollar has actually strengthened against the yuan.
Dollar vs Ruble
In the past month, the US Dollar has declined significantly against the ruble, dropping over 22% since April 5.
Intriguingly, while this has been happening, the price of a troy ounce of gold has dropped in dollar terms by a mere 2.4%…
…while dropping in ruble terms by over 24%.
This means that in relative terms, the price of gold in dollars has gained over the price in rubles (meaning it has fallen proportionately less).
Readers will recall the thesis popular within the alternative media that Russia’s “gold peg” established a “floor price” for gold in ruble terms, and thus also did so in dollar terms.
That thesis has been well and truly shattered by gold price movements since the imposition of the gold peg at the end of March.
The collapse of the floor price thesis also suggests that the Central Bank of Russia has not been buying that much gold. If Russia were on a gold buying spree of any significant volume, that action would bid up the price of gold—a primary reason for presuming the gold peg would act as a floor.
Still, there is no denying the strengthening of the ruble against the dollar since the establishment of the gold peg, and while that strengthening could be due to the myriad other economic factors swirling around both currencies, it is difficult to argue persuasively that the gold peg has not been at least a contributing factor, although the gold peg’s influence appears to be more psychological than real, given the likely scarce Russian gold purchases.
Ruble vs Yuan
Gauging gold price movements among the dollar, the ruble, and the yuan, the entity likely doing the most gold purchasing is the People’s Bank of China, as the yuan is the only currency of the three to show any gold price appreciation.
This comes even as the yuan has lost over 25% of its value against the ruble.
At the same time, the dollar has actually gained roughly 4% against the yuan, reflecting its slightly smaller losses against the ruble.
Matching Currency Flows To Currency Prices
If we presume that currency exchange rates—the “price” of one currency in another currency—is an analog to currency flows, then price shifts give us an indication of which direction the broad currency flows are moving. Currency flows presumably would go in the direction of the appreciating currency (i.e., markets are bidding up the “price” of that currency).
Following on that thesis, the ruble’s strengthening against both the dollar and the yuan suggests that global currency flows of both the dollar and the yuan are in the direction of the ruble. Put another way, sanctions against Russia are not being sustained, and the country is still finding ways to carry on international commerce.
To the extent that the gold peg—or at least the announcement of the gold peg—has boosted international confidence in the ruble, the maneuver is definitely “working”. It may not be furthering the transition of the ruble from a fiat currency to “sound money”, but at a minimum it is reasonable to conclude it has helped persuade other countries to continue doing business with Russia, sustaining global confidence in the ruble even as Putin’s invasion of Ukraine (and the attendant military spending) is likely to prove a primary driver of Russian inflation over the near term.
However, the failure of the gold peg to establish a floor price for gold either in rubles or dollars merely accentuates the reality that the ruble is a fiat currency alongside the yuan and the dollar, and the ruble’s ultimate strength or weakness will rise and fall not on the basis of the price of gold or other precious commodities, but on the overall performance of the Russian economy.
That does not augur well for the ruble, as the Russian economy is likely to contract anywhere from 8% to more than 12% in 2022 alone, according to former Russian Finance Minister Alexey Kudrin.
The Russian economy is expected to contract by 8.8% this year, with more conservative estimates seeing a possible decline of 12.4%, Kudrin said, citing the forecast by the Economic Development Ministry.
This will happen in a painfully stagflationary episode, as core inflation is forecast to be above 20% for this year and likely be at 6% by the end of 2023.
Russian economist Yevgeny Nadorshin suggests the ruble’s recent strengthening is unsustainable, as Russia’s domestic economy has suffered as a result of the Ukrainian War and attendant NATO sanctions, while Russian exporters are sure to see a loss of revenue as the ruble’s strength undermines export prices.
“Now the main force supporting the Russian economy is probably exporters in the first place. Domestic demand is quite hit. The federal budget resources, which support the Russian economy well now, are export resources. And the more expensive the ruble, the harder it is for exporters. export positions from certain fields by certain modes of transport may no longer be profitable," he added.
Given the ruble’s recent strong performance, it must be fairly said that Putin’s “gold gambit” has worked to stabilize and strengthen the ruble in the near term. The evidence of prevailing mid-market currency rates admits of no other conclusion.
However, as even Russian economic observers have conceded, the Russian economy remains in a parlous and contracting state, which both war and sanctions will only exacerbate. Putin’s attempt to establish a “gold peg” cannot change the state of the economy, and cannot substitute for strong economic fundamentals—something conspicuous in the Russian economy by their absence.
With the March declaration and implementation of the “gold peg”, Putin arguably succeeded in buying a little time in which to resolve the Ukrainian War and begin working to return Russia to full participation in global commerce, participation which has been largely disrupted by the NATO sanctions.
Whether Putin will use that time to find a pathway to peace in Ukraine remains very much an open question, with the answer either “yea” or “nay” ultimately being pure speculation.