April 3, 2022
“Did Russia’s central bank just upend the entire global monetary system and unilaterally use the West’s sanctions to its advantage and link the ruble to the gold standard?
Certainly that would be unimaginable, because Washington’s sanctions were designed to choke off any life to Russia’s financial system to the point that it can no longer sustain the war in Ukraine, let alone its own economy. However, it appears that Moscow may have outsmarted the West again— or at least the Biden administration failed to think even one step ahead, because Russia’s central bank is now one step closer to transitioning into the gold standard, all thanks to Washington’s crude and gold trade restrictions.
But, here’s what’s actually happening, and why Washington has once again failed to recognize loopholes in its heaping sanction sandwich: shortly after the US blocked gold-related transactions with the Bank of Russia, the central bank announced it would start purchasing gold from domestic banks at 5,000 rubles per gram— and yes we are getting the IKEA commercial vibes, and no it’s not a mistake— it is a steal of a deal! But why would the banks be inclined to sell gold at such low rates unless their arm is twisted and they are forced to do so?
When the west sanctioned Moscow’s gold, it inadvertently created an arbitrage opportunity, whereby Russian gold becomes significantly cheaper than its foreign counterpart due to lack of outside market demand, particularly given the consequences of being caught buying the precious metal from Russia. Simply put, if the sanction sandwich is preventing you from selling your bullion reserves to foreign investors and all of a sudden the Bank of Russia comes along and offers to buy the gold at a slightly lower discount, you would happily sell because you are still making a premium.
And, its a win-win for Russia’s central bank, because it’s now boosting its gold reserves, subsequently upholding the ruble, and given that gold is traded in US dollars, setting a price floor for the ruble with respect to the US dollar. The next move for Russia is to boost foreign demand for its currency, which Putin did by instructing “unfriendly” nations to pay for Russian natural gas in rubles. Eventually, the initial discount of 5000 rubles per gram of gold will turn into a premium for the central bank, which in turn will strengthen the flow of gold into Russia from international markets, just as the domestic supplies start becoming depleted.
Still, Russia will ultimately have to liquidate some of its gold, otherwise how else would the country pay for the goods and services it needs? Well, not necessarily— all the central bank would have to do is proclaim the ruble as a substitute for gold at a determined exchange rate ie., the gold standard. However, before transitioning its entire economy, Russia must first ensure it has adequate gold reserves, which it is precisely doing right now by taking advantage of the arbitrage inadvertently created by Washington’s sanctions."
https://thedeepdive.ca/is-the-russian-ruble-about-to-become-a-gold-standard-currency/