Russia pegs ruble to gold standard

Russia pegs ruble to gold standard

Russian money will be as good as gold. Even before invading Ukraine, Putin had prepared himself to deal with the imminent sanctions. Despite seeing the writing on the wall, leaders in the West played write into Putin’s plans. Biden imposed, what he termed as “crippling” sanctions on Moscow and excitingly waited for the Russian economy to “blow up.”

But that delusion never saw the light of the day. Now, considering Russia’s steps to shore up its currency—the Ruble. Russia, with three major steps, has effectively recovered the lost valuation of its currency. And now market experts say that the Russian Ruble is now more stable than the US dollar!

Russian puts the ruble on the gold standard

Recently, the Russian central bank announced that it will put the ruble on a gold standard. The bank pegged 1 gram of gold to 5,000 rubles. Now that means, one troy ounce of gold or 32 grams of Gold would now cost 1,60,000 rubles in Russia. At the current exchange rate, 32 grams of gold would cost roughly $1,600 in Russia.

But wait, in the US, the same quantity of gold would cost you $1,928. That means Russia has effectively ratcheted up its currency’s value against the dollar by pegging it to gold. If, 1 gram of gold is bound to 5000 rubles, then according to Western standards, the ruble must be valued at 70-75 units against 1 dollar.

Both Russia and China have been building up their gold reserves, while the United States has been depleting it's reserves - vivomix
Both Russia and China have been building up their gold reserves, while the United States has been depleting its reserves – vivomix

This move to encourage domestic gold inflows to the Russian Central Bank

Since the West has banned Russian gold under sanctions, Russian banks would be more than happy to sell whatever gold they possess to the Russian central bank. They will sell even on discounts since they can’t find buyers in the West due to sanctions. More domestic gold flows to the Central bank would mean the ruble will get stronger with each passing day.

How Russia has weaponized its gas trade with Europe to strengthen its currency?

Russia has asked “unfriendly” nations to pay in gold or the ruble for their gas trade with Russia. That would encourage international gold flows to the Russian bank. European countries would either have to buy rubles using gold or simply trade through gold. In both ways, the EU will end up helping Russia deepen its gold reserve. That would mean that ruble’s value would get even more strengthened.

In contrast, Russia is selling oil to India at a pre-war discount of $35, essentially around $62 per barrel. India can even pay using rupee-to-rumble denomination. This will almost certainly keep India as a neutral country should there be any further escalations in the war.

Russia to declare the ruble as a substitute for Gold

Now, under the third step, Russia will simply put its currency on the gold standard. It can simply declare the Ruble a hard gold substitute at a fixed exchange rate. Now, when a currency is backed by gold rather than the US dollar, it becomes more stable and stronger. With a strong ruble backed by gold, Russia would simply be in a position to insist on payment for Russian commodities in rubles. So, each time any European country pays Russia in the ruble or gold, it will simply end up strengthening the ruble’s position even more.

They had thought that by devaluing Russian gold and by sanctioning it, they would reduce the amount of stuff Russia could buy using that gold. Instead, the ruble’s binding with gold and ensuing decision of forcing EU nations to pay in ruble or gold for their gas trade with Russia have simply turned the table on the West.