Tuesday, December 23, 2014

CNBC: Could Russia Back its Currency with Gold?

This CNBC article raises the question: Could Russia Back its Currency with Gold? This follows recent reports last week that Russia might sell some gold due to its current economic problems and falling ruble. Later, the rumor was put to rest when news was released that Russia has been adding more gold reserves instead. Below are some quotes from this article and then a comment.


"Russia's government could still be pushed into using its gold reserves to bolster the falling ruble, currency experts have forecast. Rumors last week that Russia was on the verge of selling its gold reserves were quashed with the news on Friday that it has continued to add to its holdings. However, John Butler, chief investment officer at Atom Capital, and Alasdair MacLeod, the head of research at online bullion exchange GoldMoney Foundation, believe that Russian President Vladimir Putin could bring the country onto some sort of "gold standard" to try to shore up its economy."

"It was (and still is) in Russia's power to adopt a gold standard," MacLeod told CNBC via email."

"Whether Russia would actually decide to do it was another matter, said MacLeod, and expected the country's central bank to the lack the courage to act. However, he said that if Putin is "provoked sufficiently" he may judge it to be in Russia's best interests and could overpower any reluctant officials at the bank."

. . . . .

"Russia has been aggressively buying the commodity in recent years and has formed closer currency ties with neighboring China in the process. Russia's gold holdings rose to 38.2 million ounces as of December 1, according to a statement by the central bank on Friday. This was a rise from a figure of 37.6 million from the month before, and allayed fears that it had sold the precious metal for dollars so it could further rebalance the ruble."

"Jim Rickards, the senior managing director at Tangent Capital and who has written extensively on the subject, told CNBC via email that Russia will move to a gold-backed currency but believes that such a move could be a long way off."

My added comment:

We covered the Alisdair Macleod article linked above earlier this month here on the blog. Now CNBC has picked it up. I note that Macleod says in this article that he does not think Russia's central bank will have the nerve to make such a bold move as to back the ruble with gold. Also, the article quotes Jim Rickards as saying "such a move could be a long way off".

If Russia took a step like this in 2015 we can conclude it means they are reaching a crisis point and are willing to ramp up open confrontation with the western banking establishment. A move like this would be a direct attack on the US dollar, especially if the other BRICS including China were to come in behind Russia. We can expect that this would generate a response from the west to put even more pressure on Russia.

For now, it seems like that the odds are against such a move. What happens to the Ukraine in early 2015 may provide a hint because the situation is coming to a head soon. The Ukraine is getting close to running out of money and facing potential default. The IMF says it needs at least another $15 billion more than it had expected to keep the country afloat and right now the money is not available and the IMF has not indicated it is interested in pouring more money into the Ukraine either. Russia is being heavily pressured by a combination of sanctions and crashing oil prices. So both sides are ramping up pressure on each other and something has to give in early 2015. Russia would probably like to see the Ukraine default to embarass the western banking establishment. That's a key to watch in early 2015.

If Russia "wins" this skirmish, I doubt they would be desparate enough to move to gold backing for the ruble any time soon. If they lose and conditions get worse in Russia, they might be more willing to take the risk. I doubt Russia will make the move unless China and the other BRICS nations signal they will have their back. We'll see how it goes in 2015.

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