Friday, February 20, 2015

Mises Institute: Is Russia Planning a Gold Backed Currency?

The idea that Russia might opt to back the ruble with gold continues to float around. Some alternative view articles appear regularly suggesting this either might happen or will happen. This article appeared recently on the Mises Institute web site about this idea. The Mises Institute favors the Austrian economic view and therefore is naturally an advocate for using gold to back currencies.

Below are some quotes from this article. After that some comments.

"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  . . . .

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

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.

"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."

. . . . 

"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."

. . . . 

"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."

"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)."
. . . . . 
My added comments:

As we have noted here, this idea does circulate quite a bit on the internet. This article presents the case for why Russia might consider it as well as any out there. So far, we don't see any tangible evidence that Russia is actually considering doing this. All the information in the articles we research indicates that Russia (and the other BRICS) first priority is to continue to work within the existing global framework at the IMF, the UN, and the World Bank and are supportive of the SDR used at the IMF.

There is very clear evidence that the BRICS nations (led by China and Russia) are rapidly increasing their gold reserves. But it is not clear what their ultimate plan is for this gold. The evidence so far suggests it is more a hedge for them against the assets they own held in US dollars. However, we will keep an open mind to this idea of an actual gold backed currency coming from the East. If that is their plan, it will become more obvious over time. 

Here are the two recent articles we wrote that summarize what we have found on this topic doing research for blog articles here:

Do the BRICS want out of the IMF and UN? - Part II

Added note: 

Here are a couple of other articles related to this issue readers might find interesting:

Willem Middlekoop: A New Gold Standard in the Making

Alasdair Macleod -Gold and Russia

Thought Question for the day on this topic: If Russia was really interested in using precious metals to strengthen its position, why do they not go after silver? Silver is a key industrial metal needed by both the Eurozone (solar energy) and China (electronics). If they cornered the silver market (which they could do), they would be in a great position to offset a move in the EU towards solar energy and away from Russian natural gas. Just something to think about.

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