A few months ago, there was talk that Russia was making serious moves to strengthen the value of its currency, the Ruble. Russia got the world talking about when they started buying up more gold around 2019-2021. This was way before the Ukraine invasion was even a whispered rumour. The Russian bank increased its gold holdings at a rate and for an amount that had a lot of people wondering if they were preparing themselves for something. the effects, inflation, and whether Russia was making some questionable economic policies. It announced in late March this year that it would be fixing the price of gold at 5,000 ruble per gram. Capping or fixing the gold price in Rubles led some people to believe that Russia was fixing to return to the gold standard or a similar version of it.
The Russian Bank announced the gold price fix as was an attempt by the government to boost the country’s economy. Somehow this policy change meant that the Russian government was planning on buying domestic gold at a fixed price of 5,000 rubles. This would not have been an attractive offer for local gold producers seeing as how the Russian ruble was already so depressed. This meant that the Russian government would always pay a fixed rate regardless of how well the gold price was going. However, the Ruble was not doing so well in the markets which means when the Russian price of gold was stuck at 5,000 Ruble it turned out to be significantly lower than the London market gold price. It could only recover if the ruble recovered to 80 rubles per dollar.
What does it all mean? What the Russian government has done is create a false demand for its currency. They are making sure that the currency is protected against inflation and the effects of the ongoing conflict with Ukraine. That is a great move on the part of the Russian Central bank.
The central bank benefits because it can print the rubles to pay for the domestic gold it buys. Printing currency is relatively cheap and it’s something that countries have done before in times of war.
The question that remains is why Russian gold producers would sell their gold below market value? And isn’t Russia shutting itself off from acquiring foreign materials and expertise?
The answer to those questions is that the sanctions that have been put against Russia have essentially barred gold producers from Russia from being able to sell their gold to Western markets. The only market that is now open to domestic producers are the local banks. This means that domestic gold miners can only sell to one buyer.
This should be no surprise that foreign gold miners like Kinross Gold want out.
Since the invasion of Ukraine, there has been a strong private demand for gold in Russia and local banks have sold a lot of their gold to private customers. A lot of local people are also exchanging their gold for rubles or other currencies especially as the war intensifies.
Declaring that a gram of gold should be worth 5,000 might be easy. However, it might not work in unregulated markets. What the Russian Central bank is doing might be a temporary fix, to help keep the market and the currency safe in the face of sanctions and limits on exports. The Bank of Russia is taking advantage of the opportunity that the war with Ukraine is creating as wells the global sanctions limiting the exports of gold from its domestic producers and maybe extricating itself from the U.S dollar hegemony.
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