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Category: Soap Box

Soapbox: The puzzle over Putin’s plans for gold

President Vladimir Putin is angry not just with Ukraine, but with the West generally. That's one reason why one of his closest associates has suggeste...

3 May 2022

Gary Mead

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President Vladimir Putin is angry not just with Ukraine, but with the West generally. That’s one reason why one of his closest associates has suggested he is flirting with the idea of pegging the Rouble to gold – along with defeating NATO, the Dollar needs to be humbled. The war against the West will have two strands to it – missiles and money.

Nikolai Patrushev, the secretary of Russia’s Security Council and a close Putin ally, told the Russian government newspaper Rossiyskaya Gazeta that proposals on pegging the rouble’s value to gold (and other goods) were being drawn up. “The most important condition for ensuring Russia’s economic security is reliance on the country’s internal potential” he said. Russia is a big gold producer; about 10% of gold globally mined each year comes out of Russia.

But Elvira Nabiullina, governor of Russia’s central bank, dismissed Patrushev’s suggestion. She told a press conference that a gold peg for the Rouble “is not being discussed in any way”.

Who should we believe? One of Putin’s buddies, the former KGB man who will be standing-in for Putin while Putin supposedly has cancer treatment, or the largely respected (in the West, that is), Nabiullina, who reportedly wanted recently to resign but was pressed by Putin to stay put?

Mind you, reliable information from the Kremlin is at a premium these days, not least when it comes to gold. On 25 March, the Russian central bank announced that it would buy gold at the fixed price of 5,000 Roubles ($52, which was then about $16 below the prevailing market price) per gram (or 155,500 Roubles an ounce) until the end of June, only to abruptly change course 10 days later (after the Rouble recovered its previously lost ground) and said it would buy gold at ‘negotiated’ prices . Maybe it’s only a matter of time before Putin resurrects the chervonets, the traditional Russian name (derived from “червонное золото” meaning red gold) coin.

Russia has long regarded gold as having a special status; under Stalin the amount of gold held by Russia was a state secret. He refused to join the International Monetary Fund (IMF) when it was created at Bretton Woods in 1944 largely because it would have committed Russia to disclosing details of the country’s gold reserves and production.

Just as Russia may be returning to an earlier era regarding money, so too it seems to be headed for an earlier time politically. The family of the last Tsar, Nicholas II, came to rely heavily on a bearded Russian peasant/mystic/weirdo named Rasputin. Putin has his own Rasputin, in the form of a bearded “fascist prophet” named Aleksandr Dugin, who has been referred to as ‘Putin’s brain’. Dugin promotes the idea that there is a conflict between ‘Atlanticism’ (shorthand for the US and Britain) and ‘Eurasianism’. He has written of the US being a “common enemy” to Moscow and most of Europe and has claimed that “the battle for the world rule of [ethnic] Russians has not ended”.

Into this troubling cauldron is thrown Russia’s 2,301 tonnes of gold, which is about 20% of its official reserves. It’s a puzzle as to what Putin has in mind for this gold; some insist that Russia is positioning itself to move the Rouble to a gold standard. But headlines asserting that Russia has already moved to a ‘gold standard’ are misleading – for that to be the case the central bank would have to agree to buy and sell gold at a fixed parity to the Rouble – and that’s not the case.

From Rasputin to Dugin

Dugin’s delusions are set out in his 1997 book Foundations of Geopolitics, which preaches Russian rule ‘from Dublin to Vladivostock’, using military means, disinformation and leveraging natural resources. Dugin clearly has clout; he has delivered courses for Russia’s military General Staff Academy. In March this year, Foreign Policy asserted that the “recent invasion of Ukraine is a continuation of a Dugin-promoted strategy for weakening the international liberal order”. Putin and his circle genuinely do not believe Ukraine is a real country. For them Ukraine has become mistakenly separated from Russian civilization; Ukraine needs to be reconnected with its motherland, Russia. “We no longer accept that the US is boss… we are going to fight, up to the end, in order to show to everybody that United States is not any more [the] unique master”. Dugin’s words in October 2016. If Putin pays as much attention to this latter-day Rasputin as it’s claimed, the Ukraine war will drag on for years and spread: it’s a war to defeat the West.

But it’s an open question whether Russia can afford such a war. It’s been bad enough for Ukraine, which will experience a massive slump and has suffered at least $565 billion in economic losses; Ukraine has lost more than half of its export capacity according to estimates from the Vienna Institute for International Economic Studies. Russia may be spending as much as $20 billion a day.

Testing times

Russia, Russian oligarchs, and public personalities have been targeted by wide-ranging US, Canadian, and European state sanctions but members of the European Union (EU) are struggling to achieve unanimity to hit Russia where it would really hurt – banning imports of Russian fossil fuels, gas especially. Self-interest is getting in the way.

Robert Habeck, Germany’s economy minister and deputy chancellor, said on Monday this week that it’s “inconceivable that sanctions won’t have consequences for our own economy and for prices in our countries… We as Europeans are prepared to bear [the economic strain] in order to help Ukraine. But there’s no way this won’t come at a cost to us”. Russia has told fuel importers that henceforth payments must be in Roubles via Gazprombank but Brussels has warned EU states that to do so will breach EU sanctions.

But this is a two-way dependency – while around 30% of Europe’s gas needs are met by Russia, Russia is dependent on Europe to buy 90% of its gas. “The reality is that Russia needs the European energy market more than Europe needs Russian gas”.

No doubt Russia wants to push the Dollar from its perch as the world’s international reserve currency but as of today that looks like a remote possibility. The Dollar has reached its highest in 20 years; the Dollar index, which measures the Dollar’s strength against a basket of other developed world currencies, has reached close to 104, the strongest since 2002. The Dollar has risen by more than 8% so far this year – promises by the US Federal Reserve to keep ratcheting up interest rates, while other leading central banks seem reluctant to raise rates, are helping the Dollar’s rise. The Yen has simultaneously dropped to a 20 year low; the Renminbi, China’s currency, dropped more than 4% in April, its steepest monthly fall on record. The Dollar remains king – the Rouble and Renminbi are no-where.

The immediate priority for Russia is to defend its fiat currency, the Rouble. It’s taken steps to do that by requiring buyers of its energy to pay in Roubles, which now are partially linked to gold, and some big buyers – such as Hungary – have said they are willing to do that. Russia has almost a quarter of the world’s natural gas reserves, and the developing world, particularly India and China, need that gas. They will happily pay for it in Roubles, or gold. Russia’s gold reserves mean it can continue being part of the international economy, despite all the sanctions that have been imposed.

A gold-backed currency is perhaps the only way to topple the Dollar. As one commentator has argued, “foreign countries don’t want to switch from a US-controlled fiat, to a Chinese-controlled one. However, gold makes money neutral, and that is something everyone can get on board with”. Watch this space.

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