Putin's attempt to Salvage Ruble

Putting gold parity into play was a practice commonly seen in the 19th and early 20th centuries, and affected by the ‘major’ powers of the world. This was a practice to facilitate international trade payments. In August 1971 however, US President Richard Nixon ended the Bretton Woods System by ending dollar convertibility to gold, and instead enacted wage and price controls. In a surprising move, the Bank of Russia has announced a fixed price of RUB5000 for a gram of gold, pegging the Ruble to gold. This is an attempt by Putin to salvage the Ruble given its declining value and to counter its collapse.

A Good Move

For one, it is disruptive and potent, since, with this, a significant portion of the global energy trade could take steps away from the dollar. The attempt from Putin is to revive gold and any or every payment mechanism that is not the dollar, to become the preferred mode of exchange. It seems ingenious since both India and China are inclined towards gold. In India alone, the gold owned by the citizens accounts for about 40% of the total GDP! Russia too has more than 50% of its forex in the form of gold. With this move, the Ruble has recovered most of its strength, post stumbling miserably post the US and allies’ sanctions imposed on Russia.?When the sanctions were announced the Ruble closed at 121.5 to a dollar – currently the Ruble stands at 81.669 to a dollar. The fact is that any currency that is backed by gold is viewed as more stable and stronger than others.

Several European countries and even India, have signed an agreement that states the payment of gas from Russia will be made in gold. This new arrangement began on March 28 and is expected to carry on up to June 30 of this year. Putin has gone a step further by indicating that gold as payment, would extend beyond just oil – would maybe extend to all its exported commodities such as neon, aluminium, wheat, nickel, enriched uranium, and more.

Will this stand hold?

Experts seem to disagree, since making the Ruble a gold standard, means that Russia would need to abide by certain other rules of this ‘game’ – be amenable to exchange Rubles for gold. Going forward this could lead to a similar situation as the US dollar in 1971. The truth about wars is that they go against the normal state of affairs and carry humongous amounts of precariousness and no reliability of forecasting is possible. Markets react in strange ways during such times, and it is indeed possible that the value of the Ruble might fall worse. This in turn could lead to investors making a collective decision to withdraw all their gold from the Central Bank of Russia, completely shaking the foundation of the Russian economy.

The main aspect of all of this is whether countries continue to want fuel from Russia. If the west is unable to reduce its dependence (and pays in rubles) on Russia for oil and gas, the demand for their currency could remain stable and upwards. However, economists believe (and might be heard by politicians) that if countries stop imports from Russia, it could lead to the collapse of the Russian currency and their economy as a whole. This would most certainly result in a painful increase in oil prices across the world, but on the upside, this could be the safest way to impel Russia to give up the war.

Pegging the Ruble to gold overall is a productive measure since the ‘yellow metal’ is being used obliquely to stabilize the currency. However, this step being connected to an unfortunate event such as the war is giving it an ominous feel. All the same, countries that are battling to save their ‘disheveled’ currencies, could probably use the method to salvage their situation. Let’s see how it pans out. Hoping for a sensible situation and a better world economy.?