Will Russia Move to a Gold Standard?

The value of the Russian ruble has crashed in recent weeks, causing some industry experts to speculate that the country may move to a gold standard monetary system for stability.

This would link the nation’s currency to its gold reserves, with Russia one of the world’s biggest buyers of bullion over the last year. Earlier this month, International Monetary Fund (IMF) figures showed the country increased its holdings for the eighth consecutive month in November.

Russia already has the fifth largest stockpiles of gold in the world, but it purchased a further 18.7 tonnes of the precious metal last month. This brings its total reserves to 1,187.493 tonnes.

One of the primary drivers of bullion buying in the country has been the central bank’s need to purchase gold from domestic producers. Miners in Russia have been badly affected by Western sanctions imposed after the Ukraine crisis.

Ruble fears mount

The ruble has plummeted roughly 40 per cent in value against the US dollar and euro this year, with some analysts suggesting this may encourage Russian president Vladimir Putin to sell off gold reserves to halt the slide.

Interest rates climbed a staggering 6.5 percentage points overnight earlier this month, jumping from 10.5 to 17 per cent. However, high interest rates usually slow growth, which is dangerous for a country already on the edge of recession.

Moscow’s Trust Bank has been an early casualty of Russia’s economic woes. The country’s central bank was forced to provide a US$530 million bailout package to the local lender, with many more institutions expected to follow in Trust’s footsteps.

A Russian gold standard

Chief Investment Officer at Atom Capital John Butler said it is still within Russia’s power to adopt a gold standard to protect its currency.

“There is no doubt that Russia and China, plus the other Eurasian states in their sphere of influence are all accumulating gold and the indications are they see it as central to replacing the US dollar for cross-border trade,” he told CNBC.

“It is already in Russia’s interest to cast itself off from inflating Western currencies and to base their economy on sound money, aka gold.”

While Mr Butler admitted such a change would be unexpected, he claimed President Putin could overrule hesitant central bankers if “sufficiently provoked”.

Even without a move to the gold standard, Russia is likely to continue stockpiling the precious metal over the coming months as it distances itself from the US dollar.

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