Russia Unexpectedly Returns to the Gold Standard
Since the beginning of the Ukraine war, the Russian rouble has gone on a downward spiral. The Russian currency has suffered numerous hits, mostly from restrictions in the form of sanctions coming from both the west and east. Furthermore, since a lot of businesses have pulled out from Russia, the demand for the currency is abhorrently low. It’s so low, in fact, that the country is limiting foreign currency purchases to retain a semblance of value. In an unexpected move, however, Russia reinstated the gold standard, hoping that it would result in at least a short-lived stabilization.
In late February and early March, the rouble slid over 70%, wreaking desolation on Russia’s domestic economy. It created an urgent need to mend the situation by whichever need was immediately available. One move that the government tried to apply is requesting that Russian gas be purchased in roubles. That would doubly aid the ailing economy, bolstering the currency and attracting the usual gas sale profits. The other is the recent decision to peg the rouble against gold and interlink the value of the two.
Russia hasn’t expressed its currency in gold parity since 1999. Following the gold standard was abandoned by world powers in the 20th century. However, Putin envisions that his new agreement will last for a bit over four months, spanning March 28th to June 30th. Currently, the price is 5,000 roubles for a gram of gold, which is equal to about 60 US dollars or 53 euros.
Russia’s switch to the gold standard doesn’t come without any strings attached. Namely, one caveat is that they need to exchange the rouble for gold for anyone that requests to do so. That’s where the issue lies within gold standard adherence, as it may only deepen already present shortcomings.
If people were concerned with the rouble’s value, they could attempt to exchange their reserves for gold. That goes for investors and ordinary people alike, potentially causing mass gold withdrawal requests. That destabilizes the fixed rate as the demand for the rouble plummets and the requests for gold soar. However, it’s likely not meant as a long-term cure anyway; rather, it’s to stop the immediate hemorrhage.
Now we’re left in a waiting game. If Russia’s economic partners submit to its request of paying in roubles for gas, Putin’s move may pay dividends. However, if imports stop, it may be just the blow that stops Russia’s assault in its tracks.