Russia discussing indexing gold to ruble

Current international financial system is 'colonial' and punishes developing countries, says expert.

Russia discussing indexing gold to ruble

There are discussions in Russia of indexing the ruble to gold and various other commodities to help stabilize the national currency and boost the country’s financial independence.

With around 2,300 tons of gold reserves and some 300 tons of gold production per year, discussion of indexing the ruble to gold gained momentum due to Western sanctions, as shown by statements by Russian authorities.

Nikolai Patrushev, secretary of the Russian Security Council, told Rossiyskaya Gazeta daily on April 26 that Russian experts are working on a "bicyclic monetary and financial system.”

Indexing of the Russian ruble to gold and various commodities is being evaluated, Patrushev said, adding the move would make the ruble exchange rate “correspond to real purchasing power parity.”

"To ensure the dominance of any national financial system, the payment instruments must have an essential value and price stability, it shouldn't be tied to the dollar," he added.

Dmitriy Peskov, a Kremlin spokesman, also confirmed that the issue of indexing the ruble to gold and various commodities is being considered.

The Russian ruble rose from 70 to 130 against the US dollar after sanctions by Western countries, and the country's central bank, the Bank of Russia, began to implement harsh capital controls due to the country’s currency crisis.

The ruble subsequently fell below the level of 60 to the dollar, recovering from its losses.

While the Bank of Russia on March 28 announced that it would temporarily buy gold from the market at a fixed price of 5,000 rubles per gram, some Russian and international economists claimed that the step means that the ruble is indexed to gold.

Elvira Nabiullina, governor of the Bank of Russia, stated that the free-floating structure of the ruble against the foreign currency should be preserved, adding that the idea of ​​​​indexing the ruble to gold is not on the bank's agenda.

Russia tried gold standard in 19th century

Amid rising expectations that the Russian economy has entered a process of comprehensive change due to far-reaching Western sanctions, history tells us that this is not the first time the idea of indexing the Russian ruble to gold came up.

Sergey Vitte, who served as finance minister in Czarist Russian from 1892 to 1903, introduced a gold standard policy in 1897.

This step led to a steep loss in value for the ruble, which then boosted export revenues and foreign investments.

Vitte earned the nickname "the father of Russian industrialization,” especially thanks to rapid industrial growth.

In an article for the Bank of Russia, historian Aleksandr Bugrov said Vitte's gold standard policy would not lead to increased foreign investments in Russia, claiming the country is already an attractive market.

He also argued that this policy led to a steep rise in Russia's foreign debt.

The indexing of the ruble to gold ended due to the start of World War I.

Despite some efforts, after the war it was not put into effect again.

Difficult transformation process

Artem Tuzov, a director at Moscow-based UNIVER Capital, said that 100 years ago, cash had equivalents over gold.

Pointing out that in the modern technological era, some cryptocurrencies were indexed to fiat money or metals, Tuzov said: "The indexing of the ruble to some export products can be developed similarly.

"With the digital ruble project, a two-cycle monetary system could exist: fiat rubles in the country and digital rubles indexed to some export products for the international market."

But Tuzov said the transition to such a system would create difficulties and people’s foreign currency savings could also be damaged.

“The profitability in low-cost production over the ruble will decrease and exporters may suffer but, in the end, Russia can get rid of the continuous depreciation of the ruble, which leads to a permanent decrease in the purchasing power of the citizens," he said.

Calling the current international financial system "colonial,” Tuzov said: “While Western countries can print money forever without fear of inflation, developing countries constantly suffer from the depreciation of their national currencies.

"If Russia manages to get rid of this legal exploitation of developing countries, it will be a groundbreaking development and a model for other countries."