Russia shows its hand
Russia continues to ditch the US dollar.
For the first three months of this year, the former soviet state bought 55.3 tonnes of gold, bringing its total gold store to 2,186 metric tonnes.
Meaning Russia now has almost 20% of its total foreign reserves in gold.
That’s small fry compared to the US, where 75% of the country’s total foreign reserves are in gold.
But according to Jim today, comparing Russia’s gold stores to its total foreign reserves misses the point…
Avoiding the US dollar payments system
In December last year, Russian Economic Development Minister Maxim Oreshkin said Russia should be doing more trade in euros:
‘I believe we should think about switching at least to the euro as a more common currency, both for Russians and the Europeans.’1
It looks as though the wheels may already be in motion, with the European Commission for Energy Union’s Vice President recently meeting with the Russian Finance Minister.
Both are keen to set up a bilateral trade agreement when it comes to payments for energy resources.
Essentially, the two powers are working out how to swap rubles and euros for commodities.
Why hoard gold?
Russia’s heavy bullion buying means the country’s gold stores may surpass those of Italy and France (2,451 metric tonnes and 2,436 metric tonnes respectively) within two years.
Central banks of developed economies — like the Reserve Bank of Australia and the Bank of Canada — have ignored the benefits of a large exposure to physical bullion, while Russia has spent a decade investing in hard money.
In other words, while most central banks are making short-term moves, the Russian central bank has a multi-decade plan.
Part of that plan involves moving away from use of the US dollar for trade and setting up bilateral trade agreements with friendly countries.
Although, as Jim points out today, there is a next step.
While the Russian ruble is highly unlikely to become a major global currency, creating a gold-backed currency might be the endgame.
This is surprising.
Russia has been anti-crypto for many years. In 2015, the country blocked websites talking about crypto, and then blocked crypto platforms in 2017.
One Russian minister even said cryptocurrencies would never be legal in the country.
Yet it appears Russia is interested in a form of cryptocurrency it can control.
Read on for more.
Until next time,
Russian Endgame Becomes Clear
Jim Rickards, Strategist
There’s nothing new about the Russians’ accumulation of gold bullion in their reserve position.
It began in a material way in 2009 when Russia had about 600 metric tonnes of gold.
Today, Russia has 2,183 metric tonnes — a stunning 264% increase in less than 10 years.
Russia is the sixth-largest gold power in the world after the US, Germany, the IMF, Italy and France.
Russia’s gold hoard is over 25% of the US hoard, but Russia’s economy is only 8% the size of the US economy.
This gives Russia a gold-to-GDP ratio over three times that of the US. While these developments are well-known, the question of why Russia is accumulating so much gold has never been answered.
One reason is as a US dollar hedge.
Russia is the second-largest energy producer in the world.
Most of that energy is sold for US dollars.
Russia can hedge potential US dollar inflation by buying gold.
Another reason has to do with the avoidance of US sanctions.
Gold is nondigital and does not move through electronic payments systems, so it is impossible for the US to freeze on interdict.
Central bank considers gold-backed crypto
Yet a deeper reason is that Russia has a long-term plan to subvert the US dollar’s role as the leading global reserve currency.
The Russian ruble is not positioned to be a reserve currency, but a new cryptocurrency backed by gold would be a good candidate.
The Central Bank of Russia will consider a new study that suggests just such a gold-backed cryptocurrency to settle balance of payments among willing participants.
Elvira Nabiullina, head of the Central Bank of Russia, said recently her plan is to review a potential cryptocurrency:
‘As for mutual settlements, we will consider, of course a proposal on a cryptocurrency that is tied to gold. But, in my opinion, it is more important to development settlements in national currencies.’
This plan is in its preliminary stages and is a long way from reality at this point.
Still, the Russian endgame has now been revealed.
The US dollar’s days as the leading reserve currency are numbered. Got gold?
All the best,