Gold And Russia

Author & Head of Research @ Goldmoney
February 18, 2015

Putin and goldIn late November I wrote an article suggesting that it could be in Russia’s interest to put the rouble on a gold exchange standard. The salient points were the Russians could easily make it stick, inflation would be tamed, and importantly Russia would divorce herself from the currency war being waged against her by her NATO enemies. The immediate consequence of such a move would almost certainly drive gold prices higher, if only because bullion banks would be forced to reconsider their short positions, in the knowledge that Russia would probably become a more aggressive buyer to build her reserves.

This move would be very good for Russia, if you understand Austrian economic theory, but would be judged reckless by mainstream macroeconomists. So it is obviously a prerequisite that President Vladimir Putin’s advisers would have to lean strongly towards sound money theories, if they are to advise such a move. Whether or not this is the case we do not know; the only thing we can do is look at the evidence and try to see things from Putin’s point of view.

Putin is an old-fashioned mercantilist, tolerating mild dissent to preserve the appearance of democracy, but ruthless with anyone who gets in his way. He runs Russia like a business, always looking for the commercial advantage in alliances. For this reason he decided some time ago that Russia’s future lay as a dominant partner with China in a Eurasian super-state, and so the Shanghai Cooperation Organisation (SCO) was founded in 2001. It’s a natural: Russia has the resources and China the manufacturing. The SCO will have half the world’s population under its control when India joins, and will heavily influence another billion Asians. Even Turkey, a NATO member and previously an applicant to join the EU, intends to join the SCO instead.

The West pushed Putin in this direction, by refusing to engage with him after the Litvinenko affair in London, and by financing unrest in Georgia and Ukraine. These activities have only served to heighten Russia’s sense of insecurity and renewed her determination to secure her borders.

An important feature of the SCO is that China, Russia and most of the other members have been buying gold. China has been buying since 1983 at least, but for Russia this is a relatively new activity, having lost her official reserves at the time of the Russian financial crisis in 1998. Nevertheless, she has been aggressively buying so that she has more than tripled her holding since 2005 to 1,207 tonnes, now the world’s fifth largest holding. Importantly, during the recent rouble crisis Russia continued buying gold at a time when she might have been expected to preserve her dollar reserves.

Circumstantial evidence perhaps, but Russia’s gold policy clearly tells us Putin’s advisers favour the stuff. Of course, the reasons may not be economic, but strategic. What if his intelligence services have evidence of the lack of gold in western central bank vaults? What if the Central Bank of Russia’s gold dealers are setting a trap for the heart of the West’s financial system, and can break the bullion banks when they please? Both these are possible, and they may be fundamental to Russia’s defence strategy, given the war being waged is more financial than military.

We can only speculate, but there is an overriding aspect of the future that Putin is almost certainly considering: his legacy. If this matters to him he will want Russia to not only survive but for her to be top-dog, with him as the architect. He has almost certainly been made aware of MacKinder’s Heartland Theory: “he who rules East Europe commands the Heartland; who rules the Heartland commands the World-Island; who rules the World-Island controls the World.” Nor is this mumbo-jumbo; MacKinder’s point was that the World-Island, the inter-linked continents of Europe, Asia and Africa is the largest, most populous, and resource-richest of all possible land combinations. Russia’s partnership with China through the SCO substantially achieves this, particularly since China now also controls Sub-Saharan Africa.

When Putin has secured Russia’s borders, he will need to deal with organised crime, eliminating it as much as possible. He will have to change the way he does business and enhance private property rights. Russia with her low taxes will then be an attractive place to do business in and with. And finally, he will have to secure the currency from the increasingly inevitable collapse of the global currency system.

This ultimately is the importance of gold for Russia, and the fact she has been acquiring it aggressively suggests Putin knows it.  Remember that Putin is not like a western politician driven from one trivial crisis to another and wholly reliant on a central bank to handle money matters. Elvira Nabiullina, the head of Russia’s central bank was previously his personal economic adviser, and is almost certainly his personal appointee. Through her, we can assume Putin controls the central bank.

Given that Putin is actively considering a move towards some sort of rouble-gold convertibility, it comes down to timing. Ideally, Russia would probably like to add further to its reserves, though we don’t know how much non-monetary gold Russia owns. It is quite possible Russia has additional gold to the 1,207 tonnes declared so far. If so a first step would be to declare the full position, which may trigger a similar declaration from China, there then being no point in China continuing to conceal Russia’s true position. The more gold Russia actually has, the more likely it is to want to announce its intentions sooner rather than later.

To a large extent timing will be down to NATO. If NATO escalates its involvement in Ukraine, with or without more financial sanctions, Russia might respond to stabilise the rouble by announcing a gold standard. The good news for us lesser mortals in the West is that at least a financial war is better than a nuclear war. Unless, that is, it becomes one.


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Alasdair became a stockbroker in 1970 and a Member of the London Stock Exchange in 1974. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy. After 27 years in the City, Alasdair moved to Guernsey. He worked as a consultant at many offshore institutions and was an Executive Director at an offshore bank in Guernsey and Jersey.

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