Summary of the thesis
One of the first victims of the Ukraine-Russia conflict was the rouble. The Russian currency plummeted after the outbreak of the conflict, but has now recovered strongly following numerous measures taken by Russia to defend it.
More recently, Russia enacted a temporary fixed ruble/gold exchange, leading many to argue that it has returned to a gold standard.
In this article, I discuss the effects of this policy on Russia and the world and examine how it affects Bitcoin (BTC-USD), which is often described as “digital gold”.
Is Russia a gold standard?
Between March 28 and June 30the Central Bank of Russia will buy gold from banks at a fixed rate of 5000 rubles per gram.
Does this mean that the ruble now has a fixed exchange against gold? Not exactly.
For a gold standard to be in effect, this arrangement would have to work both ways, which it does not. The Russian central bank buys gold at this fixed rate, but it will not offer to sell it at this price.
In a “gold standard”, the value of the currency is supported because there are arbitrage opportunities when the price deviates from its peg. Let’s say the Russian Central Bank offers to buy and sell rubles for gold at a fixed exchange, and the ruble is trading below that exchange. (It is weak) The demand for rubles would increase, since countries and banks have the possibility to buy gold at cheaper prices, but only with rubles.
Alternatively, if the ruble got too strong, exceeding the exchange price, people would sell gold to the Central Bank at the set price, get rubles, and then use those rubles to buy more gold on the international market. Rinse and repeat until there is no more price discrepancy. This is how arbitration works.
At present, 1 gram of gold is worth 63 dollars on the international market, and 5,000 rubles are worth almost 58 dollars. This means Russia is paying below market prices for gold, which would not support the rouble.
For there to be an arbitrage opportunity here, the value of gold would have to decline, so Russia is paying above-market prices for gold. In this scenario, one could sell gold to the Russians for, say, $65, and then use the rubles to buy gold for $70. This would eventually weaken the ruble against gold, bringing it back to parity.
So what Russia has created is not a floor price for the rouble, but rather a ceiling price. Russia is happy to buy all the gold in the world at 5,000 rubles/gram, but it will not sell gold at or below that price to “defend” the ruble.
That said, the ruble has rallied over the past month, but this may be related to other important steps taken by the Russians. All of these elements must come together to understand what is going on behind the scenes.
First, the Russian Central Bank has doubled its interest rate from 10% to 20% on February 28. Second, and most importantly, the Russian government obliges foreign governments use rubles to pay for their products, i.e. energy, which supports the demand for the ruble.
We can visualize how these events affected the rouble/USD trade on the chart below.
Russia has therefore created a link between energy, its currency and gold. Its exports are now priced in rubles, which in turn are partially linked to gold. In the end, Russia says it is happy to receive both rubles and gold for its exports.
Those wishing to trade with Russia can still get fixed price rubles for gold, but they cannot get fixed price gold for rubles, which is an important distinction. However, they can get energy at a fixed price for rubles, which means that there is an indirect link between Russian energy and gold.
If a barrel of oil is worth 5000 RUB, which in turn is worth 1 gram of gold, then the barrel is worth 1 gram of gold. This will not change, as the Russian Central Bank has agreed to buy 1 gram of gold for 5,000 rubles at any time, or at least until June 30.
What does this mean for the world?
So Russia is now selling its energy for roubles/gold and depending on how the market reacts, it gets away with it.
Russia alone can hardly replace the USD-denominated financial system. But with the help of strategic allies, very big steps can be taken to reduce the world’s dependence on it, which is very bad news for the United States.
Russia holds 1.688 trillion cubic feet of natural gas, which represents 24% of the world’s reserves. China will soon become the largest economy in the world. Russia, China and India collectively own 16% central bank gold reserves. India and China also have nearly 2.8 billion people combined.
An allegiance between these three countries could replace the global dollar-based financial system. Each of them has something to add and a lot to gain, and gold would be the ideal vehicle to achieve this.
If something like this were to happen, it could cripple dollar-denominated economies. The West has built a very fragile system based on increasing amounts of dollar-denominated debt. This was only possible because this debt is accepted as a reserve. But what happens when it doesn’t?
What does this mean for gold?
Gold has been the world’s currency of choice for millennia. The world was actually on a gold standard, of sorts, until as recently as 1971 when Richard Nixon closed the gold window. Since then, governments and central banks have done their best to eliminate gold from world trade, but even they know how useful gold is, which is why central banks hold it in their reserves.
The current decision in Russia brings gold back to the forefront of finance. Gold now has a very real utility for many countries, allowing them to buy Russian gas.
Moreover, a gold-backed currency may be the only way to dethrone the US dollar. Foreign countries do not want to switch from US-controlled fiat to China-controlled fiat. However, gold makes silver neutral, and that’s something everyone can accept.
What does this mean for investors? Owning gold is now more important than ever, and although the yellow metal has underperformed in recent years, now might be the time to shine.
What does this mean for Bitcoin?
Russia opens the doors to a new monetary paradigm, which creates a unique opportunity for countries around the world. The US dollar is disputed as a standard of value. What will replace it?
Gold is the first choice. It has been used as a store of value for millennia, and countries like Russia, China, and India have been hoarding it for years. But in the current conflict, we have seen evidence of a new standard of value emerging that has surpassed even gold, and that is Bitcoin.
Bitcoin was designed, by chance, to possess very similar characteristics to gold. It is difficult to mine, with mining becoming increasingly difficult over time. The supply is limited and around 80% has already been mined, a proportion similar to gold. And, like gold, it resists passing.
However, Bitcoin also has key characteristics that make it superior to gold, and Russia knows this firsthand. The G7 actively tried to prevent Russia from using its gold reserves, prohibiting people and institutions from making transactions with the Russian central bank.
Moreover, in a geopolitical conflict such as this, it would not be uncommon for gold held in foreign banks to be seized or for mining operations to be halted.
And this is where Bitcoin makes the difference. For starters, Bitcoin is much harder to track and “sanction”. Speculation about how Russia might use Bitcoin to avoid financial repression has been common in recent weeks.
To top it off, Russia also has a significant competitive advantage when it comes to Bitcoin mining. Russia is the third contributor The hash mining power of Bitcoin. In addition, 11.9% of the total population of Russia already owns a cryptocurrency.
But if Russia already has gold as the basis of its monetary system, why would it want Bitcoin?
Beyond the reasons stated above, Bitcoin would provide an element of diversification. It would also give Russia access to the thriving DeFi market that is growing in crypto, of which Bitcoin is the store of value. And finally, the best defense is a good offense. Bitcoin would be a great way for other nations to compete with the gold-based system. So why not go ahead?
What does this mean for Bitcoin investors? The global reserve currency, the USD, is being challenged and Bitcoin was created to act as a store of value. This makes cryptocurrency a more attractive investment than ever. Bitcoin may step in to feel this void, as there will be a real need for a neutral store of value, free from political agendas and government. control.
In conclusion, as the world becomes less dependent on the US dollar, other standards of value will rise to take its place. Gold and Bitcoin top the list in my opinion. Together they bridge the gap between the past and the future. The physical and the digital. They complete each other.
Although Russia does not apply a gold standard system, it links its exports to gold, which marks a very important development. People need to understand that the current conflict in Ukraine is just the tip of the iceberg. Another war is being waged between the world superpowers. A world for money control. And whoever controls the money controls the world.