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The Bank of Russia's gold games
A cautionary tale
Gather ‘round the campfire, internet friends. Today we will tell you the story of the gold-pegged ruble, the mythical creature that continues to haunt the internet even though it definitely does not exist.
Once upon a time….
There was a central bank called the Bank of Russia.
The bank was headed by an IMF-obsessed lady named Elvira Nabiullina. Despite losing half of her bank’s foreign exchange reserves, and despite being completely obsessed with the IMF, Elvira was reappointed in April to lead the Bank of Russia for another five years. But that is a story for another time.
On March 25, the Bank of Russia made a curious announcement: starting on March 28, Russia’s central bank would begin purchasing gold from credit institutions at a fixed price of 5,000 rubles per 1 gram. The policy would remain in place until June 30.
The bank explained that “the established price level makes it possible to ensure a stable supply of gold and the smooth functioning of the gold mining industry in the current year.”
The 5D wizards rejoiced. Verily, ‘tis proof Moscow hath pegged the ruble to our favorite kind of bullion.
Then, on April 7 — less than two weeks after this “game-changer” began changing the game forever — the Bank of Russia issued an update: “Due to a significant change in market conditions, the Bank of Russia is making adjustments to its pricing policy when carrying out operations to purchase gold from credit institutions. From April 8, 2022, the purchase of gold by the Bank of Russia will be carried out at a negotiated price.”
What happened? Why did the Bank of Russia suddenly cancel its amazing shadowplay?
It’s very simple, actually. The (very temporary) fixed price had nothing to do with subverting the US dollar or pegging the ruble to gold or leaking the contents of Hunter Biden’s laptop or whatever.
Elvira was (and still is) thrifty and wanted cheap gold from Russian banks that could no longer export their shiny metal due to sanctions. That’s it. That’s all.
In an April 19 article titled “Gold Double Standard,” Interfax explained:
Russian gold miners traditionally sell gold to commercial banks, who can export it or resell it domestically. In 2020-2021, the bulk of the mined metal was exported abroad. But now, when several banks — major players in the precious metals market — have fallen under sanctions, the export channel has been closed for them, and the liquidity of the gold market has decreased significantly.
Against this background, the Bank of Russia, which practically did not replenish gold reserves for two years, decided to resume purchases … albeit at a fixed price of 5 thousand rubles per gram. At that time, this meant a significant discount - the benchmark of the London Precious Metals Market Association (LBMA) in terms of rubles exceeded 6 thousand rubles per gram.
When, due to the dynamics of exchange rates, the market price of gold dropped to 5 thousand rubles or less, the Central Bank announced that “due to a significant change in market conditions” it was switching to buying gold from banks at a “contractual” price instead of a fixed one.
How the “negotiated” price will be formed, the Central Bank did not explain, but soon the gold miner Petropavlovsk disclosed in its materials that the central bank sets a daily price at which it buys gold from commercial banks, and, as a rule, it is lower than the LBMA benchmark.
“The purchase of standard ingots by commercial banks in the Russian Federation is now carried out on non-market conditions, which significantly reduces the interest of producers in such cooperation,” confirms a source in another subsoil user company.
The Bank of Russia is now buying gold at a 15% discount. Not at a fixed price. At a discount against the current market price.
This isn’t 5D wizardry, it’s the Bank of Russia playing hardball with commercial banks that have no one to sell their gold to.
If Elvira was covertly promoting some kind of sneaky arbitrage (which doesn’t even make sense, because the Central Bank was only buying gold at a fixed price, not selling it), probably Interfax would choose a different subhead than “Thanks for the discount”? Is that fair to say?
By the way: the Bank of Russia has a long history of buying gold at a discount. In fact, this policy was employed to encourage gold exports. In other words: “Yeah, we’ll buy your gold—at a discount. So you should probably ship it to London instead.”
This is literally what Nabiullina said during a press conference more than two years ago, on April 10, 2020:
Yes, we know, Nikolai Patrushev said in April he was exploring the idea of backing the ruble with gold or other commodities. (And then Elvira stepped in and said pegging the ruble to gold was not even being discussed.)
But for now: there is no gold-pegged ruble. The ruble is not pegged or linked to gold in any way, shape or form. When there is some kind of meaningful connection between gold and the value of the ruble, we will happily report it.
Edward Slavsquat reports on all ruble-related developments. Including the digital variety of Russia’s currency, which actually exists.