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Russia: Gold and Oil Price Developments

Russia's rouble devaluation due to the severe oil price drop is likely to have side-effects and might even set trends for 2015 and the coming years.

What we all know is what happened to oil's price and Russia's national currency, which is tied to the oil exports.

What's interesting to study is: how Russia is reacting to the phenomenon and how this will affect commodity price and other currencies.

In this brief analysis, we are taking a look at the developments and the consequences of the rouble's devaluation.

Russian economic crisis

Russia is experiencing a severe economic crisis, leaders affirm it will take at least 2 years for the rouble to recover

Source: Morguefile/fmfm166

The Rouble Crumbles,
Government Takes Compensatory Actions

The Russian Government has taken the action to force Russian companies to buy roubles with at least 50 % of their income.
This should stimulate demand for the rouble, since investors and wealthy Russians are rushing away from the devaluing national currency.

As a natural reaction, the oligarchs, the rich and the major companies in Russia have immediately shown aversion towards the rouble, as soon as it started devaling.
Capital started flowing out of the country, many major stores and companies have halted sales in roubles (including the Swedish furniture producer, Ikea, which suspended all sales due to currency volatility).

Higher demand is required for the rouble, therefore interventionist actions are going to occur in the future as well.

The Russian National Bank
Buys 1.2 Million Ounces of Gold

Various sources have mistakenly reported Russia selling part of its gold reserves in order to compensate for the rouble's value loss. But in fact, Russia has only increased its gold reserves.

As of December 2014, Russia has 1,188.1 tonnes of gold (World Gold Council Data, 2014).

And, quite recently, it added 600,000 ounces of gold bought in November and, a further 600,000 ounces were added in December again.
(Sources: Goldbroker and Casey Research).

Russia Started Dumping the Dollar

Until last week's end, Russia has sold dollar reserves in excess of 10 billion in order to compensate for the rouble's devaluation. This is just a small portion of almost 100 billion dollars-worth of foreign reserves, which Russia has gotten rind of this year.

The intervention seems to have had some positive effect on the Russian currency, but it still remains weak in comparison with the US dollar, which has been trading between 52 and 57 roubles today.

During a year's time, the rouble has devalued in excess of 100 % in comparison with the US dollar. The latter's cost in roubles having risen tremendously from above 32 roubles exactly a year ago (December 29, 2013) and a maximum of more than 74 roubles (December 16, 2014), recently.

Gold-backed Rouble Planned?

Besides pure speculation, one can take a look at the concrete figures published by Russia's Central Bank.

This forex reserves factsheet, entitled "International Reserves of the Russian Federation" shows concrete figures, changes month by month, occurring to Russia's forex and gold reserves.

In a year, Russia's foreign exchange reserves have dropped by nearly 100 billion USD.
The official fact sheet is showing us 474.95 billion USD reserves in December 2013, while there were only 373.65 billion USD in December 2014.

Gold is not showed in weight quantity, but in terms of dollar worth. But even despite gold's further price drop, one can observe an increase (from 40 billion USD to 45 billion USD in a year).

Conclusion: Russia is getting rid of its foreign currency reserves gradually, while at the same time, they're accumulating gold.

Is Russia accumulating gold just as a hedge or, do they intend to (at least partially) back the rouble by gold?

Bank Runs Could Follow, then Gold Runs?

Bank runs are already occurring in Russia - according to a Financial Times article and,

Banks are experiencing runs on deposits, as people rush to take their money out.

Some are shopping their roubles away for fear of further devaluation.

It's logical to assume that the run on the banks could be followed by a run on gold.
The population may turn to gold as a safe haven, in order to preserve their wealth. And the wealthier a person is, the more likely it is for this to happen.

Gold's price has risen tremendously in Russian roubles. Just check the chart below...

Then it slightly slipped after Russia intervened to protect the rouble.

Gold's price in roubles

Gold's price has skyrocketed in terms of Russian roubles

Crisis Propagation to
Other Former Soviet States

The rouble devaluation has heavily affected certain former Soviet states, among which Armenia was most influenced. There, the inflation has reached 15-20 % by mid-December and has reached up to 40 % with some products.

Other countries with strong economic ties to Russia were also greatly affected: Belarus, Georgia, Azerbaijan, Kazakhstan and Tajikistan have all witnessed currency devaluation and inflation.

It's not just the devaluation that can propagate. Russia might strengthen its ties with the mentioned countries and create multiple bilateral agreements, which could encourage the use of the respective parties' currencies and exclude the dollar from trade.

More Rouble Swap Agreements?

It's a wide-spread speculation that Russia might make further bilateral currency swap agreements - China would be the greatest deal.
China requires oil or natural gas from Russia. Russia could request China to buy roubles when the latter orders commodities. This could help Russia compensate for the rouble's value loss.

An earlier Prime Values article about Russia preparing to exit the petrodollar system.

A complete exclusion of the US dollar from Russia's commodity sales is a likely retaliatory measure.

Currency agreement swaps may also occur between Russia and the former Soviet republics.

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