By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News, May 12, 2022

View on Moskva City, the Moscow International Trade Center, where billions of dollars are made every day.
Photo credit : Swann Collins, January 2022

The Russian currency is strengthening against the euro and the dollar amid sales of foreign exchange earnings by exporters. The dollar fell below ₽ 64 for the first time since February 2020. The Russian ruble has also strengthened thanks to the growing gold reserves of the Bank of Russia and the announcement of Russian central bankers on March 25 that they would set a a fixed price of 5,000 rubles per gram of gold.

The euro rate at the auctions of the Moscow Exchange on May 12 fell to ₽65.93. The last time the European currency traded below the ₽66 mark almost five years ago – on June 27, 2017, the euro rate fell to ₽65.6175. Relative to the previous session, the euro fell by ₽5.

The rate of the US currency fell to ₽63.51, losing more than 5%. The dollar fell below ₽64 for the first time since February 2020.

The ruble continues to strengthen, ignoring the negative external background, as well as high geopolitical uncertainty and high economic risks. Such dynamics is caused by the persistence of an imbalance in the Russian foreign exchange market due to the current restrictions of the Central Bank and the authorities. Together with the fall in demand for foreign currency from Russian importers, these measures have reduced demand in the market, while supply remains high due to the mandatory sale of 80% of export earnings.

On March 25, 2022, the Bank of Russia announced that it would set a fixed price for gold purchases made in rubles from March 28 to June 30, 2022. On March 28, the Russian government announced that international raw purchases could no longer be carried out in dollars or euros, but rather than everything, from oil and natural gas to cereals and industrial metals, was now to be negotiated in rubles. The objectives of the Kremlin were obvious: leading foreign states and companies to carry out transactions in rubles, the Russian currency which, due to a complete and growing range of Western sanctions, was strongly devalued after February 24. Moscow also tried, by demanding payment in rubles, to increase the demand for its currency while rejecting commercial operations based on the US dollar.

The Russian bank was therefore arranged on March 25 to buy gold from Russian banks at a fixed price of 5,000 rubles per gram, which fixed an effective “floor” on the ruble. At 31.1 troy ounces per gram, with Russia’s central bank offering gold at 5,000 rubles per gram, an ounce of gold would be bought for 155,500 rubles, or about $1,556.64, during March 25 . On the international market, the price of an ounce of gold was then 1,953.80 dollars.

In the situation of the deep shock of foreign exchange liquidity that the Russian banking system is now experiencing, gold will once again serve to store value and protect wealth against inflation. Demand for gold from Russian citizens has increased since the start of the military operation in Ukraine on February 24.

In early March, Russia amended its Tax Code adoptiong a law abolishing VAT on the purchase by individuals of precious metals in bullion with their withdrawal from bank vaults. Previously, the VAT tax rate was 20%.

Read also : How to invest in gold

The ruble is also strengthening against the backdrop of positive dynamics on commodity markets. The cost of July futures for Brent crude oil on the London ICE exchange today grows by 0.7% – up to ₽108 per barrel. Gas prices in Europe today added almost 20%, and futures quotes on the index of the largest European hub TTF exceeded $ 1200 per thousand cubic meters. m, according to ICE Futures.

Lastly, the Executive order of U.S. President Joe Biden banning the transfer and the use of U.S. dollars to Russian or Russian nationals and legal entities have greatly damaged the status of dollar as international reference currency. Now countries like China, India, Russia, Brazil and African countries are thinking about building an alternative international currency system, if they had not already thought about it. Gold could come back as the currency standard in coming years. The days of the paper-dollars are counted.

Read more about gold, inflation and monetary imbalances with Gold : Build Your Wealth and Freedom

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© Copyright 2022 – Swann Collins, investor, writer and consultant in international affairs.