Russian Ruble as the world's new reserve currency?

Russia just backed its currency with gold, providing an alternative to fiat (debt-based) currencies like Sterling and the dollar. But are investors really willing to put their money behind it?

----------------

Debt vs gold

As most of the world is facing an inflation crisis, the weakness of fiat currency has returned as a major issue. During the pandemic, governments ramped up deficit spending to deal with the effects of lockdowns. Now, it's time to pay the bill, and it is being felt in the form of increased prices for, well, pretty much everything.

Supporters of the gold standard argue that this could be avoided by having the national currency backed by something ‘real’. To add some weight to that argument, the Swiss Franc, is partially based on gold. Switzerland has only reached a CPI of 2.4% y/y, which is quite the contrast with the 7.5% y/y in the United States.

Moving away from the dollar?

The dollar has remained the world's reserve currency for many reasons - the petrodollar system, the dominance of the US economy and military- and simply because the alternatives were less attractive. Switzerland's economy is too small to have a reserve currency, the exchange rate of the Yuan is fixed by the government, and the Euro is just another fiat currency. Up until recently, so was the ruble.

With Russia being cut out of most of the fiat currency markets, the country might be forced to return to a gold standard to provide investors with extra assurances. The problem, for now, is, that it's not politically expedient to use rubles. And when/if the political situation improves to the point that countries would take the risk, Russia is likely to be able to return to the credit markets.

Russian Central Bank head Nabiullina has done an impressive job defending the currency in extreme circumstances. But that is kind of the problem: The move to stabilize the currency was prompted by the extreme geopolitical instability of Russia. And that is likely to discourage investors much more than any other aspect of the currency including whether it is backed by gold.

USD/RUB back on track

The USD/RUB exchange rate has returned to pre-war levels and declined to its 7-week average near 96 on Friday after soaring 112% since late February.

The top looks unlikely to be revisited soon and there is a growing likelihood of sliding to the 50-week average below ₽80.

The ₽100 is a critical round level and it could be revisited any time. A break above it on the daily chart would increase the chances of a retracement up to ₽105/ ₽110. Contrary, a rejection would speed up the drop.

USBRUB

Key takeaways

Russia’s move to towards a gold standard to stabilize the ruble offers an interesting alternative to dollar-backed indebted world economies. However, it take a brave soul to investing Russian assets under current circumstances (fortune favours the bold?) and backing the currency with gold might only be a temporary alternative until confidence in the ruble is regained.