‘Remember the golden rule! Whoever has the gold makes the rules!’
That quote, from a newspaper comic strip in the US in 1964, was satirising American politics at the time. Yet over the years, it’s been quoted as a means of implying that whoever has the most gold reserves gets to set the agenda.
It also may be Russia’s new mantra…
Each quarter for the past three years, Russia has announced an update to their gold holdings.
As at December last year, Russia had 1,838 tonnes of gold in reserve. It purchased a total of 223 tonnes for 2017.
Last year’s buying spree now makes Russia the sixth largest holder of gold in the world. And only four tonnes behind the fifth largest holder, China, with 1,842 tonnes.
Of course, that’s China’s ‘official’ holding. Given that China mines on average 460 tonnes of the yellow metal each year — and none of it leaves the country — the actual figure is probably much higher. China randomly updates their gold holdings. And only when they need to rattle the market a little…
At the moment, China is keeping quiet, leaving Russia to shake the market.
Russia’s increasing gold reserves shouldn’t be ignored. Even though the precious metal isn’t at the centre of the financial system today, gold still equals power.
Russia’s increase in gold reserves came as a result of international sanctions in 2014.
When Russia stepped into the Ukraine crisis in 2014, the international community wasn’t happy. Part of the sanctions meant foreign banks could no longer buy gold from Russia’s local banks, which they bought from Russian gold mines.
This massive supply of gold needed to be absorbed somehow. So the Russian central bank began buying up all the gold to keep the banks funded.
Since July 2014, Russia’s central bank has increased gold stores by 75%.
More importantly, however, this was part of a broader plan in Russia. Increasing the gold holding was a way to diversify their foreign assets away from currencies. Enabling Russia to get away from the oppressive US dollar and euro.
Over the past three years, this incredible gold accumulation has meant that bullion now accounts for 17% of Russia’s total foreign reserve assets. In comparison, China’s gold stores account for 2.5%.
What began as a necessary action to ensure local banks had funding actually propelled Russia on a progressive financial path.
Repeated international economic sanctions continue to encourage Russian President Vladimir Putin to look for new ways to avoid the US dollar.
One of the recent ways was embracing China’s yuan-based oil futures contract. The ‘petroyuan’ means the two countries can trade oil without needing the US dollar.
Late last year, however, Russia added a new twist to the story.
Russia plans to be the first country to embrace a national cryptocurrency.
Less than two weeks ago, a bill was submitted to Russian parliament proposing a ‘cryptoruble’, a legal cryptocurrency that would work in tandem with the fiat ruble.
The digital currency will be pegged to the ruble, will be non-mineable, and will become the legal cryptocurrency in Russia. It’s worth pointing out that all other crypto mining will be banned in the country. However, Russia can’t ban Russians trading it…yet.
And while the cryptoruble will use blockchain technology, it won’t be decentralised like the majority of cryptocurrencies are.
In other words, the cryptoruble will be kept on local databases, under control by Russia’s central bank, making every single transaction traceable. Russia has plans to launch the cryptoruble in mid-2019.
Putin reckons his local cryptocurrency will enable the country to avoid economic sanctions in future.
Right now, there isn’t a large demand for rubles…let alone a digital version.
At least not yet.
But things change quickly when conditions are favourable for investors.
The cryptoruble is all part of Russia’s long game to end their need for US dollars.
To achieve that, Putin is ensuring the cryptoruble will be attractive for investors. In doing so, he hopes to encourage foreign capital into the country.
And the carrot is tax.
Sure, right now you don’t want rubles. I can’t imagine many people do. That’s even with 10-year Russian bonds offering a 7.20% return.
Even though the cryptoruble is entirely traceable, it’s part of the path required to ‘legitimise’ Russia’s economy. The black market in the country has been a punch line for a couple of decades now. And much of the international money flowing through the economy is from ill-gotten gains.
So in order to get some clean money into the country, Putin is offering up a tax break on it. All cryptorubles can be exchanged for regular rubles at any time. But if the holder of the crypto can’t explain where they got them, a 13% tax will be levied. The same tax rate will also be applied to any difference in price between the purchase and sale price of the crypto.
This can almost be seen as a direct attack on how the US treats bitcoin.
For example, the IRS in the US says that bitcoin is ‘property’, and that every bitcoin transaction creates a taxable capital gains event. Meaning every single bitcoin transaction is basically a taxable event for the buyer and seller of the goods.
Which is why most places in the US aren’t in a hurry to embrace bitcoin. It creates too much paperwork.
It may even be why so much money has moved into bitcoin without moving back into the economy — it’s too much of a tax obligation.
However, Russia is in the process of creating a new and perfectly legal way to use cryptos within their market. And, importantly, with as little tax as possible.
Make no mistake; Putin isn’t a revolutionary. He is a nationalist out to protect his country’s interests.
And one of those interests is growing the economy and removing the reliance on the US dollar.
Accumulating gold was part of that plan. The second part is encouraging fresh international money to come into the country. And the cryptoruble is key to that.
Investors will always go to where their cash is treated well.
Editor, Markets & Money