U.S. Sanctions Fail – How Russian Currency Emerges Stronger Than Pre-War With A New Gold Standard

U.S. Sanctions Fail – How Russian Currency Emerges Stronger Than Pre-War With A New Gold Standard


Ruble was trading at 81.16 per U.S. dollar on Feb 23, the day before Russian President Vladimir Putin launched a special military operation, sending troops into Ukraine. After the U.S. and Europe imposed sanctions on Russia, it triggered a massive devaluation of the country’s currency. It was so bad that Russians lined up at ATMs to withdraw their money.



About 2 weeks later (March 7), the “Ruble” plunged to its record low of 151 to a U.S. dollar, triggering the nightmare of the 1998 Russian financial crisis. For a moment, it looked like the economic and financial sanctions on Moscow were working. The currency collapse was so devastating that U.S. President Joe Biden mocked that the ruble had been reduced to “rubble”.



A month later (April 7), however, the Russian currency was trading at 79 per U.S. dollar. It has not only erased all its losses, but its current value is higher than before the invasion of Ukraine, despite the ongoing sweeping sanctions which supposedly have crippled Russia’s economy. Not even U.S. latest dirty trick to block the Kremlin from servicing its debt could undermine ruble.



Yes, it appears that the badass Putin has once again outsmarted Biden and his allies, and the White House was not impressed. When sanctions were slapped on Moscow on Feb 24, all foreign currency reserves – US$630 billion – held by the Central Bank of Russia with U.S. banks were effectively frozen. It was definitely unfair to seize money belonging to the people of Russia.



Initially, the U.S. Treasury Department had allowed Russia to use the reserves to pay its external dollar-denominated debt, coupon obligations, at least until May 25. On March 16, Putin government managed to pay US$117 million interest to foreign bondholders, averting what would have been its first foreign debt default since the Bolshevik Revolution in 1918. But that also means a slap in the face of Biden.



So, on Monday (April 4), the U.S. Treasury changed the rules again and blocked Moscow from using its reserves to pay even dollar-denominated international debts. Biden, under pressure to win the war against Putin, hopes the latest move will force Russia to either use up its own stockpile of dollar that it generated from selling oil and gas, or to default on its first debt in decades.



After more than 700 various types of sanctions imposed by the U.S. and European Union, Biden administration has been trumpeting how Russia is facing recession, skyrocketing inflation, shortages in essential goods and a pariah currency that no longer accepted in most part of the world. Obviously, it would be extremely humiliating if the Western powers could not bring Putin to his knees.



The U.S. and E.U. have underestimated Russian’s powerful leverage on its oil and gas, not to mention China or even Western allies like India and the Arab world, who refused to sanction Moscow. But none of that would matter had Putin not done his homework in strategic planning before launching the invasion. For a start, the Russian supremo has a brilliant plan to boost its currency.



The strategy was to limit ruble selling and force ruble buying. First, Russia’s central bank immediately hiked interest rates to 20% from 9.5% to limit withdrawal as fresh sanctions by Western countries put pressure on the country’s financial system. Then it capped the amount of dollars (US$10,000 limit) that every Russian can withdraw from foreign-currency bank accounts.



Next, local banks were barred from selling foreign currencies to customers for the next 6 months (till Sept 9). At the same time, brokerages are not allowed to let foreign clients sell securities. The capital controls kicked in to fight the U.S. and its allies’ attempt to isolate Putin and Russia, hoping the economic disaster would trigger an uprising and regime change.



In retaliation against the European Union’s economic and financial sanctions, Putin has issued an ultimatum – Russia wants “unfriendly countries” to pay for Russian natural gas in ruble. Russian gas accounts for some 40% of Europe’s total consumption and E.U. gas imports from Russia contributes up to US$1 billion – every day – to Moscow even during the ongoing war.




Moscow’s unexpected retaliation saw the ruble hit 95 against the dollar as the plan will push demand for the Russian currency. But a change of currency for import of Russian energy could create more havoc and trouble for the EU, which has already seen some European and British wholesale gas prices up to 30%, sparking the risk of inflation and escalating cost of living.



Energy ministers from the Group of Seven industrialized nations rejected the ruble payment demands, saying – “All G7 ministers have agreed that this is a unilateral and clear breach of existing contracts”. Hungary, however, has not ruled out that it will pay ruble for Russian gas. Nevertheless, Moscow has already sent notifications about the new payment order to European buyers, whether they like it or not.



Apparently, every E.U. customer would need to have two accounts in Russian banks, one in euros and another one in rubles. Russian Gazprombank would be responsible for making the foreign exchange conversion on their behalf. For example, Germany may seem like still paying in Euros and not Ruble, but behind the scene, Gazprombank would have converted to ruble.



The fact that European clients have to send the Euros to Russian banks means it can prevent the fresh funds from being seized due to sanctions. The mechanism is quite brilliant because it gives an impression that the E.U. refuses to pay in ruble. Instead of forcing the E.U. to convert its currency to ruble, Gazprombank is doing it, allowing the Europe to save face. The end result is the same.



Putin’s decision to enforce ruble payments for energy products has indeed boosted the Russian currency. Interestingly, the Russian president has also issued a decree on March 5, which allowed Russia to pay creditors from “unfriendly countries” using rubles instead of US dollars, Euros or Pound sterling. But Putin has more tricks up his sleeve.



On March 25, the Bank of Russia unexpectedly announced that it would link ruble to gold at 5,000 rubles per gram. By pegging the currency to gold, Putin has effectively strengthened the ruble with a gold standard. Meaning he has set a floor price for the ruble in terms of the U.S. dollar since gold trades in U.S. dollar. And this is where the fun begins.



Because gold has been trading at about US$62 per gram, it translates to (5,000/62) about 80.6 rubles per dollar. This is why the Russian currency hits the roof. By demanding that buyers of Russian gas pay using rubles, the country’s natural gas is now linked to gold via ruble. Moscow could begin accepting gold directly in payment for its oil and gas exports – or even other commodities.



By linking the ruble to gold and then linking energy payments to the ruble, it has not only put a floor under the ruble-dollar rate, hence stabilized and strengthen the ruble, but also could alter the global monetary system. U.S. dollar used to be backed by gold – till President Nixon’s unilateral decision to end it in 1971 for fear that the U.S. would run out of gold due to expenditure in Korea and Vietnam War.



With one stroke, the powerful and disruptive strategy could move the global energy trade away from the dollar. The move is seen as injecting credibility and confidence into the ruble by making it more valuable and desirable in the foreign exchange market. Russia’s gold reserves are estimated at more than 2,298.53 tonnes – the fifth largest in the world after the U.S., Germany, Italy and France.



Theoretically, if a majority of the international trading system begins accepting ruble for commodity payment arrangements (because it is backed by gold), this could drive the Russian currency to become a major global currency. Putting aside logistic issues, any move to accept “direct gold” for oil payments will cause more international gold to flow into Russian reserves, strengthening ruble even further.



Putin must have done something right when the U.S. Treasury moved to ban all gold transactions with Russia’s central bank. Between ruble, which could be convertible to gold, and dollar, which can’t, it’s not rocket science why the U.S. is running around like a headless chicken to stop Moscow. If other countries copy Russia’s model, the U.S. dollar will be in serious trouble.