The Gold-Pegged Ruble: System Failure

On March 25, the Bank of Russia announced it would buy gold from credit institutions at a fixed price of 5,000 rubles per gram. The policy, which would begin on March 28 and last until June 30, aimed to ‘balance supply and demand in the domestic precious metals market.’ ‘The established price level makes it possible to ensure a stable supply of gold and the smooth functioning of the gold mining industry in the current year. After the specified period, the purchase price of gold can be adjusted taking into account the emerging balance of supply and demand in the domestic market,’ the CBR said in its statement. As wrote on March 31, the Bank of Russia wanted to provided Russian mining companies with a ‘“’fixed basis for calculations, making it possible to economically mine gold, despite high inflation in the country and the extremely unstable ruble exchange rate.’ In other words: the 5,000 rubles per gram was a “guaranteed” price that Russia’s gold miners could rely on during extreme market fluctuations. But this “fixed” price only applied when selling gold to the Bank of Russia. As it turns out, the CBR got cold feet. When the actual market price of gold dropped below 5,000 rubles per gram, the Bank of Russia dropped its “fixed” rate. On April 7, the Bank of Russia announced that “due to significant change in market conditions,” gold purchases would be carried out at a negotiated price starting the next day.

Published by markskidmore

Mark Skidmore is Professor of Economics at Michigan State University where he holds the Morris Chair in State and Local Government Finance and Policy. His research focuses on topics in public finance, regional economics, and the economics of natural disasters. Mark created the Lighthouse Economics website and blog to share economic research and information relevant for navigating tumultuous times.

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