Russia's $41 Billion Move

June 3 2021 may one day be noted as a turning point in monetary history. However, there's little talk about it for now. Probably because the short, medium and long term effects have yet to play out. It wasn't immediately clear what was going on, and it still remains to be seen what it all meant.

The day started with an announcement by the Russian state that its sovereign wealth fund would sell all dollar denominated assets for other assets, including gold, and that this move would be completed within the end of this month. That's $41 billion of assets transacted in the space of a few weeks.

That same day, gold was hit by massive selling which has persisted to this day. Gold is down 6% since the Russian announcement. As for other assets, there's no sign of price action correlating to the announcement. It's as if $41 billion is so little these days that it doesn't matter. A seller can announce such a transaction ahead of time and still end up with a sweet deal on his intended purchases.

Normally, we don't declare our intended purchases ahead of making them. But Russia is under threat by Westerns states, and must make sure that it never does anything that can serve as an excuse for these states to aggress against it. Making it clear ahead of time that it's dumping dollar dominated assets in favour of other assets is one way to achieve this.

The response by the West was predictably one of feigned disinterest. Otherwise, the West would have portray itself as weak and unable to handle a reallocation of a few billion dollars by an economic inferior state.

This feigned disinterest by the West was probably calculated into the Russian plan. They assumed correctly that their announcement would be met with price suppression by the West. Furthermore, there are ways to suppress commodity prices in the futures market that the Russians themselves can take advantage of. The 6% drop in the gold price since Russia's announcement may therefore be the result of Western and Russian gold suppression efforts happening in parallel.

The West has been keen to suppress the gold price to demonstrate Russia's irrelevance, while Russia has been suppressing the price simply to get a good deal. However, once this month has passed, a new challenge emerges and that's where we might see some drama.

Russia is going to ask for delivery of its gold, and it's not clear whether Western bullion banks are up to the challenge. The Western gold market is mainly a paper market. Very little gold is ever delivered. However, this month will be a big delivery month. That has been clear since Russia's announcement at the start of this month.

The West may find themselves short on the promised gold. But they cannot blame the Russians. They cannot react with feigned surprise, and refuse the delivery on grounds of Russian hostility. They must admit that the gold isn't there. However, Russia is probably well aware of how much gold can actually be delivered, and their purchases are likely to be just so much that delivery can be made.

It play's into the interest of gold importers like Russia that the charade continues as long as possible. The longer they can keep it going, the more gold they can extract from the West before they put their foot down. But the suppression will become harder to maintain, and with a successful transfer of gold from the West to Russia there will be less gold suppression by the Russians. The Chinese may be of a similar opinion about their own holdings, and gold will then be free to go higher relative to the dollar.

Vladimir Putin

By Kremlin.ru, CC BY 4.0, Link