The case for a Russian gold standard is growing

In very thin markets, the rouble recently fell to 115 to the dollar before recovering to 104. Is this justified, and does it make sense for the rouble to go onto a gold standard?

With Russia being on a war footing, she suffers economic distortions leading to supply shortages which are undoubtedly fuelling price inflation. But let’s take a step back to see whether the recent collapse in the rouble (and its subsequent partial recovery) reflect the true economic situation.

Following currency sanctions against Russia, the foreign exchange market in roubles is extremely limited, which is another way of saying that the rouble’s exchange rate is not necessarily a good indication of her economic conditions. But the setback is an opportunity for unsympathetic analysts to conclude that Russia’s economy is in trouble. Often, such an attack on an exchange rate can become a self-fulfilling prophecy, because analysts assuming that the exchange rate is falling for a reason will seek to justify it in fundamental terms.

This is not to say that an economy on a war footing is free of difficulties. Economic resources are redeployed by the state from the private sector, creating shortages of labour, and driving up prices of raw materials needed by the war machine. Inevitably, these bring price pressures on all aspects of the economy. And with Russia’s unemployment estimated at only 2.6%, labour shortages are pushing up wages dramatically.