On December 3, 2022, G7 members formally set the highly anticipated price cap on Russian oil at 60 USD per barrel.
The purposes of this price cap are to:
(i) maintain a reliable supply of seaborne Russian crude oil and petroleum products to the global market
(ii) reduce upward pressure on energy prices
(iii) reduce Russia’s revenues
Russia’s response to this price cap:
Russian authorities have drafted a decree banning the sale of Russian crude oil to buyers part of the Price Cap Coalition or if the purchase is limited by the G7/EU price cap, as a measure to counter the $60 a barrel price ceiling set by the West
Russia responded to sanctions earlier in the year by pegging the Ruble to gold. While speculative, it is entirely possible Russia may further respond to the oil price cap by accepting Gold for oil.
Why would Russia do this? Russia’s gold reserves rank as the fifth largest in the world AND the Russian Ruble is pegged to gold. Accepting Gold for Oil would reduce Russia’s dependence on the US dollar and give Russia pricing power over Gold and oil, and deeper gold reserves all in one fell swoop. A calculated chess move.
I’ll walk through this again but this time in over-simplified terms.
Russia is at war with Ukraine.
The G7 (Canada, France, Germany, Italy, Japan, the UK, and the US) is using this as an excuse to gang up on Russia, saying “you’re bad so now you have to sell us cheap oil.”
G7 put a price cap, banning the shipment of oil from Russia unless it is price at $60/barrel or less.
Russia doesn’t like this for obvious reasons, mainly because it reduces their revenue from oil.
Thus far, Russia appears to be responding by banning the price cap. In other words, Russia is saying “if you are going to cap it at $60/barrel, you won’t get any of our oil all.”
This leaves Russia without oil revenue, but leaves the West without oil. Lose - lose.
However, Russia does potentially have a win-lose chess move to pull.
Zoltan Pozsar, an analyst at Credit Suisse, speculates that Russia could simply start offering 2 barrels of crude oil, for one gram of gold (which is currently worth ~$60).
This would be such a cheap price (~$30 worth of gold per barrel) that countries around the world would not be able to refuse.
They’d start buying gold, to then spend on oil.
This buying pressure would cause the price of gold to “re-price” based on the current market rate for oil and destroy the petro-dollar. In this scenario Gold would likely 2x overnight from ~$1800 → $3600.
Putin would be getting his $60+ per barrel, but it would be paid in gold. Russia’s Ruble is backed by Gold. Russia has large Gold reserves, which would double in value overnight.
Remember, the US dollar is not backed by anything tangible such as gold.
It is, however, backed by some intangibles such as a productive economy, the US military, and the fact that it is used as a medium of exchange for oil (petro-dollar) and most other global trade which has made it the world reserve currency.
A move to gold-backed trade by Putin undermines the dollar’s value and greatly strengthens Russia’s currency.
Other countries would be incentivized to get on board with using Gold or other commodities as a medium of exchange rather than continuing to depend on the weakening United States ‘backed by nothing’ funny money, especially after the latest DXY run crushed most foreign currencies this year.
As mentioned, Gold would likely skyrocket. Other precious metals and commodities like Silver, Copper, Palladium, etc. would likely see speculative bids.
Crypto could also see a speculative bid as Gold is heavy and not ideal to transact with. A logical transition from Gold-backed trade would be crypto-backed trade.
While conducting trade in Bitcoin would solve some problems Gold has (heavy, expensive to ship and store), Bitcoin is not 100% fungible.
It can be traced on the blockchain and dirty ‘Russian Bitcoin’ could be sanctioned and hold a lower value than Bitcoin that doesn’t come from Russia.
This is where privacy coins like Monero or Zcash could become useful as they are impossible to track.
Hold gold or PAXG and be ready to get long other precious metals, Bitcoin, and potentially privacy coins if/when Russia makes the move to gold-backed oil trade.
This is a particularly attractive play currently as gold is seen as a risk-off asset and the general consensus globally is that we’re barreling towards a global recession in 2023.
Even if Russia does not pull the trigger on gold-backed trade, gold may hold up decently this year in comparison to risk assets.
Update 12/20: The ruble tumbles as Russian oil exports drop off in the face of $60/barrel price cap.