Putin goes for the gold

Lately Russia has been buying gold by the ton — 37 tons in September alone. Why?

One obvious answer is that gold is now cheaper than it has been for quite a while and Russian President Vladimir Putin knows a bargain when he sees one. But Western countries have been selling gold (or at least not acquiring more), which means that Putin is moved by other considerations, some political, some personal.

For years the Kremlin has been calling for resistance to the hegemony of the dollar and the political power the U.S. derives from its being the world’s reserve currency. Now the Ukrainian crisis and its consequences for the Kremlin have turned rhetoric into action. Something akin to the opening skirmishes in an economic war between Russia and the West has commenced.

Western sanctions have already resulted in a plunge of the ruble and the Russian stock market and in a sharp increase in capital flight.

Russia’s response has been to buy gold and turn east, cementing deals with China and, it would seem, firing the opening salvos in a cyber currency war with the U.S. The tactics, such as ones employed in Crimea and Ukraine, use proxies, limit attacks and retain deniability. A deep and massive hack at JPMorgan Chase, widely believed to have originated in Russia, does not seem to have resulted in any theft but has rattled confidence in the U.S. banking system and digital U.S. dollars. Moscow’s purchase of bullion and the assault on the bank can be seen as tactics of a single strategy designed to break the monopoly of the dollar. Gold is Russia’s hedge against that hegemony; it can’t be hacked.

Some economists and investors consider gold laughably backward. The economist John Maynard Keynes famously called it a “barbarous relic.” The investor Warren Buffet satirizes gold by saying that we dig it out of the ground, melt it down, put it in another hole in the ground and guard it day and night. But Russia is old-fashioned and believes in tangible, zero-sum games. Its incursion into Crimea was criticized for, among other things, not being 21st century enough. In that sense, the Kremlin’s buying so much gold is a case of one barbarous relic obtaining another. Former Federal Reserve Chairman Alan Greenspan has said that “in extremis, paper money is accepted by nobody, and gold is always accepted.” The Russians believe the dollar has been weakened by debt and will soon find itself “in extremis,” a process that they are more than willing to help along.

On the more personal front, why might Putin be interested in acquiring gold? Thus far, the sanctions against Russia have targeted some of his closest associates without going after Putin himself, which is sometimes referred to as the nuclear option. His personal fortune is estimated at $40 billion. Supposedly, that wealth takes the form of ownership of or control over shares in major Russian gas and oil companies. But control over those holdings is entirely dependent on his control over the political system. He can be ousted if the rich and powerful around him feel endangered by his actions.

Putin is, of course, highly aware of this possibility. And it’s not only political power and personal wealth that he could lose. A U.S. embassy cable released by WikiLeaks from then–Secretary of State Condoleezza Rice observed that Putin feared becoming the target of law enforcement investigations. If Russia’s richest man, oil tycoon Mikhail Khbodorkovsky could end up in prison, why couldn’t Russia’s most powerful politician?

If Putin were the subject of a criminal investigation, neither his holdings in various companies nor personal property in Russia would be of any value to him. If, however, with the canniness honed by his years in the KGB, Putin had prepared for every eventuality, that preparation may well have included skimming off a portion of the gold that Russia has been both buying and producing. The 205 tons of gold Russia produced last year was shipped from Siberia and the Far East by FeldSvyaz, a special courier service that reports directly to Putin. This would not be the first time in Russian history that large amounts of gold went missing. It happened during the civil war of 1918–1920 and again when the USSR collapsed.

Gold has many advantages. It is compact — $1 million in bars is only three times as heavy as its equivalent in U.S. $100s — and it is virtually untraceable. It is accepted everywhere. To get to the wizard of the Kremlin, follow the yellow brick road.

It isn’t all speculation either. On Nov. 5, Russian legislators introduced a bill to ban the circulation of U.S. dollars in Russia. Russian citizens with dollar accounts would have one year to exchange their dollars for rubles or other currencies (the government and security services excepted, of course). This is yet another attack on U.S. currency. More important, if Russia keeps stockpiling bullion, we could be in for a gold war that might last as long as the Cold War.