Russia To Accept Gold for Oil. What Does That Mean for the U.S. Dollar?
After the invasion of Ukraine by Russia, the United States was quick to respond with a series of unprecedented sanctions. Within days of the sanctions, Russia’s economy spiraled into a free fall which threatens to destabilize its financial system.
Now, the Kremlin is fighting back by accepting gold as payment for oil. What does this mean for the U.S. dollar and can it deal a fatal blow to the greenback’s status as the global reserve currency?
Why Russia’s Gold Move is a nothing burger right now?
Oil is known as the lifeblood of the global economy. Companies, nations, and even militaries rely on oil for continued operation. Around the world, oil is priced is brought and sold almost exclusively in US dollars. That is because the US dollar is considered the most stable and most liquid currency. Thus, using U.S. dollars to buy and sell oil has strengthened the superior status of the greenback.
With Russia moving to accept gold as payment for oil, the US dollar could see less use by major commodity buyers and sellers. While this may not affect the U.S. dollar in the short term, it could have some long-term ramifications for the U.S. dollar. While the dollar maybe usedless for the actual purchase oil is still priced and dollars. If the dollar is the unit of account then the oil then this move is more of an inconvenience than a move off the gold standard.
What Happens if More Countries Purchase Russian Oil with Gold?
If more countries decide to purchase Russian oil with gold, this could lead to major buyers using U.S. dollars to purchase gold. This will cause the price of gold to spike in terms of U.S. dollars. Over time, we could see the price of gold trending higher while the value of the U.S. dollar trending lower.
Right now, gold is in a bull market. That means that it will be more expensive to purchase oil with the precious metal commodity. However, some nations such as Iran and North Korea may be happy to pay for Russian oil in gold if it can adversely affect the U.S. dollar.
How Will This Affect the U.S Dollar?
Over time, the U.S. dollar could potentially lose its reserve status around the world. This could cause the U.S dollar to collapse and become worthless. Right now, there is no immediate threat to the U.S. dollar as the reserve currency. However, that could change over time if oil is priced in gold. For example, right now a barrel of oil today is about $107 and countries will exchange $107 worth of their currency to purchase about .05 oz of gold at today's price to buy one barrel of oil is really not the big deal the media is making it out to be. The unit of account is still the US dollar, but if Russia were to say a barrel of oil is .05 oz of gold and countries had to purchase .05 regardless of what their currency was doing it would be a game changer. Think about this if right now today for some reason the dollar weakens severely against other currencies weaker dollar means cheaper oil for the rest of the world. The dollar is the base of the transaction, so the dollar is still king because you need to purchase oil at $107 regardless of what your currency of choice is doing that day. However, if Russia were to price their oil in gold a barrel of oil is .05 oz of gold then you need something to happen in the gold market to get weaker gold to get cheaper oil. Gold is king in this scenario because you need to purchase at .05 oz of gold regardless of what your currency of choice is doing that day. As of today countries are not willing to accept the currency risk of pricing oil in gold and are by default saying they would rather use the US dollar instead and hence the strong dollar right now.
As of late March 2022, the US dollar index is sitting at 98.37 which is a gain of 2.5% year to date. Additionally, the price of gold is sitting at around $1,925 per ounce which is a gain of about 6.5% year to date.
Will Russia Continue to Accept Gold for Oil?
It is quite possible that Russia will use its acceptance of gold as leverage in negotiations to lift sanctions. After all, transacting in gold is a lot more complicated than simply paying in U.S. dollars. As the war in Ukraine continues on, it appears that there is little chance that the sanctions will be lifted anytime soon.
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