Lessons from the Russian Ruble Crash ZT

万得福

Moscow Update: Gold During the CrisisEditor's Note: Dmitriy Balkovskiy is a Russian coin dealer in Moscow we’ve interviewed before. Since the ruble’s crash, he’s witnessed some interesting developments in his country, so we asked him for an update.
        By Dmitriy Balkovskiy
        I would like to expand on Jeff Clark’s piece “Gold Was Up 73% Last Year”  with some real-life stories from inside Russia.
        First, a small correction… Jeff describes an investor sitting in a Moscow café and reading about gold’s phenomenal rise in rubles in a Russian newspaper. In reality, gold-related info in a Russian newspaper would be buried on page 17 and very difficult to locate. “Serious” gentlemen deal in stocks or real estate; gold coins and bars are for the naïve. In this respect, Russia is no different from the USA, and even worse.
        Now to my episodes…

• Our small office is located about 200 meters from the Kremlin’s entrance, right across the street from it. So sometimes we get visitors from within those walls. In the early afternoon of December 16, a Ukrainian construction worker came in wishing to buy a one-ounce Austrian Philharmonic. He had just finished several months of work at the Kremlin reconstruction site and wanted to get rid of his rubles and take home a hard asset. (Note: December 16, 2014 has already been named the Russian Black Tuesday. On that day, the ruble fell from 58 to 72 per USD in several hours.)
  
                  Now this guy must have been burnt a few times in his life, because he wanted to check the coin for authenticity in every possible way. When he first entered the door, the coin sold for about 86,000 rubles. It took us about 30 minutes to complete the checking procedure to his satisfaction—but when we looked at the price again it had soared above 100,000 rubles. Unfortunately all he had in his pocket was 90,000 rubles. The coin had literally slipped from his grasp.
  
                  He told me he had long wanted to buy a thick gold chain, and so we suggested a jewelry store nearby. “Prices do not change there as often,” we told him. Off he went with a sigh.
  

•                 That same day I went to a nearby branch of Sberbank (the biggest banking chain in Russia), which was full of people, probably 100 customers. They looked grim and determined to withdraw rubles and buy dollars and euros ASAP. I addressed bank tellers I know there: “So our dear countrymen are vacuuming hard currency at historical highs again?!?” Girls giggled in response. It is both painful and funny to see Russians repeating the same mistake again and again.
  

•                 An elderly woman at the supermarket cashier, in response to the rumors about a possible freeze of bank accounts, said, “They will take away our money like they did in the early ‘90s?” I replied, “Why not try gold and silver for the long term?” She testily snapped, “What are we gonna do with them—eat ‘em for dinner?”
  

• A discouraged friend told me, “I’ve got to buy euros to pay my rent (rents are often fixed in euros in Moscow), but any exchange office I go, they have run out of euro cash.”
  

• A couple days later I overhead this conversation at an electronics retailer: “Honey, I still have some rubles left on me—let’s get a third flatscreen TV.”
  

Now here we are in the middle of January, and 1 USD goes for 65 rubles. Have any lessons been learned? Have Russians turned into hard money enthusiasts? Unfortunately, US dollars and euros (and even flatscreen TVs) are still seen as better hedges against chaos than gold.
        What about all those articles about the Russian central bank buying gold? Actually, very few Russians are meaningfully aware of these purchases. It hasn’t influenced people’s financial decisions yet… although it should—the Bank of Russia bought 171 tonnes of gold last year, more than any other central bank in the world.
        Meanwhile, as I write, a Russian language website is teeming with ads offering to sell those appliances bought for 40,000 rubles in December just for 32,000 rubles!
        Does this mean there won’t be a gold bull market in Russia? I think it would be a mistake to draw that conclusion, and here’s why…
First, there was an upsurge in gold and silver sales at the end of 2014. Some local sources said coin sales grew by 50%, some by 100%. Our sales volume also definitely picked up in December compared to last fall, but April 2013 was much more active in terms of volume and interest. Keep in mind that all of this is from a very low base.
        The most promising sign is that regional bulk buyers reappeared after a long absence—these guys come in with cash and buy 50, 100, or 150 ounces of gold at a time. They are mostly provincial businessmen looking to “deep freeze” their savings for the long term, always taking the newest and cheapest one-ounce gold coins. The concept of precious metals ownership is slowly seeping into psychological makeup of Russian businesspeople.
        A major financial event or a sudden spike in the USD gold price will serve as the real catalyst for a gold stampede. The loss of trust in Western currencies for economic or political reasons may stir Russians to action, too.
Second, gold ownership is just one wholesome habit in what I call “personal fiscal hygiene.” Russia in many ways runs far ahead of the developed world in terms of debt prudence and anti-welfare mentality. Here are just two examples in support of this:

• Mortgage debt. Russians also buy real estate on credit, but the size of the market is miniscule. There is about $51 billion in residential mortgage debt outstanding in a country of 144 million people, of which only 3.5% is in currencies other than the ruble. This is pocket change compared to the US—yet you should hear all the anti-debt rhetoric in the local media.
  

• Unemployment benefits. Here’s a headline for you: “Level of Unemployment in Moscow Will Rise to 0.5% by 2017.” And this is from 0.35% (25,100 people) who are officially unemployed here today. There are about 13 million residents in Moscow, and the real rate of unemployment or underemployment is way higher than that.
  
                  The highest level of benefits here is about $78 per month, and that’s really for former top managers. You can count on benefits for about three months, and they will literally hound you with seminars, job fairs, and check-ins. Just to put this number in perspective… the cheapest apartment here costs $50,000 to $60,000, and it would be just a hole in the wall. As a result, Russians simply don’t register with the unemployment office; they try get along on their own.
  

        The majority of Russians have a savings-oriented mentality, so gold would fit rather snugly into their financial frame of reference.
        It’s time for Russians, Americans, and everyone else to wake up, face up to the dangers of statist debauchery, and prepare ourselves for the hard times to come!