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. Last Updated: 07/27/2016

Expert Urges Gold-Backed Bills

Russia's private banks and financial institutions should introduce a gold-backed currency to operate in parallel with the ruble, a senior U.S. economist told bankers and journalists Wednesday.

Richard Rahn, an economist with the U.S. Committee to Assist Reform, said that creating gold-denominated certificates would help fight inflation, stem capital flow and promote investment in Russia.

"The case for moving to commodity-backed financial instruments is stronger than ever," said Rahn, who also works with the World Gold Council, a body that regulates gold prices. "A gold-denominated parallel money would give the economy a good reference point and give people holding these instruments protection against inflation."

Precious metals and stones, particularly gold, are perceived to be a reliable repository of value in times of economic uncertainty and a hedge against inflation. The value of the ruble has declined from 0.6 per dollar in 1990 to nearly 4,000 during the "Black Tuesday" crash last month, causing confidence in the currency to collapse. As much as half the money circulating in Russia is now U.S. dollars, which Rahn said can only harm the Russian economy.

"Every time a Russian buys foreign currency or a foreign security, it's capital leaving Russia," he said. "It would be better to have your own instruments, and given Russia's natural resources this should be quite easy to do. This way you would even see a transfer of wealth back to Russia."

Russia's gold industry produces around 150 tons of the precious metal per year and is one of the few sectors of the economy where output has not fallen.

Russia is no stranger to gold-backed paper. In the 1920s, the gold-backed chervonets circulated freely alongside the ruble during the inflation-stricken New Economic Policy period. The Finance Ministry last year issued certificates redeemable for Russian gold, but secondary trading in the securities failed to take off.

Rahn said it would be preferable for private banks and institutions to issue gold-backed certificates rather than the government, which might face a conflict of interests since it has responsibility for managing the ruble.

He suggested that private companies form a watchdog body that would draw up and enforce regulations for trading in gold-backed certificates.

Russia's Gold Club, which aims to be registered by the year's end, hopes to fulfill exactly this function, bringing together banks licensed to trade in gold and including representatives of the government and president's administration, said Mikhail Barzhanov, president of the Interbank Center of Project Financing and a coordinator of the club.

The club aims to oversee the launch of freely traded gold-backed certificates, that could be purchased even by small investors, Barzhanov said.

Barzhanov said the certificates would seek to attract some of the estimated $30 billion of Russian capital that is currently circulating in the country's unruly financial markets.