Not everyone (ourselves included) was convinced the Federal Reserve would increase its interest rates in June, but the FOMC has indeed hiked the benchmark rates by 0.25%. On top of that, it’s now increasingly likely we will also see the Fed starting to reduce the size of its balance sheet although it might take a while before the central bank starts to unload its securities at a more aggressive pace.

While there’s continuous pressure on the Federal Reserve and the European Central Bank to ‘normalize’ the interest rates, Russia has now started to reduce its benchmark interest rates, as the Russian Central Bank has now cut its interest rate to 9%, as the bank claims the inflation rate is now under control.

Source: Tradingeconomics

Indeed, whereas the Western world had severe difficulties to increase the inflation rate to the target of 2%, the low oil price has pushed the inflation in Russia much higher than the eyed 4%. The situation was pretty bad in 2015-2016 as not only did the lower oil price send the value of the ruble tumbling, you might remember importing food from the European Union and the United States was banned as a ‘punishment’ for the sanctions initiated after Russia (re-)annexed the Crimea region.

Source: ABN Amro

As you can see on the previous image, the impact of the export ban only had a short-term impact on the Russian food inflation number which spiked to almost 25% in 2014-2015 before trending down to the 3-5% level right now. This still sounds high for Western consumers and investors, but it’s actually completely in line with the core inflation rate.

Now the oil price is increasing again, the value of the Ruble is increasing as well, and the next image gives you a clear overview of the impact of the increasing oil price on the value of its currency. Keep in mind the export of oil and gas accounts for well over 50% of Russia’s total exports, so every dollar really counts.

Source: Bloomberg

Most economists will obviously point at the oil price and the fiscal and monetary policy as the main reason why the economy seems to be improving. That’s fine, but we’d also like to argue the consumer and purchase manager confidence might also have been helped by the increasing strength of the balance sheet of the Central Bank.

Indeed, throughout the entire Ruble-crisis and inflation spike, Russia continued to purchase more gold. Whereas the central bank owned just 33 million ounces of the yellow metal at the end of 2013 (before the sanctions came into effect), the most recent numbers from April 2017 indicate the Russian central bank now owns in excess of 54 million ounces of gold and in excess of 15% of the total reserve assets of the central bank are now backed by gold.

The stronger balance sheet of the Central Bank has very likely helped to restore the confidence of the domestic companies and consumers in the Russian currency, and now the oil and gas prices are increasing again, the Russian economy might have benefited from having invested in gold.