The World Gold Council (WGC) has announced that it does not expect the Group of Seven bans to have a significant impact on the global gold market. Because of the large above-ground stockpiles, there is an abundance of gold to meet the needs of manufacturing and trade. According to Fuad Razzaqzadeh, who is a Market Analyst at City Index Financial Services, the gold prices have already fallen sharply in recent months, suggesting that the Russian embargo has no effect at all.
Although Western sanctions have already begun as of June 24, however, no significant change has been observed in the effective operation of the London market, the global over-the-counter gold market.
Russian gold mainly goes for consumption within Russia. It can be said, that after six months of economic turmoil and war gold buyers in Russia currently consist mainly of the country’s central bank. Those buyers are mainly domestic commodity customers who want to keep their money in something safe, and buyers in Asia, especially China and India that have not imposed sanctions on Moscow.
The quantities of Russian gold find their way to evade sanctions through the United Arab Emirates (1). Switzerland has recorded a significant increase in gold imports from the UAE since sanctions were imposed on Russia, and the Swiss NGO “Swissaid” has called for more transparency to determine whether the gold is originally coming from Russia or not.
In March 2022, the Federal Office of Customs and Border Protection recorded 36 tons of gold imports from the UAE, worth up to CHF 2.1 billion, the largest amount imported in a single month in the past six years.
Dubai has become a major commercial hub for gold during the last years. In July 2021, an investigation by “Swissaid” revealed that gold coming from conflict zones in Africa had entered the gold supply chain via Dubai. Gold is processed by UAE companies that do not have direct ties to Swiss refineries, making it impossible to trace the source of the imported material.
But the Swiss Federal Administrative Court ruled in favor of gold refineries when it rejected a request from the NGO “Association of Threatened Peoples”, which wanted to ask refineries to disclose the assets of the gold they process.
Conclusions
Several months after the start of the Ukrainian – Russian war and after Russia have been sanctioned by “the Western world” in different economic areas the situation can be analyzed as followed:
- a) The decision to ban new contracts for Russian gold will open the emergence possibility of a secondary market parallel to the gold sale of world markets, outside the circle of countries supporting these sanctions, which may be in the interest of the economy of the purchasing countries. The data shows that Russia managed to double its financial income in the first 100 days of the war on Ukraine, from sales of crude oil and natural gas, whose prices are hitting record highs. Moscow sells a barrel of oil through a secondary market, at discounted prices, up to 35 % below official prices (2). Therefore, a secondary market for gold sales is expected to appear by marketing it to countries outside the Western alliance, at discounted prices, a move that would earn importing countries huge sums. Russia targets the markets of Asia and the Middle East, with India being the world’s largest gold importer. The Gulf states are expected to be a target for Russian gold, especially the UAE which has a thriving gold trade. Anadolu Agency said the volume of exports of gold and jewelry in the UAE reaches about 240 tons per year. According to estimates of the Dubai Jewelry Group the country accounts 11% of global gold exports, and gold trade accounts for about 20% of the country’s non-oil exports.
- b) The recent European sanctions appear to be weak, fearing a backlash on the European Union. Furthermore, the Union fears a Russian retaliation by cutting off energy supplies, as evidenced by Ukraine’s dissatisfaction with the move. Ukraine’s special envoy for sanctions, Oleksiy Makyev, hinted at BBC Radio 4 that the EU is different from other Western countries in terms of sanctions. “we expect the EU to take the lead with regard to the imposition of sanctions.”
- c) “Russian gold exports have already been rerouted since the beginning of the war, flowing east rather than west, reflecting the imposition of self-sanctions from participants in the Western world’s gold market.” says Carsten Mink, the senior analyst at commodity broker Julius Bayer. Analysts believe that the impact of the Russian gold ban on the Russian economy will be minimal, as it is likely to sell gold to its existing customers in some Asian countries. It can be concluded that the ban on Russian gold is a highly symbolic measure, and although it may have a limited impact on Russia’s purchasing and trade power in the short term, the West hopes that the ban will have repercussions on its domestic industry in the long run, and a general impact on morale.
- d) In August 2022, Switzerland imported 5.7 tons of Russian gold which had been refined and stored in the UK, as investors look to the global refining and transit hub as a conduit for potential resale. The jump in imports could suggest that investors who hold Russian rails may be looking to remelt their alloys at Swiss refineries for resale afterwards. The data suggests that the latest sanctions do not apply to the quantities of gold recently imported because they were produced before the sanctions were imposed, while investors seek to avoid dealing in Russian gold. At the same time hundreds of tons of gold mined in Russia are still stored in the UK, Switzerland and the US. News of China importing Russian gold is conflicting; with reports saying that China is still willing to import Russian gold, even though at much lower levels compared to previous months. The data showed Beijing imported 0.3 tons of Russian gold in August. On the 20th of September 2022, “Markets.businessinsider” reported that China has significantly intensified its gold purchases from Russia, importing $108.8 million in July 2022. This represents a 750% jump from the previous month’s total of $12.7 million and a 4,800% increase from $2.2 million, Russian RBC media reported, citing Chinese customs data.
- e) Russia is working to further achieve independence from the Western economy. In early August 2022, it was reported that Russia was looking at its own international standard for precious metals after it was banned by the London Bullion Market Association (LBMA). Russia could have a fixed gold price in national currencies, and this reflection on the measure suggests that Russia fears that the gold ban will lead to negative long-term effects with no expected near end to the war in Ukraine.
References:
1- Swissinfo website on May 18, 2022
2- Turkish Anadolu Agency on June 30, 2022
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