In July 2022, Western countries banned the purchase of Russian gold. Gold is for the Russian economy as important as the trade with oil and cereals. The Western world attempted to limit Russia´s ability to benefit from its large gold reserves, to support the economy of the country and to finance the Ukraine war.
European Commission President Ursula von der Leyen announced that EU sanctions against the Kremlin were “sending a strong signal to Moscow”. She stressed that the EU will keep a significant pressure on Russia as long as possible and as long as necessary.
“The most important thing at the moment is the Russian gold ban, which is Moscow’s second – largest export industry after energy” said the European Union’s foreign affairs official, Josep Borrell, on Monday, the 18th of July 2022.
Naturally, this step will affect the Russian economy because the large reserves of Russian gold have contributed greatly to Moscow’s resistance to the sanctions imposed on it so far, as Russia has worked to strengthen its gold reserves over the past years in anticipation of a possible change of the global political climate, but some analysis questions the importance of this step and its ability to weaken the Russian currency.
The measures agreed upon in Brussels have been dubbed the “six-and-a-half-package” due to their limited ambition. On Monday, July 18, Josep Borrell admitted that leaders were increasingly concerned that sanctions were harming themselves (6), meaning that the recent sanctions on gold would be somewhat limited.
Why are the gold reserves important?
The importance of Russia’s gold reserves is due to the fact, that gold is a major supporter of the national currency. Chris Weaver, a Russian economics analyst at Macro-Advisor describes the situation as followed: “While Russia will still be able to sell gold to other countries outside the Group of Seven, this will affect its ability to reap export revenues. This revenue has been supporting the country and the economy since the start of the imposition of Western sanctions on February 24 (1). The huge reserves of the precious metal have been built over the past 5 years and are intended to be a kind of Russia´s economic insurance policy for the country. Although most countries in the world keep their gold reserves in London and New York near their main trading centers to facilitate the sale, Russia keeps most of its gold reserves in its possession, which has limited the ability of Western countries to freeze Russian gold stocks abroad.”
Furthermore, Fergal O´Connor, who is a lecturer at the Cork University Business School in Ireland says: “Russia’s storage of large quantities of gold for a crisis was just like this. But if no one trades with you, there is no value in the gold in your hands.” (3)
Russia produces about 10% of the gold mined globally each year. Its gold holdings have tripled since it annexed Crimea in 2014. Russia is the world’s second-largest gold producer, producing more than 331 tons last year, according to World Gold Council data. But the Russian Finance Ministry revealed that it produced 346.42 tons of gold in 2021, up from 2020 when it reached 340.17 tons. According to official U.S. estimates Moscow owns between $100 billion and $140 billion of gold reserves, nearly 20 % of Russia’s central bank reserves.
The impact of sanctions on the Russian economy and gold prices globally
This is not the first time that Russian gold has been subjected to sanctions. In June 2022 the US imposed a ban on newly mined gold in Russia. Other industrialized countries have also banned imports of Russian gold, which is bought by wealthy Russians to ease international financial sanctions. (2) Under the recent EU decision this will now be applied throughout the EU.
According to the Economic Complexity Observatory which collects international trade data the vast majority of Russian gold went to the UK in 2020, with the remaining €2 billion shared between Switzerland, Kazakhstan, Turkey, and India.
The ban is seen as a direct blow to the Russian elite. Especially the Russian oligarchy uses gold bullion as a safe haven to mitigate the impact of the Western sanctions. Details of recent European sanctions on Russian gold have not been made public, but according to the draft regulation published by the British newspaper “The Guardian”, the EU will ban the direct or indirect import, purchase, or transfer of gold.
When the UK, US, Japan, and Canada revealed their plans to ban new gold imports from Russia earlier in June 2022, Great Britain said the measure would have a “significant impact” on Vladimir Putin’s ability to fund his armed forces and the oligarchy’s attempts to avoid the impact of financial sanctions by buying alloys.
But gold industry analysts were less enthusiastic, calling the ban largely symbolic because sanctions imposed on Russia after the Ukraine war had already closed European and U.S. markets.
Polymetal International, which mines gold and silver in Russia and Kazakhstan, reported a 36% drop in sales in the second quarter of this year. Vitaly Nisis, the company’s chief executive, said: “International sanctions against Russia continue to materially affect sales, procurement, and logistics” (5).
According to a statement issued by the London Gold Bullion Market Association (LBMA) “it is noticeable that refined Russian gold has been marked and dates placed on it and therefore can be directly recognized.”
In the past decade, the vast majority of Russian gold has been sent to the UK, the world’s largest bullion trading center. Britain imported $15.2 billion worth of Russian gold last year, according to the United Nations Database of International Trade Statistics, Comtrade. According to the trade data Russia has also sent gold in recent years, to countries such as Switzerland, Turkey, and Kazakhstan.
The Market Analyst at City Index Financial Services, Fuad Razzaqzadeh added the following: “It’s not that important to the Russian economy, but Western sanctions are designed to kill thousands of domains, and this is just one of those. The ban on the sale of Russian gold is unlikely to have a significant impact. (6)
References:
- businessinsider on March 19, 2022
- Radio Free Europe website on July 20, 2022
- Bloomberg Agency on May 18, 2022
- News24 magazine published in South Africa on 19 July 2022
- (Financial Times) on June 20, 2022
- (The Guardian) on July 20, 2022
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