Why Is Russia Accumulating So Much Gold?
‘In the first two months of 2019, the Russian Central Bank added over 37 metric tonnes of gold to its reserves, with Moscow on course to edge out France as the nation with the fourth-largest gold reserves.’
This according to Russian news agency Sputnik, in an article you can read here.
Russia is on a long-term gold-buying effort. Western/US sanctions are a big part of it. Indeed, sanctions are making Russia economically stronger. This was not the intent of policymakers.
In this respect, US sanctions against Russia are a failure and are backfiring.
Let’s begin with the current list of the top 10 gold-holding nations, according to Trading Economics:
Top 10 gold-holding countries
Source: Trading Economics
As the numbers above show, Russia is currently ranked fifth in terms of gold holdings. And by adding a few hundred more tonnes, Russia will likely move ahead of France on this list.
Meanwhile, Russia has already passed China in gold holdings. Yes, China!
There’s a clear gold/monetary policy at work here for Russia. Look at this chart of Russian gold acquisitions in recent years. It shows the very steady effort over time to accumulate gold:
Russian increases physical gold
Source: Trading Economics; World Gold Council
Obviously, there’s a gold-buying trend in Russia.
The nation is buying gold and building reserves. It’s not some random fluctuation of accounting. This is Russian monetary policy on display… Buy gold!
What’s going on? Many things…but we should start by looking at a Russian explanation for what Russia is doing.
According to Sputnik, ‘Moscow’s sovereign gold stockpile jumped up to over 2,100 metric tonnes last year, with the country’s status as a major gold producer allowing for reserves to be built up using domestically sourced bullion.’
Note that last point: ‘using domestically sourced bullion.’
In essence, Russia is buying gold for its vaults from Russian mines and miners. It’s quite a bargain, in fact.
Getting gold on the cheap
Russia mines gold using domestic inputs — Russian labour, energy, chemicals, machinery, transport, etc.
And all these inputs are priced in rubles, which — as currencies go — are currently beaten down in world markets due to Western/US sanctions.
But if you are a Russian living in Russia?
You buy your food using rubles, pay the rent in rubles, buy fuel at the bowser using rubles…
You don’t really care that the ruble isn’t worth more at the foreign exchange booth.
That only matters if you want to buy something that Russia doesn’t make internally. And Russia makes most of what Russia needs.
Here’s another way to look at it. In recent years, Western sanctions have created a ‘bargain basement’ environment in Russia vis-à-vis the ruble versus foreign currencies like the US dollar, euro, yen, pound and more.
That is, the Russian government can buy the nation’s gold — and support a robust mining industry — using discounted rubles.
They’re discounted relative to the true value of what they can buy.
Here’s an example.
Let’s say that the ruble is at a 30% discount to the US dollar due to sanctions.
That is, the sanctions have driven rubles about 30% lower than what they ‘ought’ to be in a world of more open trade and exchange.
So when the Russian government buys the country’s gold from its mines, mills and refineries, it’s not paying a true ‘world’ price of, say, US$1,300 per ounce. It’s paying rubles, but at the equivalent of 30% less, or US$910 per ounce.
The bottom line is that Russia uses artificially depressed rubles — depressed by Western sanctions that are part of intentional anti-Russia policies — to buy gold that’s priced at international levels of value, typically in US dollars.
Discount price with full book value
So when it comes to the idea of who is harming whom? Well, it’s debatable.
It’s actually easy to show that Western sanctions are creating a windfall for Russia.
Indeed, on many fronts, Western sanctions have pretty much backfired against the West.
Sanctions have driven Russia to focus more on domestic production of what the country needs — from food to aerospace. Western sellers have lost significant markets.
And back to the key point here… Russia is buying gold with rubles, versus using US dollars.
Russia uses depressed rubles to buy gold at a relative discount and then book the full international value when the bars are in the vaults.
Another related angle is that Russia sells oil abroad and collects the price in US dollars.
It’s much the same situation as with gold.
About 95% of all oil patch inputs in Russia are in rubles. Russian labour, machinery, chemicals, energy, etc. It’s all paid for in rubles to produce a product — oil — that’s valued in US dollars.
Again…we see a bargain for Russia. Produce oil in rubles; sell it in US dollars. And then, Russia takes the US dollars and buys gold.
No need for greenbacks
It’s all part of how Russia is de-dollarising. Russia has sold off nearly all of its holdings of US Treasury instruments.
Again, more from Sputnik: ‘Russia has been implementing a comprehensive plan to diminish the country’s reliance on the [US] dollar as a proactive measure amid the Trump administration’s sanctions spree.’
It’s not unfair to say that President Trump is on a ‘sanctions spree’.
After all, he has to prove he’s not ‘Putin’s puppet’, or whatever is the insult du jour. But it’s fair, and worth noting, that Western sanctions against Russia began long before Trump became president.
Indeed, it’s worth noting that Western sanctions against Russia began as an outgrowth of failed Western policies in places like Georgia (2008 war) and Ukraine (2014 coup d’etat).
That is, the West tried to stage certain outcomes in nations that are directly on Russia’s border. And those outcomes failed.
And then when Russia reacted, the West kicked in with sanctions.
Here’s the takeaway.
US and Western sanctions have been in effect long enough to say that they are failed policies.
Most sanctions are ineffective and, now, counterproductive.
Russia is going to do what is in its national interest.
Right now, sanctions help create a balance of currency rates that favour Russia buying gold and de-dollarising.
The US is not really harming Russia, and instead is setting up the US dollar for a fall.
Look ahead, to a time when gold becomes far more valuable as the US dollar continues its inexorable debasement.
Russia will have next to no exposure to US dollars and a large stash of very valuable gold.