Russia: A Prominent Player in the Global Gold Market

December 10, 2021

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Russia: A Prominent Player in the Global Gold Market?

Geopolitical tensions between Russia and the US are heating up again. The WSJ (12/07) reported:

“President Biden warned Russian President Vladimir Putin that the U.S. and its allies would meet a military invasion of Ukraine with strong economic penalties, moves to bolster Ukrainian defenses and fortify support for Eastern European nations.”

This comes days after the Russian Finance minister announced that they planned to add US$6.7 billion to its gold and foreign exchange reserves over the next month.

Prior to putting gold purchases on hold at the beginning of 2020 due to a slump in oil prices, the Covid-19 pandemic, and other geopolitical risks, Russia had added an average of 205 tonnes of gold to its official holdings since 2015.

Also, at 2,302 tonnes, Russia has the 5^th largest gold holdings behind the US, Germany, Italy, and France.

US and EU Put Sweeping Sanctions on Russia

The increase in Russia’s gold reserves is part of a multi-year drive to reduce the countries exposure to US dollars and the Euro.

Nevertheless, this campaign began in earnest after the US put sweeping sanctions on Russia in 2014. This was in response to Russia’s backing of separatist groups in eastern Ukraine.

Additionally, these sanctions targeted major sectors of the Russian economy including the finance, oil, and weapons sectors.

Three of the country’s largest state-owned banks were cut off from the US economy.

The United States and European Union also denied Russian banks access to the European capital markets. It also banned any arms or related imports or exports. Also, denied the country technology and equipment related to the energy sector.

Prior to the 2014 sanctions and the ensuing de-dollarization plan, Russia had amassed large US dollar reserves. This was due to the large exports of oil and gas. These are priced in US dollars.

Also, the oil and gas sector accounts for approximately 60% of Russia’s exports. This comprises about 30% of the country’s GDP.

According to the US Treasury Foreign Holding Statement, Russia’s holdings of US Treasuries peaked at US$176 billion in October 2010.

It also averaged over US$150 billion until close to the end of 2013.

This was prior to declining to just under US$100 billion by early 2018.

image-20211210113315-3 Russia’s Holdings of US Treasury Securities Chart

A further steep decline occurred in 2018 as the US issued additional sanctions against Russia.

This resulted in the country doubling down on its efforts to ‘wean’ the county off the US dollar.

Specifically, the Trump administration issued additional sanctions against seven Russian oligarchs with ties to Putin and 12 companies they owned.

The sanctions were also aimed at 17 senior Russian government officials and the state-owned weapons company.

However, the US claimed the sanctions were in response to Russia’s interference in the 2016 US election. Also the ongoing threats against Syria, Ukraine, and Crimea.

Russia to Increase its Gold Reserves

In July 2018, the president of the second-largest bank submitted a plan to move the country further away from the US currency:

“Russia has been seeking ways of decreasing its dependence on the US currency after Washington and its allies imposed sanctions against the country in 2014.

In May, President Putin said Russia can no longer trust the US dollar-dominated financial system.

This is because America is imposing unilateral sanctions and violating World Trade Organization (WTO) rules.

Putin added that the dollar monopoly is unsafe and dangerous for the global economy.” (RT.com, 10/18).

Russia’s oil revenues shown in US dollars on the chart above are, as one might expect tied to the price of oil.

According to its revised oil strategy plan released in April by the Energy Ministry stated that the country’s focus will be on maximizing its crude exports before reaching peak production in 2027-2029.

Additionally, world demand is expected to decline due to the increased emphasis on renewable energy and global decarbonization trends.

The bottom line is that for the coming years Russia will continue to want to diversify the monetization of its energy production into holdings that do not involve American, or European or any other countries rules which looking at pre-covid data would put Russia’s gold demand at over 200 tonnes per year for the next six to eight years.