Western Sanctions Are Stifling Russian Gold: How Does Moscow Plan to Sell Its Stockpile?

The Group of Seven (G7) agreed during its recent meeting to ban Russian gold imports in the latest round of sanctions due to Russian President Vladimir Putin's invasion of Ukraine and in a new effort by the West to financially tighten Moscow.

The ban includes importing gold newly mined in Russia and not gold obtained before the ban was imposed.

The decision of the G7 opened the door to the possibility of the emergence of a secondary parallel market for the sale of Russian gold to global markets outside the circle of countries supporting these sanctions or to find alternatives to export its production estimated at $20 billion annually.

Russia has the world's fourth-largest gold reserve (2,300 tons), valued at about $140 billion. Still, no one wanted to buy it even before the Russian invasion of Ukraine, according to a report by Business Insider.

 

Russia's Gold

Russian gold recently became the new victim on the altar of Western sanctions after US President Joe Biden announced on June 28, 2022, that the G7 countries—the United States, Britain, Canada, France, Germany, Italy, and Japan—had imposed a ban on Russian gold imports.

The G7 claimed that Russia used gold to bolster its currency to circumvent the impact of sanctions. One way to do this is to exchange gold for more liquid foreign currencies that are not subject to current sanctions.

The New York Times indicated that the ban on Russian gold by the G7 has come as a result of steps already taken to isolate Russia from the international financial system, deprive it of additional revenue that would help it fund its war in Ukraine, and punish Russian President Vladimir Putin and his wealthy businessmen close to him.

Christopher Swift, a national security lawyer at Foley & Lardner, told the newspaper: "Russia is one of the world's biggest producers of gold, cranked up the mining of new gold to compensate for some of the paralyzed assets."

US Secretary of State, Antony Blinken, said during remarks he made on June 24, 2022, to CNN: "Gold is Russia's second most profitable export commodity after the energy sector, with nearly 90% of revenue coming from the G7 countries."

"Therefore, banning these countries from importing gold from Russia will deprive them of about $19 billion annually, and this is important," he said.

Russia's exports amounted to about $18.7 billion in 2020, more than 5% of global gold exports in the same year.

Russian gold exports have more than tripled after the start of the war in Ukraine last February.

The reason for this is that Russian businessmen have been buying gold bars in an attempt to mitigate the impact of the sanctions, according to the New York Times.

The Gold Bullion Market Association in London, a major center for the global gold trade, suspended its dealings with 6 Russian silver and gold refineries last March.

According to the Russian Central Bank, the share of monetary gold as of December 1, 2022, was estimated at $133.07 billion.

According to the same bank's statistics, the volume of gold reserves in Russian banks for the period from February 1 to April 1, 2022, decreased by more than 20%.

Russia produces about 10% of the gold extracted worldwide every year. According to data from the World Gold Council, it exports about 330 tons annually, making it the second-largest gold producer in the world after China.

Gold stocks in Russia are not limited to what the country produces, but there are press reports indicating that about 30 tons of Sudanese gold are transported, through unofficial ways, to Russia annually.

A report published by the Daily Telegraph on March 03, 2022, indicated that Russia had smuggled hundreds of tons of illegal gold from Sudan over the past few years as part of a broader effort to build a fortress of Russia and stave off the possibility of increased Ukraine-related sanctions.

It is noteworthy that Russia's vast reserves of the precious metal have been built up over the past decade and a half, and it was intended to be a kind of economic insurance policy for the country against Western pressure.

Moscow has more than quadrupled the amount of gold held in the Russian Central Bank since 2010, which enabled Moscow to create a war fund by mixing foreign imports with massive domestic gold reserves.

Gold had exceeded dollar reserves for the first time since June 2020, as gold bullion accounted for more than 23% of the total reserves, which rose to $630 billion until last month.

Russia began stockpiling gold mightily in 2014, when the United States imposed sanctions on the Kremlin for its annexation of Crimea, doubling its gold reserves.

 

Secondary Markets

"Russia will seek to export gold to other countries, especially in Asia and the Middle East, after a new ban on Russian gold imports was imposed by the G7," TASS news agency quoted Russian Deputy Foreign Minister Sergei Ryabkov as saying.

In the same way that Moscow was able to increase its oil exports to East Asian countries, it is expected to create a secondary market for gold sales by marketing it to countries outside the Western alliance at discounted prices, which is a move that would earn importing countries huge sums and increase the attractiveness of Russian gold in new markets.

It is expected that Russia will target the markets of Asia and the Middle East, as India is the world's largest importer of gold, and one of the largest exporters of manufactured gold, or export more to China and the Middle East, which are not part of the G7.

Observers believe that the decision of the G7 on Russian gold means that it will be forbidden to its markets, especially London and New York, but it can access intermediary markets with the aim of legalizing it and then re-exporting it to any of the G7 markets.

It is also expected that the Arab Gulf countries will be a target for Russian gold, especially the UAE, which records a thriving trade in gold.

 The volume of exports and re-exports of gold and jewelry in the UAE amounts to about 240 tons annually, according to a report by the Emirati newspaper Al Khaleej.

Switzerland had recorded a significant increase in gold imports from the UAE, which prompted Swiss government circles to start an investigation and audit of the origin of this gold, especially since Abu Dhabi is accused of colluding with Moscow in the context of evading international sanctions imposed on it.

On June 24, Swiss customs officials announced, in the context of monitoring possible violations of economic sanctions imposed on Moscow, the tracking of about 3 tons of Russian-origin gold, worth about $200 million, that had entered Switzerland from Britain last month.

In coordination with the G7 and the European Union, it is noteworthy that the United States imposed additional sanctions against Russia last March, including the Russian gold reserves.

In turn, Economic Analyst Alexander Razuvaev confirmed to Bloomberg that "even if the EU imposed restrictions on the sale of Russian gold, this would have little impact on the Russian gold mining industry because this ban has been in place since last March," adding that "gold will become more expensive in the global market, but not by much."

As a result of the repercussions of the decision of the G7 countries, gold markets around the world are still not stable yet, especially as it imports more than 50% of gold from the Russian market.

Many investors bought gold after the G7 decided to ban Russian gold, which raised its price somewhat, but the dollar's strength and expectations of an interest rate hike by the US Federal Reserve hurt gold prices and are near their lowest level in seven months.