August 7, 2022

As More Investors Seek Shelter in Gold, Russia Is Only Too Happy to Sell

MOSCOW — Two years ago during the global recession, gold bugs took note when Russia’s president, Dmitri A. Medvedev — taking a swipe at the American dollar — proposed that central banks hold reserves in what would be a new, gold-backed international currency.

But more recently, as gold prices have soared — in part on market expectations that central banks will begin adding to gold reserves as a buffer against global uncertainties — Russia is not following its own advice.

Far from hoarding gold, Russia is selling it. The country’s domestic gold mining industry has continued to sell onto international markets. Russia has also eased gold trading rules to let more gold be mined and exported more quickly.

Meanwhile, the Russian central bank is buying gold at a desultory pace that is barely keeping up with its overall accumulation of foreign currency reserves.

In short, Russia is selling gold because this has been a seller’s market — and the nation needs the money. After years of surpluses before the recession, Russia’s federal budget has slipped into a deficit. And economists predict that Russia could also run a trade deficit within a few years, something that could be addressed in part by exporting gold.

Gold, which many investors view as the ultimate safe haven, is off the recent highs it reached in April. But the price is still up 62 percent in the last two years. And just this week, gold futures contracts have risen in response to continued uncertainty over the European debt crisis. On Thursday, spot gold contracts rose to $1,530.20 an ounce, up more than 3 percent for the week so far.

Russia was the fourth-largest gold producer globally last year, following China, Australia and the United States. (China in 2010 mined 351 metric tons of gold; Australia 261 tons and the United States 234 tons. Russia mined 203.)

When asked about Russian officials’ supposed commitment to holding gold, the central bank issued written responses.

“The bank of Russia is not committed to buying any particular amount of gold,” the bank said. “Nor is there any official target amount of gold purchases. The bank buys gold at a market price, and its buying intentions completely depend on the market conditions.”

And despite Russia’s frequent criticism of the dollar’s status as an international currency, the bank statement said its gold policies were based purely on its investment judgment of the value of gold as a reserve. “It doesn’t result from the wish to diversify away from any particular asset or currency,” the bank said.

Gold as a share of Russia’s central bank’s reserves has actually increased — to 7.8 percent of the total this year, from 5.3 percent in January 2010. But nearly all of that gain is because of the rising value of the gold over that period.

The Russian bank’s gold holdings are far below the global average of 12.1 percent as reported by the International Monetary Fund. And Russia’s portion is minuscule compared with the United States, which holds 74 percent of its reserves in gold, according to the Treasury Department.

The Russian central bank now, as before the economic crisis, keeps about 50 percent of its reserves in United States dollars. It needs those assets on a daily basis to intervene in currency markets to smooth out fluctuations in monetary flows from Russia’s main export of oil and natural gas, which are priced in dollars.

Russia’s gold behavior seems grounded in the country’s hard-learned lessons about commodity markets. Since its financial crisis in 1998, Russia has enacted policies intended to counterbalance the historical cycles of commodity prices to protect the economy during downturns.

Russia, for example, which is currently the world’s largest oil producer, imposes high marginal taxes on oil exports during price spikes, with the proceeds shunted to Russia’s sovereign wealth funds. During the recession, as oil prices plummeted, the government released a portion of these funds as a shock absorber for its domestic economy.

But gold, unlike oil, is naturally countercyclical. In times of economic insecurity, investors tend to buy gold. And so, for Russia’s economy, an economic crisis can be a good time to sell, not stockpile.

And in contrast to tight state control of the far more lucrative petroleum industry, authorities have largely liberalized gold mining and trading in Russia, and have imposed no export restrictions or tariffs.

Russia formerly maintained tight Soviet-style secrecy around its gold reserves. Gold’s glasnost occurred in 1992, when Yegor T. Gaidar, then prime minister, instructed the newly created central bank to publicly declare its holdings, at that point about 300 metric tons. (Last month the central bank held 854 metric tons of gold, while the United States Treasury, representing a much larger economy, reported holding 8,133 metric tons.)

There was more loosening in 1996 when Gokhran, a state agency that formerly had a monopoly on gold purchases, surrendered that role. Now, approximately 30 private banks are licensed to purchase gold. The largely liberalized sector has flourished.

“Our leaders pay far less attention to gold than to petroleum,” Yuri V. Kirilov, director of Irmita-Konsalt, a consulting company, said in an interview.

The formerly highly secretive Gokhran agency, one of two state repositories for gold along with the central bank, also now publishes its reserves of gold bars. It had 12.3 tons in June. And like the central bank, it is not bulking up. So far this year, the agency has purchased only 375 kilograms of gold, according to Prime-Tass news agency.

Gokhran, formed in 1920 as a depository for jewelry confiscated from the bourgeoisie and from the millions of people sent to gulag camps under Stalin, had long embodied the mystery around Soviet and then Russian gold policy.

In one of the few residual areas of secrecy in Russian gold policy, it still does not disclose its volumes of gold jewelry from prison camp inmates and so-called trophy gold taken from Eastern European nations after World War II.

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