Precious Metals Weekly – Why is Russia piling up gold?

by: Georgette Boele , Peter de Bruin

151021-Precious-metals-weekly.pdf (499 KB)
  • There has been a steady increase in Russian gold reserves…
  • …which has started since the global financial crisis
  • This could be the result of a strategy to protect against commodity price volatility and a weaker ruble
  • But most likely a way to support domestic gold miners…
  • …and to become less dependent on the US dollar


Steady increase in Russia’s gold reserves

Since the global financial crisis, Russia has increased its gold reserves at a steady pace of on average 0.3 million ounces per month and on average 3.5 million ounces per year. What are the reasons for this development?

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Direction in commodity prices could have been a reason…

As a major commodity producer and exporter (energy, gold, nickel, aluminium and diamonds), the preferred situation would be stable and/or rising prices. The bull-run in commodity prices came to an abrupt end with the arrival of the global financial crisis. Since then prices of Russia’s commodities have been volatile or diverging. Over the last few years gold has been relatively resilient to sharp falls in oil prices (see second graph on the right). Such developments could have urged the Russian government to increase its percentage of gold in its reserves.

…as well as a tendency of the ruble to weaken…

Since 2008, the Russian rubble has been on a downward trajectory versus the US dollar, a move that has accelerated since the annexation of the Crimea in 2014 and the sharp drop in oil prices at the end of 2014 and beginning of 2015. A sharply weaker ruble may support the attractiveness of exports. But the reason for this ruble weakness was outright negative for financial market sentiment towards Russia and ultimately plunged Russia into a financial crisis. The sanctions that have been imposed by the US and the eurozone and the huge capital outflows that drained Russia’s FX reserves have sharply reduced the availability of hard currency in Russia. As Russia is a gold producer, a way to build international reserves is via buying domestically mined gold. This way this gold will not enter the international market. In a way it reduces its dependency on the US dollar for international reserve building.

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…or hoarding by a state institution

Under the Russian Ministry of Finance there is a state institution “Gokhran” that is responsible for the State Fund of Precious Metals and Precious Stones of the Russian Federation. In the case of lower demand for rough diamonds, Alrosa (Russia’s diamond miner) sold at times diamonds to Gokhran. This way, the rough diamonds did not enter the market and therefore did not have a downward effect on rough prices. This could also have been the case for gold. Gold purchased by Gokhran could have ended up at the central bank via a transaction between the central bank and Gokhran. Gokhran’s holdings seem not to be part of Russia gold and foreign exchange reserves, though this reflects accounting principles as Russia would have had access to the gold reserves at any rate.

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