Russia ranks sixth in the world in gold reserves, with the Russian Central Bank saying they totaled 1,828.56 tons in 2017, an amount that has been increasing at a rate of about 15 percent per annum since 2013. The Russian Central Bank is one of the world’s leading gold buyers, and over the past two years has purchased more than 20 tons of gold.
Russia’s gold reserves, though, have not always been so strong, and its use as a financial reserve has waxed and waned over the years. The Russian empire attained its largest gold reserves in 1894, when they amounted to 800 million imperial rubles. Until 1914, the gold reserves of the Russian Empire were the largest in the world, amounting to 1,400 tons. The vast quantity of gold allowed Finance Minister Sergei Witte to carry out monetary reforms, which resulted in the introduction of the gold standard in 1897. Upon the Revolution in 1917, the Bolshevik government quickly spent the Czarist gold reserves to buy food and industrial equipment, and by 1928 only 150 tons remained in the Soviet treasury. During Stalin’s rule, however, the country’s gold reserves grew substantially because the Soviet leader believed such reserves were an important pillar for the economy’s fast-paced industrialization.
Stalin left 2,500 tons of gold in the state reserves, but after Khrushchev’s rule that figure decreased to 1,600 tons, which was almost entirely erased under Brezhnev who left 437 tons. Andropov and Chernenko slightly increased the national gold inheritance to 719 tons, but Gorbachev delivered the final blow to the Soviet gold reserves, and in October 1991 only 290 tons remained. More recently, Russian President Vladimir Putin has engaged in a policy of increasing Russia’s reserves, under the belief that gold and foreign currency reserves are a guarantee of Russia’s financial independence. Given the sanctions placed upon it by the West in the past few years, that policy has arguably kept Russia afloat.
“When prices are low, governments increase gold reserves, and this often owes to traditions and historical reasons,” said Anton Tabakh, an economist and professor at the Higher School of Economics. “In the reliability-liquidity-profitability triad, gold is marketable but prices greatly vary”. Other experts positively view Russia’s determination to increase gold reserves during global economic uncertainty. Konstantin Sakharovsky, who worked many years as director of innovations at a large Russian jewelry retail company, believes that the Trump presidency means gold will have more significance.
“Increasing the share of gold reserves is a very good decision in today’s economic and political climate,” said Sakharovsky, who links the increased demand for gold to the political risks tied to the election of the new U.S. president. “Trump is unpredictable,” said Sakharovsky. “There could suddenly be a new wave of sanctions and a freezing of assets. Gold will help Russia maintain its assets. Of course, there are also problems related to a possible drop in gold prices, but all this can be hedged.”
But Russia isn’t just buying up gold on the global market. It is also a major producer, with known deposits amounting to some 12,500 tons, some of the world’s largest. These are buried mainly in Eastern Russia and Siberia, but extraction is continuing at a rapid pace. In this regard, the Russian policy is similar to that of the Chinese, who have also been buying up gold reserves as well as mining its own deposits, estimated to be some 2,500 tons. Last year, China mined 470 tons at a rate that will see its own gold deposits exhausted by 2023.
In addition to its own reserves, Russia is also involved as a senior partner in the Eurasian Economic Union, whose members include Armenia, Belarus, Kazakhstan, and Kyrgyzstan. Their gold reserves are as follows. (Gold reserves are the amounts held by the respective central banks, gold deposits are measured in tons and are still to be mined.)
|Country||Gold reserves||Known gold deposits|
Mining investment into Russia, especially by Chinese and to some extent, Indian companies, can be expected. Both China and India are among the world’s largest consumers of gold, and interestingly, both are currently in negotiations with the Eurasian Economic Union concerning Free Trade Agreements. China has already established the Silk Road Gold Fund, with capital of some US$16 billion earmarked to fund gold mining activities in countries with which it has signed off agreements under its Belt and Road Initiative. India, Russia, and all the other members of the Eurasian Economic Union are involved, with the precious metal once again expected to be used to fund infrastructure developments in each of these nations. Of these, Russia has by far the largest known deposits, although another Central Asian and ex-Soviet state, Uzbekistan, also possesses significant reserves estimated at some 5,000 tons.
It will almost certainly be the Chinese who will be the keenest to realize the potential of the Russian deposits. Indeed, the first in what is likely to be a long line of deals involving China’s gold companies in the region has already gone through. In May 2017, Russia’s Polyus Gold (OPYGY) said it would cooperate with China’s largest gold company – China National Gold Group – to explore Russia’s biggest gold deposit at Natalka in the far eastern part of Magadan’s Kolyma district. The fund may also include setting up an exchange-traded fund that will invest in gold and gold mining companies in Russia and the Eurasian Economic Union. Russia will be happy to let the Chinese do the grunt work – after all, they have the labor force. Splitting profits of realized gold suits both countries in terms of increasing their gold reserves, and in both cases also helps to pay for infrastructure developments. Eastern Russia is poorly connected and needs considerable upgrading along rail and road, as does its many inland ports. The same is true of much of the Eurasian Economic Union and other ex-Soviet states. Using their inherent gold deposits to create wealth just requires the mining tools and a balanced approach to bleeding the new gold onto global markets so as not to depress the value too much. Amounts not destined for sovereign wealth funds and national reserves can be used to purchase equipment and pay for infrastructure.
Ultimately, should the bulk of these deposits be realized, the value of the holdings may cause other issues, which again run in both China and Russia’s interests – that of securing assets against their own currencies. At present, the dominant currency is the US dollar, which is essentially a credit backed system and is off the gold standard. However, with US reserves currently standing at some 4,582 tons; a resurgent interest in establishing and adding to gold reserves has a special attraction for China and Russia, as reaching those kinds of figures is an achievable target for them. Gold is an emotive metal and remains linked to the U.S. dollar in those terms. This is because it behaves consistently as a multi-faceted asset. The price of gold is often sensitive to the overall perceived value of fiat or paper currencies in general terms. During times of tension or geopolitical turmoil, the price of gold tends to rise as faith in governments falls.
During times of calm, the price of gold tends to fall. As perhaps the world’s oldest and most storied currency, gold is an important barometer in terms of global economic and political well-being. Therefore, the price of gold can go up or down depending upon many factors. The fact that the U.S. dollar is the benchmark for gold trading around the world leads to the special relationship it has with the metal. On daily basis price movements in the U.S. currency often influence the price of gold.
An announcement by either China or Russia that they possess more gold reserves held by their Central Banks than does the United States Treasury would be a game-changer as it will diminish the perception of the U.S. as a dominant player.
With China and Russia now both mining amounts equivalent to 400 tons plus per annum, and investments being made into gold mining throughout Central Asia’s known deposits of 22,770 tons, and beyond into Africa, South-East Asia, and South America, it may just be a few years – around 2023 – before that scenario becomes reality. A credit crunch in the already emotionally directed U.S. stock markets cannot be ruled out, with a re-balancing of global perception towards the economies of China, Russia, and the United States in the favor of China and Russia being a distinct possibility.
Russia Briefing is produced by Dezan Shira & Associates. The firm provides business intelligence, investment advisory, due diligence, tax advisory, corporate establishment and structuring, accounting, payroll and related professional services throughout China, India, ASEAN, Russia and the Eurasian region, servicing both Governments and Multinational clients. To contact us please email email@example.com or visit us at www.dezshira.com
Dezan Shira & Associates´ Russian investment brochure offers an overview of the services provided by the firm – both foreign investment into Russia and Russian investment into Asia. It is Dezan Shira´s mission to guide investors through Russia´s complex regulatory environment and assist with all aspects of establishing, maintaining and growing business operations in the region.