Why Are Russia’s Surging Gold Exports being Stockpiled in the United States, and not China?

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By Bob Savic, Advisor to Dezan Shira & Associates 

  • Unusual gold export patterns may indicate a change in US dollar debt as a global trade standard and a reversion to gold. 

As many geopolitical observers would note, China and Russia have formed a close strategic partnership in recent years, particularly since the ascension to power of China’s President Xi Jinping, in 2013, and that of Russian President Vladimir Putin, the year before.  This “special relationship” is reflected in their trade relations. In 2020, bilateral trade volumes reached about US$108 billion, making it three consecutive years where two-way trade has surpassed US$100 billion.

Both countries have stated their intention of doubling trade to US$200 billion by 2024. Exactly how this ambitious objective will be achieved is a matter of conjecture, including a thus far delayed negotiations to reduce tariffs on goods traded under the China-EAEU free trade agreement, but one thing is almost certain: It is unlikely to include one major global trade commodity, namely gold and other precious metals.

Notably, in 2020, Russian exports of gold, instead of being eastbound in line Putin’s “Look East” policy, have been overwhelmingly shipped westwards, via intermediary transshipment countries, and into the ultimate ownership of the US Federal Reserve.  It is an odd outcome, given the US officially views Russia as a geopolitical rival and “revisionist” power even to the point of recently scaling up its sanctions by targeting Russian government debt.

The role of intermediary jurisdictions in gold reserve redistribution

In terms of intermediary jurisdictions through which the bulk of Russia’s gold and other precious metals exports have been shipped, it is a role the United Kingdom has played a major part in, notwithstanding its own dire relations with Moscow.  Even so, in 2020, Russian precious metals exports to the UK hit a record US$19.2 billion.

The sheer size of this export level was especially eye-catching given Russia’s overall exports to the UK were US$23 billion, while significantly exceeding previous years’ gold exports of US$911 million in 2018 and US6.4 billion in 2019. By contrast, other major precious metals producers and exporters to the UK, such as Australia, Canada and South Africa have retained high albeit stable export levels over the last few years.

Although a few other countries boosted their imports of Russian gold in that year, it was on a considerably smaller scale, including the US where direct imports from Russia rose to US$2.1 billion, up from around US$1 billion in preceding years. Hence, Russia’s gold exports to the UK and where they lead therefrom is the overwhelming headline grabber.

Consequently, the UK’s exports of non-processed gold and precious metals have literally boomed in line with the boost in imports from Russia.  This is particularly true of exports to Switzerland.  These rose significantly over the last couple years making unrefined precious metals Britain’s largest export commodity, in 2019 and 2020, and Switzerland as its second largest overall export destination, edging out Germany for the first time.

Large-scale exports of unprocessed gold to the Alpine state have persisted into the first quarter of 2021. Correspondingly, Switzerland, which reportedly processes about 70% of the world’s gold into a more refined attractive product, has also boosted its levels of precious metals exports around the world.

Yet the share of Swiss precious metals’ exports has swung markedly from developing countries, such as China and India, being noted traditional major buyers of gold and other bullion, to developed world economies. In particular, the US accounted for the lion’s share of Switzerland’s 2020 gold exports rising to US$32 billion from around US$3 billion in preceding years. Germany followed suit, albeit on a more modest scale, with imports of Swiss refined gold amounting to US$6 billion, in 2020, over previous years’ levels averaging US$3.5 billion.

Swiss bullion exports to China, on the other hand, plummeted to US$2.6 billion from US$9 billion in 2019, and US$18 billion the year before.  The UK’s gold exports to China also fell to US$1.9 billion in 2020, from around US$9 billion in 2019.

In sum, while both Switzerland and the UK have significantly raised precious metals exports to the US, their exports to China have fallen off dramatically.  A similar pattern, albeit less dramatic, is evident with Germany in contrast to India. Most other countries across Europe and Asia, being major perennial precious metals buyers, experienced essentially neutral changes in their trade flows with Switzerland and the UK.

Understanding Russia’s new gold export policy

The mechanistic explanation for the significant rise in Russian gold exports to the UK and beyond is probably a result of Moscow’s liberalization of precious metals exports last year. Prior to the reforms, Russia’s commercial banks were the only vehicles licensed to export gold and silver bullion. Now, precious metals producers have been granted the same rights with general long-term licenses, although it’s currently unclear as to whether any limitations of exports could be applied.

Still, there are likely to be underlying reasons why these largely unanticipated reforms were introduced in the first place. Some observers have argued that Russia needs to sell its substantial gold production to make up for a generally declining export picture amid the economic pain arising from Western sanctions.  But if that’s true, then why not sell directly to China, where a consistently high demand for gold and precious metals exists?  Currently, Russia exports negligible amounts of such commodities there.

Another reason for exporting gold to the UK, then on to the US, may be the desire by Russian private commercial players, who constitute the bulk of gold and silver bullion operators, to seek a safe haven in the West for their assets. Yet, scores of Russian private companies and businessmen have fallen under US and UK sanctions for alleged links to the Russian government. By parking their gold or other assets there, the risk of exposure to sanctions and local asset freezes is only further exacerbated.

The more likely explanation for Russia’s gold export drive is in Moscow’s anticipation of US and German central banks utilizing the global pandemic and the slowing global economy in 2019 to stock up on record levels of gold reserves. In fact, developed world central banks have been net buyers of gold ever since the 2008 global financial crisis. However, in 2020, US and German authorities took a further leap, by edging out demand mainly from China, but also India on a lesser scale.  This is as purchases of bullion, through the UK and Switzerland, among other developed world central banks remained relatively stable throughout this heightened buying binge.

One must therefore ask what the US and Germany can gain from ramping up their gold reserves in 2020 and the first quarter of 2021?  Perhaps it comes down to the obvious point which is that the US dollar and the American economy face an intensifying geo-economic challenge from China’s rising economy. Such scenario may prospectively imperil the status of the US dollar as the main global reserve currency, leaving the euro in an impossibly overvalued position, while the Chinese Yuan is unlikely to fulfil the functional role of the dollar in funding the bulk of global transactions over any short to medium term time horizon.

Alternatively, the US and Germany (the latter seemingly shadowing US gold buying activity due perhaps to lingering historic concerns over currency instability) may be anticipating reversion to a gold standard at some point, in lieu of another fiat currency successor to the dollar.  Indeed, as developed countries’ central banks pumped out a staggering US$10 trillion in 2020, the scenario of another fiat currency providing long term stability for the global real economy, beyond ever-inflating asset prices, seems remoter than ever before.

On the assumption the US will persist in maintaining the key role of the dollar as the world’s borrowing currency, not the least of which involves recycling capital flows to fund President Biden’s giant stimulus and infrastructure plans, the trigger point for an abandonment of dollar supremacy may still be some time off in the distant future.

Nevertheless, the Russian government’s recent policy of liberalizing gold exports, amid the surge in demand for gold by the US Federal Reserve, may be a calculated move in encouraging the US to re-introduce a gold standard, given that Moscow has not been shy about promoting a non-dollar based global economy.  At the very least, a new gold standard would leave the US in a strong position – holding by far the largest gold reserves of any country – while China and Russia would equally benefit from their considerable lead as the world’s principal gold producers.

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About Us

Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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