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Russia has not backed the rouble with gold—yet

This article breaks down the facts and fiction regarding the state of the Russian gold market and the actions taken by the central bank of Russia after the invasion of Ukraine.

Introduction

There have been lots of rumours circling on social media platforms regarding the Russian central bank’s actions in the gold market and how this ties with sanctions and the Russian energy trade. Some have even suggested that the Russian rouble is now backed by gold.

I have to break this to you: the rouble is not backed by gold—yet.

In this article, I will explain what has actually happened, why these things have happened and what might happen next. The situation is evolving all the time and it is extremely important to keep the facts in check.

Facts: What really happened?

First of all, let’s get the timeline straight:

21 February—Putin orders troops to Ukraine followed by the first wave of sanctions
24 February—Russia invades Ukraine
25 February–3 March—Further sanctions and counter-sanctions
28 February—The Bank of Russia resumes gold purchases on the Russian domestic market
3 March—LBMA asks six Russian LBMA gold refiners if they have commercial links with sanctioned Russian entities
7 March—LBMA suspends accreditation of six Russian LBMA refineries
9 March—Russia signs a law to cancel the value-added tax on the sale of gold by banks to individuals
15 March—The Bank of Russia halts purchasing gold due to increased investor demand
25 March—The Bank of Russia offers to buy gold from Russian credit institutions at a fixed price of 5,000 Russian roubles per gram starting from 28 March 2022

How does the Russian gold market work?

The structure of the Russian gold market gives major insight to what is happening and why. On the supply side, Russia is the second largest gold mining country in the world with more than 300 metric tons of gold—worth approximately 20 billion US dollars—being produced annually. On the demand side, Russia is a poor country and the Russian financial markets are underdeveloped by Western standards and there is no tradition of buying gold like in India or China. As a result, Russia has always been a gold exporting country—Russia produces more gold than what is “consumed” on the domestic market. There simply is not a big enough domestic market which could buy up all the gold produced in Russia.

In 2020, Russia exported $18.7B in gold, making it the 4th largest export for Russia. The main destinations for the gold were the United Kingdom ($16.9B), Switzerland ($693M), Kazakhstan ($424M), Turkey ($380M) and India ($96.6M). The Bank of Russia was a major buyer of gold on the domestic market from 2007 to 2019, resulting in much lower exports of gold (between 0.9 and 6 billion USD per year). But even during these years, Russia remained consistently as a gold exporting country.

Access to market for Russian gold

After the Bank of Russia stopped buying gold from Russian producers in early 2020, Russian gold producers and traders started looking for alternative buyers for their gold. As can be seen from the 2020 export figures, they turned to the most liquid gold market in the world—the London bullion market, maintained by the LBMA.

As a result, Russian gold traders became reliant on the access to international gold markets to sell their gold. For Russian gold traders, the access to the London gold market provides them the ability to sell as much gold as they need.

Typically, Russian and international bullion banks operating in Russia have Russian gold export licences. Local gold producers—mining companies—often sell their gold to these bullion banks, who then export the gold to more liquid markets. Some international mining companies have their own export licences and export and sell gold directly to other jurisdictions.

LBMA suspends Russian gold refineries

In order to be able to sell gold bars to the London market, the gold bars need to be “Good Delivery”, meaning that the bars need to be produced by LBMA-accredited refineries, of which Russia used to have six. When the LBMA revoked the Good Delivery status of these Russian refineries in early March, this meant that Russian gold could no longer flow straight to the London market.

As such, this is not a problem. The Russian non-Good Delivery bars could be sold either to some extent directly to LBMA refineries or to international bullion banks, who could then turn to other LBMA-accredited refineries, who produce Good Delivery bars. Also, by default, the suspension of a Good Delivery status does not have an impact on the Good Delivery status of gold bars produced before the suspension—these bars still retain their Good Delivery status.

Other market participants join LBMA

However, at the same time when the LBMA suspended the Good Delivery status of the Russian gold refineries, Western bullion banks like JP Morgan and Goldman Sachs announced that they will be withdrawing from the Russian market1, meaning that they would most likely no longer engage with Russian gold traders. Also, several major gold trading companies linked to the London market also announced that they would no longer buy any Russian-linked gold, which also includes the old Good Delivery bars.

In late March, two LBMA-accredited refineries in Switzerland also declined to process Russian LBMA Good Delivery gold bars.

The message starts to be clear from many LBMA participants—Russian gold is not welcome.

This is understandable because, for example, buying gold directly from the Bank of Russia violates international sanctions. Since many Russian banks have also been sanctioned, sanction-compliant payments to and from Russia are becoming increasingly difficult. Simply put, it is not worth the risk for Western traders to buy gold from any Russian sources as of now.

Russia takes action

Russian gold traders, who move billions of dollars worth of gold annually, are faced with a situation where they have a steady flow of gold material coming in from the mines yet suddenly the gold has no buyers. Establishing new sales channels for billions of dollars worth of gold does not happen overnight. Actions were needed to balance supply and demand on the Russian gold market.

Russia cancels the VAT for investment gold

To stimulate local demand, and just two days after the LBMA’s suspension of Russian gold refiners, Russia removed the VAT of investment grade gold, which used to be 20%. This, coupled with the crash of the Russian rouble, caused a short-term spike in the local investor demand for gold and, for example, Sberbank said that the investor demand for gold quadrupled2 as a result.

The removal of VAT for gold investments did stimulate demand, but considering the immense volumes produced by Russian gold miners, this was never a long-term solution to fix the supply–demand mismatch on the Russian gold market.

The Bank of Russia offers to buy gold at a fixed rate

In late February, the Bank of Russia announced that it would resume gold purchases on the domestic market. This took place already before the LBMA said publicly that it had asked Russian refiners whether they had any ties to sanctioned Russian entities, and so the Bank of Russia could already foresee what was to come. After the VAT for gold purchases was lifted and a spike in household demand for gold took place, the Bank of Russia halted its gold purchases on 15 March—just two weeks after restarting the purchases.

Later in March as household demand fell, in order to provide further support for the price of gold on the Russian domestic gold market, the Bank of Russia announced on 25 March that it offers to buy gold from Russian credit institutions (bullion banks) at 5,000 roubles per gram3. What made the announcement interesting was that the Bank of Russia said it would pay a fixed price, while usually gold is traded at international prices.

However, at the time of the announcement, the offered price was more than 20% below international gold prices. This discount has been reduced significantly since then, but still to this date, the Bank of Russia’s offer to buy gold remains below international gold market prices. This of course is not good in the eyes of local gold producers and traders.

On social media, people who are not really familiar with how the global gold markets work, have interpreted that the Bank of Russia's offer means that the rouble is now backed by gold—or that Russia has now entered the gold standard. For now, this is simply not the case.

In a gold standard, the central bank needs to establish a two-way offer to both buy and sell gold at a fixed (or a floating) price. So far the Bank of Russia has promised to only buy gold at a fixed price from a limited group of Russian companies. In a way, instead of backing the rouble with gold, the Bank of Russia is backing gold with the rouble for these entities—for what it is worth.

Unsurprisingly, it has been reported that Russian gold traders are looking for alternative sales channels from Eastern gold markets such as China, India, and Dubai4. International buyers willing to buy Russian gold are still willing to pay international prices for Russian gold and so the Bank of Russia is probably the buyer of last resort on the Russian gold market. For example Polymetal, which is one of the largest gold producers in Russia, stated in a press release that the Bank of Russia’s gold purchases are not expected to affect Polymetal’s gold sales price materially as they will continue to sell gold at global market prices5.

Gold linked to Russian energy trade

Some have speculated that Russia would use its energy trade with Europe as a weapon to force the use of gold in international energy trade and that this would strengthen the rouble's link to gold. I find these claims full of holes and as of now I see no proof of Russia using its energy trade to force a gold standard.

Do not get me wrong: Russia has used its energy trade as an economic weapon.

On 23 March, Putin stated that Russia would no longer accept euro and dollar payments for its natural gas exports from European counterparties, whom Putin labelled as ‘unfriendly’ nations. Instead, according to Putin, unfriendly nations would need to start paying for their Russian natural gas in Russian roubles.6

Gold was tied to the Russian gas-for-roubles trade situation two days later by the chair of Russia’s Duma committee on energy, Pavel Zavalny, who said in a news conference that the unfriendly nations would need to ‘pay either in hard currency, and this is gold for us, or pay as it is convenient for us, this is the national currency’. Putin even threatened that Russia would start to limit the flow of natural gas into Europe on 1 April if these payment terms were not met.7

Requiring payment in roubles or gold would certainly increase the demand for roubles and gold. But again, this is not as dramatic as it seems. According to the laws passed in Russia soon after the invasion which led to a crash in the value of the Russian rouble, Russian companies—including the exporters of natural gas and oil—have been required since 28 February to convert at least 80% of their foreign revenue into roubles in an effort to support the price of the rouble.8

This means that if a Russian company receives one billion euros from the sale of natural gas into Europe, the company is then required to convert at least 80% of those euros into roubles. This has already dramatically increased the demand for roubles, which, coupled with the international traders' limited ability to sell roubles, has raised the price of rouble considerably over the past month.

The gas-for-roubles trade situation is currently evolving very quickly and it remains to be seen what kind of an arrangement Russian gas exporters and European buyers will establish. However, it seems that gold was mentioned as a payment option by Zavalny merely to undermine the status of the US dollar as a means of international payment, and if there will be changes in the form of payment for Russian gas, the new form of payment will most likely be roubles instead of gold.

Aftermath What happens next?

The Russian gas trade is unlikely to move from dollars and euros to gold and the Russian rouble is not pegged to gold at least yet. However, this does not mean that the situation could not change. Here are a couple of topics to keep an eye on:

Sanctions and Russian gold bars

Overall, the sanctions imposed on Russia have been quite limited, but the general reaction on almost all industries, from shipping and mining to fast food and banking, has been to withdraw from Russia and abandon Russia-related trade and business operations. Companies that have nothing to do with sanctioned Russian entities have widely decided to withdraw completely from Russia, leaving tens of thousands of Russians unemployed.

Without going into whether this reaction is morally justified or not, it is safe to say that the reaction has not been completely due to the sanctions but rather from social pressure in the West. One could also point out that the US has been waging offensive war continuously for the past 20 years, but still most Western companies are happy to do business with the US.

The reaction has been similar in the gold industry, as was described above. Bullion banks and LBMA refineries are starting to avoid Russian gold bars and trade relations both in fear of new sanctions and also likely due to social pressure. However, large gold-ETF providers have not been thrilled with the idea of recycling their old Russian gold bars into new non-Russian bars. Invesco Ltd., who manage the world’s third largest gold ETF, already said that it has no plans to change its Russian gold bar holdings while other major ETFs have not commented on the topic9. Also, some major LBMA refineries such Argor-Heraeus have stated that they will continue to process Russian gold bars produced prior to 2022 as is encouraged by the LBMA10.

As a result, and again based on the information available to date, Russian Good Delivery bars produced before 2022 are unlikely to trade at a discount to international gold prices.

I would suppose that there may have been some short-term mispricings in the price of gold on the Russian domestic gold market. Traders with access to roubles and dollars and the ability to export gold from Russia may have struck some great short-term deals on the Russian gold market. However, the situation has since then calmed in Russia and new trade arrangements towards the Eastern gold markets are likely already in place.

Bank of Russia—will Russia return to a gold standard?

What remains to be seen is how much gold the Bank of Russia will end up buying. The Bank of Russia has been updating its foreing exchange reserves infrequently since the beginning of the war, but latest updates by the bank have signalled that overall reserves have shrunk11. Since February, the Bank of Russia has not been reporting on the specific composition of the reserves and the amount of gold the bank holds12.

In his speech on 16 March, Putin openly criticised the freezing of the Bank of Russia’s euro and US dollar assets by saying that:

“The illegitimate freezing of some of the currency reserves of the Bank of Russia marks the end of the reliability of so-called first-class assets. In fact, the US and the EU have defaulted on their obligations to Russia. Now everybody knows that financial reserves can simply be stolen. And many countries in the immediate future may begin – I am sure this is what will happen – to convert their paper and digital assets into real reserves of raw materials, land, food, gold and other real assets which will only result in more shortages in these markets.”

Vladimir Putin13

Although bluntly expressed, this type of rhetoric is nothing new. Russia, China and other Eastern countries have been openly criticising the reserve currency status of the US dollar for years. Central banks especially in the Eastern part of the world, with the lead of Russia, China, Kazakhstan and Turkey, have been accumulating gold ever since the financial crisis of 2008, while simultaneously selling US dollar-denominated assets such as US government bonds.

In my thesis titled ‘The Future of Gold from 2019 to 2039’ published in 2019, I examined gold’s remonetisation trend. For example, Russian, Chinese, Iranian and Malaysian high-level officials have been talking about the need for a new settlement infrastructure which would not be based on the US dollar but would rather be based on gold. The same nations have also been building bilateral trade agreements with countries all over the world, in which they agree to trade in local currencies instead of the US dollar, which is the de facto currency for international trade unless otherwise agreed on. Russia’s latest actions and statements are in line with this development.

Countries all over the world seem to be preparing for the post-US dollar age of international trade, and if history provides some guidance for the future, gold is likely to play a crucial role especially during the shift between the systems. The East has been preparing for some form of a gold-based payment system, which, based on my research, I suspect will take shape in some countries before 2039. However, I would not jump the gun based on what has happened so far. This would change if the Bank of Russia would issue a fixed price at which it would be willing to exchange roubles into gold, but I would not say it will happen in the immediate future.



Fun fact about Russian gold bars

Did you know that certain gold bars produced in the USSR—with the brand marks ‘CCCP (with the hammer and sickle symbol)’ on the bars and an approved chain of custody—are still accepted as a form of delivery in COMEX?14



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