How Russia Uses Gold as a Strategic Resource in War
Wed Nov 13 2024
Since 2014, gold has become an increasingly valuable economic commodity for Russia, as the country added it to its foreign reserves and reduced its transactions in dollars. The importance of gold grew even further following the Western economic sanctions imposed after Russia’s invasion of Ukraine in February 2022, as the state used it to respond to those sanctions. Although there is no fundamental strategy guiding Russian gold policy, aside from the reserve policy pursued by the central bank before the Ukraine war, much of the government’s gold-related policy is reactive. Hence, this resource has become an essential feature of the Russian political agenda, both domestically and internationally.
In this context, a study by the RAND Corporation published in September 2024, titled “Gold Rush: How Russia is Using Gold in Wartime,” seeks to provide insights into Russia’s pre-war objectives in the gold sector and how its priorities have shifted during the war. It also aims to identify who finances the gold industry in Russia, the challenges it faces, and finally, the role of Russian gold in the global gold trade, including its use as a form of payment.
Gold Before and During the War:
The researchers in the study divided Russia’s gold policy into two phases: one stable (before the war) and the other unstable (since the war), detailed as follows:
Phase One: Prior to the Russian-Ukrainian war, government policies regarding gold focused on two priorities. The first was the pursuit of developing the gold industry with the goal of becoming the top producer in the world, maximizing potential revenue generation for the sector. This objective was important not only for economic reasons but also due to social and regional factors, as the gold industry is significant in Eastern Siberia and the Russian Far East, where most of Russia’s gold is found. By 2020, gold accounted for over 25% of all metal exports.
The second priority was Russia’s effort to increase its gold reserves since 2006, when Moscow repaid its foreign debts and began to accumulate reserves. Between 2006 and 2020, Russia added more gold to its reserves under the supervision of the central bank. Since Nabiullina was appointed head of the Central Bank of Russia in 2013, she established a policy framework designed to enable the economy to respond to recurring crises primarily linked to the decline in global oil prices. This approach was not aimed at fostering growth but ensuring stability; although it did not prevent crises, it allowed Russia to manage them.
Phase Two: Since the onset of the war in Ukraine, Russia’s ambitions regarding gold have expanded. Within three days of the war’s start, the Russian central bank began purchasing gold in the local market without disclosing the reasons. Russian media reported that this action was taken in response to the possibility of foreign asset freezes. Later, the bank halted gold purchases when the value-added tax (20%) on gold bullion purchases was lifted, allowing Russian citizens to buy gold amid the ruble’s depreciation.
In March 2022, the Russian central bank resumed gold purchases at a set price of 5,000 rubles per gram, shortly after Western sanctions were imposed on Russian state banks, which had previously purchased gold from producers. However, the central bank abandoned its fixed price in April due to rising international gold prices alongside the ruble’s depreciation.
In October 2022, the Russian central bank halted gold purchases again despite pressure from the Russian gold producers’ union for greater government support. The bank cited concerns over rising inflation resulting from increased money supply as justification for its decision. In the same month, the central bank’s deputy governor announced that Russia would not engage in further gold purchases. Overall, the changing priorities of the Russian central bank have rapidly reflected its attempts to respond to crises, despite its clearly defined monetary policy.
Gold Policy Making:
The study indicates that the Central Bank of Russia is not the primary institution involved in gold policy-making, which changes frequently. In October 2023, for instance, the government attempted to reclaim certain taxes and impose export duties linked to the ruble exchange rate on a range of goods, including gold. This led—according to some—to an increase in the number of individuals leaving the country with gold to avoid paying the export duties.
Also, disagreements have emerged between the economic and security sectors in Russia regarding how to utilize gold. Some officials, like Nikolai Patrushev, Secretary of the Russian Security Council, have called for the adoption of both the ruble and an alternative trade system backed by gold. In April 2022, Kremlin spokesman Dmitry Peskov stated that President Putin was contemplating linking the ruble to gold, although this proposal faced opposition from the central bank and the finance ministry due to concerns it would lead to a loss of control over gold reserves.
In general, Russian policy regarding gold reserves also depends on two other institutions: the National Wealth Fund (NWF), funded by oil and gas revenues and managed by the finance ministry, and the State Precious Metals and Gems Repository (Gokhran), a government storehouse for precious metals and gemstones funded by the finance ministry. The fund has various responsibilities, including controlling the movement of metals and gemstones to and from countries outside the Eurasian Economic Union.
Financing the Gold Sector:
The study notes that the financing of the gold sector in Russia is backed by several state-owned and private banks, as well as state-owned and private mining companies, which can be outlined as follows:
The Role of Banks: At the start of the Ukrainian war, 13 banks controlled a substantial portion of the country’s assets to the extent that the Central Bank of Russia classified them as “financial institutions of strategic importance.” A few of these banks were private, while three state banks dominated over 70% of the assets in these strategically important financial institutions. Some banks were authorized to trade gold on behalf of producers, physically transferring it from producers to local and international markets. The number of banks allowed to trade in this manner has increased as the state gained more control over the sector.
The study highlights the significant role played by VTB Bank and Gazprombank in providing financing; however, major banks continue to play a central role in selling gold to Russians in the domestic market. For instance, VTB Bank alone sold more than 33 tons to individuals in 2023, totaling 50 tons; this represents about a quarter of the country’s production that year.
Mining Companies: At the forefront is “Mangizya,” which acquired “Polymetal,” one of the largest gold mining companies in Russia, in March 2024. There has been some redistribution of gold mines and related production assets. For example, “Mangizya” purchased the “Taseyevskoye” mine from Highland Gold, which itself increased its stake in the sector since the war began. Highland Gold, which acquired assets from Kinross—the only major foreign company in the sector at the beginning of 2022—subsequently sold its “Chulbatkan” project in Khabarovsk to Polyus just days after the acquisition.
However, these major producers do not encompass all notable activities in the sector. Companies like “Rosatom” play a crucial role in Russia’s international mining relations, supporting gold mining interests abroad, particularly in Africa, including Burkina Faso and Mali. Since the Ukrainian war, the company has acquired numerous assets, notably in Kazakhstan with its acquisition of the “Podinovskoye” mine from Kazatomprom, which is expected to become the world’s largest uranium exporter.
Key Challenges:
Before the Ukrainian war, Russia aimed to become the world’s largest producer of gold by increasing its gold production by 27%, from 329.5 to 420 tons in 2022; however, the war seems to have altered the industry’s outlook, presenting multiple challenges that have led production levels to stabilize around 2021 levels.
Nevertheless, the Russian gold sector was profitable in 2023, as evidenced by the earnings of Polyus, which represents about a quarter of Russian production. This profitability is attributed to rising gold prices rather than operational performance improvements; companies have remained cautious in their efforts to rebuild supply chains while high costs have curtailed some investments. In fact, these negative trends are not limited to the gold sector but apply to export-oriented industries in general.
The study indicates that the Russian gold sector experienced numerous acute shocks in 2022, including inaccessible key types of foreign equipment, spare parts, and chemicals; the ruble’s depreciation, which made importing such equipment costly; the increase in the central bank’s key interest rate and banking prices, which paralyzed lending; and the loss of good delivery status at Russian refineries due to Western sanctions.
The high degree of reliance on foreign parts and equipment in Russia’s mining sectors has become problematic, a condition exacerbated by the Russian-Ukrainian war. Many reports have highlighted producers’ need for new suppliers in the face of Western sanctions, with China being the primary supplier of equipment imports to Russia. However, there are concerns that new suppliers may not be able to provide equipment of the same quality, as well as risks associated with dependence on a single source of supply, which may affect the future productivity of the sector.
On another front, Central Asian countries have played a crucial role for the Russian industry, as exports from Kazakhstan to Russia reached record levels in 2022 (8.78billion)and2023(8.78billion)and2023(9.79 billion). Machines, nuclear reactors, and boilers constituted the third most important category of exports. Overall, Russia has significant mining interests in many countries worldwide, particularly in Armenia, Kyrgyzstan, and Kazakhstan, where such interests depend on close personal ties among political, security, and mining elites in both Kazakhstan and Russia.
In conclusion, the study asserts that gold has become a commodity of strategic importance for Russia since the war with Ukraine, but its financial value to the state is relatively small compared to oil, which is and will remain Russia’s most important export. The value of Russia’s precious metals exports in 2022 was
approximately28.3billion,withgoldmakingupjustoverhalfofthatfigure(28.3billion,withgoldmakingupjustoverhalfofthatfigure(14.6 billion). Although this positioned gold as the fifth most important export of the country and contributed over 3% of total export profits, gold’s overall contribution to export profits over the past five years has been relatively small, if not insignificant.
On the other hand, some Russian state agencies use gold directly for intergovernmental payments in various ways, and Russian companies engage in swapping gold for goods, weapons, or cash. It remains unclear how frequently the state makes weapon payments in gold, but reports suggest it has done so with Iran and North Korea. According to the study, there are indications that Russia is formalizing this trade pattern; recently, the Ministry of Economy issued new guidelines on three types of barter trade (in-kind exchanges) alongside policies for gray imports, suggesting that the state is willing to allow informal activities—which are already tax-exempt—to access foreign goods. However, its success in this direction remains dependent on willing partners.
Source: https://worldpolicyhub.com/