Bullion Bulletin: Russia’s Wealth Fund

Just before the New Year celebrations Russia’s finance ministry sprang a piece of news that, while intriguing, should surprise no-one. It doubled the amount of Chinese Yuan and gold its national wealth fund is permitted to hold. In order to make investments in the fund “more flexible” (according to the finance ministry) it raised the potential share in this fund of Yuan to 60% and gold to 40%.

Almost simultaneously the country’s largest bank, the majority state-owned Sberbank, said it would start to issue gold-backed digital financial assets (DFAs). Alexander Vedyakhin, first deputy chairman of the Executive Board of Sberbank explicitly linked the gold-backed DFAs to a broad ‘dedollarization’ which he posited is now happening.

Russia has been steadily accumulating gold over the last decade; its gold-buying has been given an extra impetus by the sanctions imposed by the US and other countries after the invasion of Ukraine. Its interest in digital assets has fluctuated wildly in the past couple of years. In 2017, President Vladimir Putin said Russia would develop a digital currency called the CryptoRuble, to be issued by the Russian government. It was reported in 2018 that one of Putin’s economic advisors, Sergei Glazyev, said during a government meeting that the CryptoRuble “suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions”. The CryptoRuble was due to be tested by the Russian public in 2022 but it’s yet to appear. Following the Ukraine invasion one of the sanctions imposed against Russia was to eject it from the SWIFT payments platform, to which Russia’s finance ministry responded by saying it would legalize the use of virtual currencies in cross-border payments, while they would remain illegal for domestic usage.

According to a Russian-based economist, the Yuan “is becoming the ‘new dollar’ due to its growing liquidity and relatively low volatility”. Sanctions imposed on Russia have been a double-edged sword; while the richest Russian oligarchs lost almost $95 billion in 2022, the US Congressional Research Service (CRS) admitted in December that sanctions have “not delivered the economic ‘knock out’ that many predicted” and that they have “contributed to disruptions in global supply chains, higher global commodity prices, and a slowdown in global economic growth”.

Perhaps most importantly, they have so far failed in their main task – forcing Russia to abandon the invasion of its neighbour. It seems likely that this war will drag on through 2023, and that Russia will continue to bolster its foreign reserves by accumulating further gold stocks from its own mining (around 300 tonnes a year) and elsewhere. The National Wealth Fund, which originally was established to help cover deficits in the national pension fund, will continue to be used to help support the fight.