Russia's growing gold hoard

Russian gold miners and refiners are churning out bullion at a fierce pace – March saw the country's production up by 26.5% year-on-year, and by 30% compared to February. The first quarter's gold production was more than 9% above the same period of 2022. At the end of February, the Russian central bank said its gold reserves rose by one million ounces in the past 12 months, with a total of 74.9 million ounces. Russia is currently the world's second biggest gold producer.

The significance of this increased gold output and official reserves of gold is arguably that Russia is building a cushion against the sanctions imposed by the West following its invasion of Ukraine. Russia's finance ministry said in February that it sold from the country's National Wealth Fund (NWF), which holds Russia's oil revenues, almost four tonnes of gold in January, to help cover a budget deficit equivalent to $25 billion. At the start of 2023, the NWF doubled the holding limits of gold (to 40%) and Chinese Yuan (to 60%). In July 2021, the NWF ditched all its holdings of the US Dollar, seven months before the Ukraine invasion, which invoked a fairly swift freezing of about $600 billion in overseas assets. The ditching of the US currency while increasing the holdings of gold has been a Russian policy for some time. By February this year, Russia had risen to become one of the top four holders of gold in its reserves.

This is not only government policy. Individual Russians have been stocking up on gold too. Russia's 20% VAT rate on physical gold trades by individuals was abolished in in March 2022; the finance ministry said in February this year that Russians bought more than 50 tonnes of bullion in 2022, ten times more than the previous year. One kilo bars accounted for about 60% of the total. The removal of the value added tax, plus the abolition of income tax on profits made when selling gold, was seen as an explicit incentive to attract people to buy gold rather than Dollars. Finance minister Anton Siluanov said in a press release in March 2022 that investing "in gold will be a great alternative to dollars amid an unstable geopolitical situation". The war in Ukraine has disrupted the normal pattern of trade for Russian gold, 80% of which was exported prior to February 2022. By the end of 2022 Russia had succeeded in re-directing its gold to Asian markets, primarily China, where Russian gold exports rose by 63% last year. In July 2022, China imported Russian gold valued at more than $108 million, a 4,800% increase from the same month in 2021. Like its diverted crude oil exports, it is believed that this gold is heavily discounted, by up to 30%.

According to Alexander Abramov, head of the laboratory for the analysis of institutions and financial markets at the Institute for Applied Economic Research of the Académie Russe de L'économie Nationale (RANEPA), the "accumulation of gold reserves increases the financial stability of the state, meaning there is a reserve in liquid assets that can be sold on the market to friendly countries if something happens".

Russia has weathered the storm of Western sanctions much better than expected; its gross domestic product (GDP) shrank by just 2.1% in 2022. This year, the International Monetary Fund (IMF) estimates the Russian economy will actually grow marginally, by 0.7%, compared to an IMF forecast that the UK's (unsanctioned) economy will shrink by 0.3% this year.