Russia stored up nearly $140 billion in gold to bail itself out of a financial crisis but is finding it nearly impossible to offload the bullion now that one has happened, thanks to Western sanctions.
Russia spent years quietly buying up a massive trove of gold, the world’s fifth-largest. President Vladimir Putin recognized that gold was an asset that could be used to shore up Russia’s currency, the ruble, should its value collapse due to sanctions.
But now it seems Putin has bitten off more than he can chew by waging war in Ukraine because, experts say, it will be very difficult for that $140 billion hoard to be sold internationally.
Sanctions are prohibiting institutions in the United States, the United Kingdom, and the European Union from doing business with Russia’s central bank — so those buyers are obviously off the table. But because of the pressure against Russia, it would also be challenging, and likely unrewarding, for other countries to try to buy that gold.
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“He’s miscalculated here. The reputational risk against third-party countries and their central banks and the fear that the West will retaliate against them is greater than wanting to get gold at a discount price and deal with Putin,” said Scheherazade Rehman, a professor of international finance at George Washington University.
Rehman told the Washington Examiner that any traders trying to buy gold from Russia indirectly by using other currencies outside the mainstream are also afraid to do so because they fear damage to their reputation or penalties.
Additionally, a bipartisan cast of lawmakers is pushing for legislation that would impose secondary sanctions on any U.S. entities that knowingly buy or transport gold from Russia’s central bank cache.
“Russia’s massive gold supply is one of the few remaining assets that Putin can use to keep his country’s economy from falling even further,” said Sen. Angus King.
“By sanctioning these reserves, we will further isolate Russia from the world’s economy and increase the difficulty of Putin’s increasingly costly military campaign,” the Maine independent continued. “We urge the speedy passage of these bipartisan sanctions to hold Putin accountable for his crimes.”
Some central banks might be eyeing a sweet deal on Russia’s gold, namely those of China and India. If they were to purchase any of the holdings, it would be at a steep discount because there would be many strings attached. The U.S. and European allies are messaging that they do not want to see other central banks try to buy Russian gold or loans being secured against that gold.
“The message is going out loud and clear,” Rehman said. “I think India and China are being smart enough to not get in the middle of this Ukrainian war. And that means if they’re going to [buy gold], they’ll do only a little bit. They’re definitely not going to do it on a massive scale that Putin needs.”
Additionally, a lot of non-Western gold exchanges cannot handle the volume involved with Russia’s gold. Putin is hoping to sell his reserves on the Shanghai Gold Exchange because he is barred out of the other two major markets in the U.S. and the U.K., Rehman explained.
While the Shanghai exchange could handle the volume, Rehman said, it’s not likely that China would expose itself to such geopolitical risk by gobbling up large quantities of Putin’s stash. Other markets, such as Singapore and Hong Kong, are also unlikely to play ball.
Adding further challenges for Moscow, the London Bullion Market Association and CME Group Inc. suspended all six Russian gold and silver refineries from its Good Delivery List, meaning that newly refined and minted gold bars are banned from entering the market.
“Nobody wants to get in the middle of this war,” Rehman said.
But selling the gold externally isn’t the only move Putin can make with the reserves. Although it would be a sign of desperation, Putin could try to sell the gold to his own people — that is, rely on the internal market. He would effectively be setting a gold standard by allowing Russian citizens to exchange rubles for gold.
The move could be attractive to the Russian people because of how the value of the ruble has cratered, while international gold prices have gone up. Gold is trading at about $1,940, a nearly 10% return from six months ago. Meanwhile, the ruble is now worth less than a penny, a precipitous decline from before the invasion.
Rehman said that selling gold internally could help Putin to some extent, although she noted that the Russian people are becoming poorer by the day and selling internally would likely not be enough to get Putin to where he wants the country to be economically — rather, it would be more of a short-term fix and hardly even a fix at that.
There seems to be a sense that Putin miscalculated how coordinated and swift U.S. and European financial penalties would be in response to his invasion.
Soon after the incursion, the U.S. and Western powers restricted the Russian central bank from accessing a big chunk of its more than $600 billion in foreign currency reserves, which it would otherwise use to halt the ruble’s decline and slow inflation. By doing so, the Western powers caused tremendous harm to Moscow’s efforts to insulate its economy from other sanctions.
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Certain Russian financial institutions have also been cut off from the SWIFT system, which facilitates crossborder financial transactions and money transfers and is used by 11,000 banks and institutions worldwide.
“We are inflicting pain on Russia and supporting the people of Ukraine. Putin is now isolated from the world more than ever,” Biden said in his State of the Union address. “Together with our allies — we are right now enforcing powerful economic sanctions. We are cutting off Russia’s largest banks from the international financial system.”
