Russia’s huge gold industry is looking for new ways to sell the precious metal, such as exporting more to China and the Middle East, as sanctions clog up its traditional sales routes. The world’s second largest gold producer has found that markets in Europe and the US are closed thanks to sanctions imposed over the invasion of Ukraine. The ban prevents them from selling newly produced Russian gold, and some refiners refuse to remelt old bars.
The country’s miners have generally sold their output to a few mostly state-owned local banks such as VTB and Bank Otkritie, which then re-export the metal, or until a few years ago to the central bank. But the sanctions mean that selling to those banks is no longer an option, and although the Bank of Russia announced it would buy gold again after two years without doing so, it is not expected to buy as much as before.
The result is that Russia’s gold industry has been wondering for weeks how to sell the roughly 340 tons it mines each year, worth roughly $20 billion. There are not many unsanctioned banks that are capable of handling such volumes. And although the government of Vladimir Putin gave miners general export licenses two years ago that allow them to export directly, few have used the process until now because they have preferred to rely on the sales infrastructure of banks.
However, companies may be forced to do so soon, as Russian miners are considering direct exports, and producers and lenders alike are exploring sales in Asia and the Middle East.
Polymetal International is one producer that is exploring the possibility of using direct exports, with sales opportunities to the United Arab Emirates and China, a company spokesperson confirmed. Some other big miners have also started talks with Chinese and Emirati companies.
The Bank of Russia was once the world’s largest sovereign gold buyer, taking nearly all of the country’s mining output before it halted purchases in early 2020. Its commitment to start buying again will help absorb part of the supply that cannot be exported. “There are very good budget revenues,” said Natalia Orlova, an economist at Alfa-Bank. “Now they can only be saved by buying gold.”
The central bank is capping the price at which it is willing to buy at 5,000 rubles a gram, about $1,880 an ounce at current exchange rates, below international prices. The planned purchases are designed to support the sales of gold miners due to the difficulty in exporting, since the domestic market would not be able to absorb those volumes.
Retail Potential
Other deals could also come from the domestic retail market. The government canceled the VAT on such purchases, a measure that had been discussed for a long time, within the package of measures to withstand the sanctions for the war in Ukraine.
“We are seeing a significant increase in demand for gold at retail,” the Polymetal spokesman said. “Banks are willing to pay it using the international reference price, and not at 5,000 rubles.”
Although gold prices do not tend to react to supply and demand fundamentals in the same way as other commodities such as base metals, energy or agriculture, the prospect of reduced Russian exports would reduce global supplies. .
“The gold market is usually in surplus,” said Suki Cooper, an analyst at Standard Chartered. “If demand from Russia grows, production is not reintroduced to the international market, and ETFs absorb excess supply, the gold market could be closer to balance for the first time since 2015.”
Nickel rises 58% while gold adds 6% since the beginning of the year
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