The Russians have sought refuge in gold in the face of sanctions for the invasion of Ukraine, the fall of the ruble and the departure of large Western multinationals from the country. Such is the increase in the demand for gold bullion by households, also motivated by the abolition of the value added tax on these operations, that the Central Bank of Russia has been forced to suspend gold purchases from banks from March 15. It is unknown how long this measure will last.
At the end of February, the imposition of sanctions on Russia by Western governments led to a massive withdrawal of money from Russian banks and the consequent collapse of the ruble to record lows. Faced with this situation, the country’s Central Bank responded by raising the basic interest rate to 20% from 9.5% and resuming gold purchases.
The Bank of Russia has the fifth largest gold reserve in the world, valued at about 140,000 million dollars, of which it has lost access to 300,000 million as a result of the sanctions. This has caused the proportion of gold in the entity’s available reserves to go from 21% al 40%. At the same time, the banking sector’s structural liquidity gap narrowed to less than $36 billion earlier this week. All this means that it no longer makes sense to buy gold from banks to maintain liquidity, VTB analysts maintain in a publication by Reuters.
The purchase of gold by Russian households could help reduce the amount of cash that floods the country’s economy, also favoring the liquidity of banks, BCS analysts point out.
Ever fewer options
Internationally, the Russian Central Bank’s options to sell its gold reserves are increasingly limited. This precious metal is the kind of asset that could be sold to prop up the ruble, in free fall since the start of the Ukraine invasion. However, the sanctions prohibit the institutions of the US, the UK and the EU doing business with the Russian entity. In addition, many traders and banks fear sanctions if they buy or sell Russian gold.
Moscow may have to look east to the central banks of nations like India or China, to sell gold or secure loans with it, according to CPM Group managing partner Jeff Christian. Another option would be to sell through the Shanghai Gold Exchangeof which commercial banks are members, although sales were likely to be rather small.
However, the move by the bipartisan group of US senators to further hamper gold transactions may deter banks from places like China and India. In addition, Beijing wants to avoid being affected by US sanctions for the war.
Why is gold going down?
Despite being the safe haven asset par excellence, the price of gold has gone from 2,043 dollars an ounce on March 8 to around $1,900 an ounce. According to Julius Baer analyst Carsten Menke, this is for three reasons:
– The first, “the drop in energy prices and the prospects of a less pronounced rise in inflation.”
– The second, the rejection “of the western world” (NATO and/or the European Union) to actively enter the war in Ukraine, which implies that the conflict will not escalate further or will not give way to a Third War World.
– And finally, “the taking of profits by short-term speculative traders,” says Menke.
The gold market reflects whether economic and financial market risks rise or fall in times of geopolitical crises. At this time, it reflects a setback, although it closely follows the evolution of the situation, which is still very changeable and uncertain, adds the analyst.
Economy
Russia loses 2% of its GDP in less than a month since the beginning of the invasion of Ukraine
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