Russia looks to golden horde for financial support

By bne IntelliNews November 24, 2014

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Russia's central bank is replenishing its reserves with domestic bullion, after spending more than $100bn slowing ruble depreciation over the last twelve months.

The central bank's reserves have declined from $524bn at the end of October 2013 to $421bn in mid-November after it tried to brake the ruble's depreciation, notably during the annexation of Ukraine's Crimea in March 2014 and following the imposition of sectoral sanctions. Enough is enough, Russia's central bank said on November 10, announcing a free float of the ruble originally planned for January 2015.

Since that time, helped by the restricted supply of liquidity to domestic banks plus a rise in the price of oil, the ruble has bounced back from its seemingly unstoppable downwards course and is currently 3% up on its value at the date of the announced free float on November 10.

Now the Central Bank is looking to replenish reserves to rebuild confidence – and has found an easy way of doing so: gold purchases from domestic producers. Russia mined 248.8 tonnes of gold in 2013, making it at third largest gold producer in the world, after China and Australia, according to Thomson Reuters.

The move has been made easier because of sanctions imposed on Russian banks by the West. This makes international banks leery of buying gold from Russian commercial banks that buy it from producers for resale internationally.

As a result, Russia'a gold reserves now put it at sixth place in the world, overtaking officially declared Chinese reserves in October, having overtaken Switzerland earlier in the year. Analysts estimate purchases in November to date at 16.5 tonnes, worth around $1.5bn at current prices, after purchases in October of 18.7 tonnes, taking total purchases year to 150 tonnes, according to central bank head Elvira Nabiullina.  This marks a clear acceleration from 77.5 tonnes of gold purchased in 2013 and 75 tonnes in 2012, according to the World Gold Council.

Russia's hording of gold has been established policy since Vladimir Putin came to power in 2000, when he used windfall oil revenues to pay down its foreign debt by 2004. Since 2004, Russia's gold reserves have increased nearly threefold.

But it still only holds 10% of its reserves in gold, compared to around 70% held by hard currency countries such as the US and Germany, which can pay for their imports in domestic currency and thus do not require huge hard currency reserves. Central banks across the world have  boosted gold reserves lately as a hedge against global financial turbulence. Nations added 409 tonnes to reserves in 2013 and 544 tonnes in 2012, according to World Gold Council statistics.

Gold reserves may not help much, however, if Russia slides back into a financial crisis because of a resumption in the oil price decline combined with escalation of sanctions by the West, since bulk selling of gold to raise hard currency funds would collapse the market. 

Days before the free float was announced, Russia's former finance minister Aleksei Kudrin calculated that Russia's liquid hard currency reserves had dropped to the critical threshold of just over six months import cover, subtracting $167bn held in government-controlled sovereign wealth funds. Kudrin advocated a quick switch to a free float, but warned that it would not be a panacea. 

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