Following Russia's invasion of Ukraine about a month ago, the U.S. and its western allies swiftly imposed a raft of economic and trade sanctions on Russia, notably on buying oil, a partial SWIFT ban and against billionaire oligarchs seen as close to President Vladimir Putin. Russia hit back by imposing export bans including telecoms, medical, vehicle, agricultural, and electrical equipment, as well as some forestry products such as timber.
But it’s the latest round of sanctions that has been drawing mixed reactions across the board: the U.S. ban on gold transactions with Russia.
On Thursday, the U.S. made it clear that any transaction involving gold related to the Central Bank of the Russian Federation is already covered by existing sanctions, and any violations were likely to attract secondary sanctions.
Russia has an estimated $132 billion in gold stockpiles, roughly 20% of the holdings in the Russian Central Bank, thanks to heightened buying activity since the 2014 annexation of Crimea. Those reserves, coupled with Russia’s $630 billion in foreign exchange reserves, can help finance its war machine.
“U.S. persons, including gold dealers, distributors, wholesalers, buyers, individual traders, refineries, and financial institutions, are generally prohibited from engaging in or facilitating prohibited transactions, including gold-related transactions in which blocked persons have an interest,” according to a release from the Treasury on frequently asked questions.
The U.S. announcement to block gold transactions was done alongside Group of Seven and European Union allies that will also impose the gold reserve ban. Putin’s foreign minister Sergey Lavrov has termed the foreign reserves ban ‘thievery,’ with finance minister Anton Siluanov revealing earlier this month that about $300 billion had been frozen.
A cross-section of experts, however, is not optimistic that a gold ban will be equally effective while others say that Putin might have unveiled the ultimate countermeasure against all sanctions.
Propping the ruble
There’s growing speculation by U.S. officials that Russia is using its vast gold reserves to support its currency as a way to circumvent the impact of sanctions. One way to do that is by swapping the gold for a more liquid foreign exchange that is not subject to current sanctions. Another way would be to sell the bullion through gold markets and dealers. The gold could also be used to directly purchase goods and services from willing sellers.
However, some experts are now questioning the rationale behind banning Russian gold transactions.
“Any sanctions on Russia’s gold reserves would do little more than reveal the degree to which government bureaucrats don’t understand gold. The beauty of gold, unlike currencies, is that it is an untrackable store of value that has no counterparty,” Brien Lundin, editor of Gold Newsletter, has told MarketWatch.
“At least in smaller amounts, Russia could easily sell gold on the open market. In bulk quantities, it could just as easily sell the gold to China with no record of the transaction,” Lundin has added, noting that China has demonstrated that it is an “eager buyer of gold.”
Jeff Wright, chief investment officer at Wolfpack Capital, says selling gold is probably not Russia’s first choice anyway because it could effectively signal a complete collapse of its economy and a sign of weakness by Russian leadership. Rather, Russia is more likely to resort to selling discounted oil to Russian-aligned countries, rather than selling gold, according to Wright.
And, these experts might be right on the money.
A couple of days ago, Putin instructed Russian oil and gas companies to sell their oil and gas to unfriendly countries exclusively in rubles.
Rubles for oil
Putin has ordered that gas contracts with "unfriendly" countries--those responsible for sanctions against Russia--be settled in rubles rather than in foreign currencies and gave Russia's central bank and gas suppliers like Gazprom one week to implement the change.
Last year, about 97% of Gazprom’s foreign gas sales were in euros and dollars.
Maybe Putin need not have gone that far thanks to the western heavy reliance on Russia’s energy commodities.
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Energy payments are a lifeline for Russia’s increasingly isolated economy, and western gas sales have been softening the blow by harsh sanctions. After crashing as much as 40% in the wake of Russia’s invasion of Ukraine, the ruble has managed to claw back much of its losses against the dollar, though it’s still trading nearly 30% below pre-invasion levels. The ruble briefly strengthened to a three-week peak of 95 rubles to the U.S. dollar on news of Putin's order, before settling weaker at 98 rubles to the dollar.
It’s not clear how far Putin is willing to go to enforce the order. Last week, Russia made a critical bond payment in U.S. dollars despite speculation that it might choose to pay in rubles or even default altogether.
"In an extreme scenario, insisting on ruble payments may give buyers cause to re-open other aspects of their contracts--such as the duration--and simply speed up their exit from Russian gas altogether," Vinicius Romano, senior analyst for Rystad Energy, has told Fortune.
In the final analysis, sanctions are likely to deal a big blow to the Russian economy, but Russia still might have significant leverage to soften the blow.
By Alex Kimani for Safehaven.com
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Like many countries of the world, Russia uses its gold holdings to support the ruble. It doesn’t need to sell any of its gold reserves. It will continue to sell its huge volumes of black gold and gas instead. If ever it wanted to sell some of its gold, China is the one to sell to since China has been amassing its gold reserves in support of the petro-yuan.
However, China’s economy and Russia’s complement each other to a great extent. China and Russia use their national currencies in their transactions as the ruble is virtually legal tender in Chinese regions bordering Russia. Trade between Russia and China has grown from $13 bn in the early 2000s to $150 bn in 2021 and still expanding.
And while the ruble lost some of its value against other currencies, its domestic purchasing power remains virtually intact. The reason is that Russia’s economy is self-sufficient to the extent that it doesn’t need to import anything if it doesn’t wish to do so. And if it does, it can easily get it via China or from other willing sellers around the world
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London