The central bank is sitting on 2,300 tons: Russia’s useless gold treasure

Central bank sits on 2300 tons
Russia’s Useless Pot of Gold

By Max Borowski

In order to be financially prepared in the event of a conflict with the West, Russia has shifted a significant part of its foreign exchange reserves from dollars to gold. Well over 2,000 tons of the precious metal are stored in the vaults of the central bank – and in an emergency they prove to be largely unsaleable.

Russia has long been preparing for the war against Ukraine, as well as for the sanctions imposed by the West. Among other things, these preparations included building up a huge gold hoard for the Russian central bank. Since 2014, when Russia occupied Ukraine’s Crimea and western states imposed moderate – compared to the current – sanctions, the central bank bought more than 1000 tons of gold. At the same time, the monetary authorities in Moscow reduced their holdings of US dollars in order to become more independent of the American financial system.

According to official information, the gold treasure, which has grown to a total of around 2,300 tons, is stored entirely in Russia and not, like the reserves of other central banks, partially at international trading centers such as London or New York.

Now the war has come. Around half of the approximately 600 billion dollars in foreign exchange reserves are no longer accessible to Russia’s central bank due to western sanctions. In contrast, the gold reserve in its own vaults worth $140 billion is protected from foreign access – and yet largely useless.

The purpose of foreign exchange reserves, which include central bank gold, is to protect the domestic currency from falling in value in the event of a crisis. By buying rubles with dollars, euros or gold, for example, the central bank creates demand and thus supports the exchange rate. But with dollar and euro holdings already frozen, Russia may find it difficult to sell large amounts of gold.

According to the sanctions resolution, British, EU and US institutions are not allowed to do any business with the Russian central bank at all. This effectively excludes Russia from major gold trading venues such as the London Bullion Market. However, as Bloomberg reports, gold dealers and banks in other countries also prefer to keep their hands off Russian gold, on the one hand because it can hardly be resold on Western markets and on the other hand for fear of so-called secondary sanctions. A motion for such a sanction against all buyers and sellers of Russian gold, in any country, is already pending in the US Senate.

Market can hardly absorb large quantities

In theory, the central bank still has ways of using its gold. So it could try to sell it to other central banks. Like Russia, other countries have been adding gold to their reserves in recent years and may be interested in further purchases. India or China, for example, are repeatedly mentioned in media reports. Larger quantities of gold would probably only be bought from Russia at a considerable price reduction. Another option would be to sell gold directly – through Russian banks or dealers – to the Russian people. Many Russians are apparently interested in exchanging their rubles for gold out of concern for their wealth. The central bank could try to establish a kind of gold standard for the ruble. However, that would severely constrain monetary policy at a time when the government may need to issue new rubles to fund the war.

For some experts, the Russian dilemma shows that gold has been grossly overrated as a reserve currency for central banks, particularly in Russia. The days of “gold fetishism” are probably over, write the economists Harold James and Brendan Greeley from Princeton University in the “Financial Times”. Ultimately, gold is not a valuable commodity, but a means of payment whose value depends solely on everyone’s willingness to accept it as such. In the case of the Russian reserves, this readiness is a political question and is therefore also dependent on sanctions, for example.

Currency expert Florian Kern from the Munich think tank Department Future points out that even without sanctions it would be difficult to use a pot of gold like Russia’s to stabilize the currency. Kern writes on Twitter that the global gold market is not liquid enough to absorb a significant portion of the more than 2,000 tons of Russian gold. A fall in prices would probably be the result. It would turn out that the paper value of this $140 billion treasure would melt away when it was actually needed.

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