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LAWRIE WILLIAMS: Russia sticks to its guns – no new central bank gold buying

The Russian central bank has released details of its foreign exchange position at the end of August, indicating again that the bank has not been buying any gold for its reserves.  This has not come as a surprise, despite Russia being the world’s largest known buyer of  gold for its reserves for several years.  The cessation of gold purchases is a policy it had announced earlier in the year in stating that April would be the final month, at least for the time being, of central bank gold additions to the nation's forex reserves.

Russia is arguably the world’s second largest gold producer by volume, just pipping Australia to that position last year according to precious metals consultancy, Metals Focus. It has designs on overtaking China as the world’s top gold producer, and if its gold output growth continues at the current rate, and China’s continues to decline, this position could be achieved within the next 2-3 years.

Russian gold miners have thus been forced to sell their product on the open market which has enabled gold to replace natural gas as a top export earner with natural gas prices low, and gold prices high.  That has enabled the Russian state to run a continuing  balance of trade surplus which has been a huge boost to the national economy given that it has been hit by U.S.-initiated trade sanctions which have closed some markets to Russian exports and by the big fall in oil and gas prices.  While the national trade surplus is lower year on year, it is still in positive territory unlike most Western nations - and the U.S. in particular which has recorded a trade deficit so far this year of some $360 billion.  The U.S. has also been piling up a huge debt position in its efforts to allay the economic effects of the COVID-19 virus pandemic which may well come back to haunt the nation once the virus pandemic is behind us.

While both trade surpluses and deficits are seen to offer some advantages, carrying a trade surplus is somewhat akin to a business making a profit.  Thus a nation carrying a surplus has some opportunities in the foreign exchange markets enabling it to build reserves of dollars, or some other currency, thus strengthening its position in the global financial pecking order.  In the past Russia has been able to use its trade surpluses to buy gold.  Given its current reluctance to buy dollars, because it fears that the U.S. might cut off its access to dollar-based treasuries and to dollars themselves, it is no doubt using its surpluses to build its reserves of other key currencies like the Chinese yuan, the Japanese yen or the euro.  While this might signify a reduction in the dollar’s position as the global reserve currency, Russia’s policy on its own would only have a pretty limited impact on the dollar’s global status.  But, of course, should other major trading nations start to follow a similar path the U.S. dollar’s role as the global reserve currency might be gradually eroded, but we’re far from that position at the moment.

Thus don’t expect Russia to change its policy of ceasing to purchase gold for its reserves for now.  The Russian central bank’s position as the dominant gold purchaser of the past several years has been largely replaced by Turkey so far this year, with the latter's central bank taking in around 170 tonnes of gold in the first seven months.  The value to Russia of gold’s contribution to its balance of trade surplus will thus likely remain in place until there is a recovery in oil and gas prices sufficient to make gold exports no longer necessary to maintai a balance of trade surplus.

22 Sep 2020 | Categories: Gold, Russia

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