/ world today news/ The G7 leaders boasted that they had found a way to deal another serious blow to Russia’s revenues. The ban on buying gold affects Russia’s second export after energy, the US Secretary of State is happy. However, the fallout from the new sanctions blow is likely to disappoint the collective West. Why are the new sanctions not as severe as G7 leaders hope?
The West decided to deal another blow to Russia’s profits and ban the export of gold. Four countries have announced such an embargo – Great Britain, the United States, Canada and Japan. Germany and France supported these sanctions, which were the result of the G-7 meeting. However, they cannot accept them alone, as they have to discuss this issue with other EU members. Most likely, the imposition of an embargo on gold from Russia by the European Union is only a matter of time, it is necessary to complete all the formalities.
US President Joe Biden assures that this will deal a significant blow to the main Russian export. US Secretary of State Anthony Blinken says it affects “Russia’s second most profitable export after energy. “The refusal of the G7 countries to import gold from Russia will deprive it of revenues of about 19 billion dollars a year,” Blinken calculated.
According to data for 2021, Russia sold 301 tons on foreign markets for $19 billion at current prices. According to analysts at Freedom Finance, Britain bought the bulk of Russian gold – 90% – last year for $15.4 billion (because London is the largest trading center for precious metals along with New York). Also in Europe, Switzerland bought Russian gold for $422 million and Germany for $318 million. Additionally, $1.134 billion worth of gold was purchased by other importers from “friendly” countries.
It is curious that the collective West so loudly announced the new blow to Russian income, while in reality the ban on trading gold with Russian in London was introduced as early as March 2022.
“This happened when the London Association of Precious Metals revoked the international certification of Russian gold bullion, when they stamped the bullion that it passed the test and could be admitted to the international market. Since then, we have not delivered bullion to Europe, Canada or the US,” says Alexei Vyazovsky, vice president of the Golden Mint.
Why, then, did the G7 countries make such a fuss about the official imposition of sanctions? First, it is a reason to add weight to the meeting of the G7 countries, at which it would be a shame if the politicians did not touch the topic of Russia and do not punish it in any way. And it is no longer so simple to find a new punishment that sounds strong, but does not further kill the economies of developed countries.
Second, it could be a shrewd move in an attempt to punish other countries. “Perhaps such a statement was made at the G-7 level to bring other countries under secondary sanctions,” Vyazovsky does not rule out.
Given the formality of official sanctions, the blow against Russia may not be as severe as the US tries to make it out to be.
On the one hand, the income from gold exports is really significant. Even from arms exports, Russia earns less – 13 billion dollars in 2020. Still, in the total income, this is not a critical share. Even the export of agro-industrial products in general brings much more significant money – in 2021 it was 34 billion dollars. And Russia’s total export earnings last year amounted to $498 billion. “In 2021, the budget revenue from gold exports amounted to about 7.57%, this year it will be about 5.35%, taking into account the changes in the dollar,” Freedom Finance analysts believe.
Second, Russia has every chance to redirect gold exports from the West to the East.
“Russia is already seeing a surge in gold trade with the United Arab Emirates. We brought bulk bullion to Dubai. India and China will join soon,” says Vyazovsky. Dubai has probably become such a gold center for Russia, through which anyone who wishes can buy Russian gold.
The expert draws a parallel with the sale of Russian oil, where India has suddenly become a major buyer. Indians buy Russian oil at a discount of about $30 to the world price and can then use it for their own needs or resell it to others at a market price, making a profit on resale.
Vyazovsky is confident that India and China, as the two largest consumers of gold, will also become active buyers of Russian gold, as will the UAE. “We are witnessing the destruction of world trade. Even China has already started to worry and sell off its dollar reserves, because it understands that they can be blocked easily, if nothing else. And gold is stored at home, nothing threatens it. Secondly, India and China are the main producers and consumers of jewellery,” says Vyazovsky. Therefore, Russian gold will most likely find a new buyer just on the other side of the “barricades”.
“In today’s world, it’s actually very difficult to ban something. Russia accounts for almost 10% of the world’s gold production. Gold is a liquid currency. When money stops working, gold will continue to move. Water will always find a hole,” says the vice president of the Golden Mint company.
“Another option to mitigate the effect on the gold mining industry is to increase purchases of gold in the reserves of the Central Bank of the Russian Federation. If the regulator decides to increase purchases of gold in the domestic market, it can significantly support the industry,” said Dmitry Puchkarev, an expert on the stock market. When the government brings back the “budget rule”, it would be logical to direct the excess profits from the sale of oil and gas (and prices continue to rise there) to buy gold and yuan instead of “unaffordable” dollars and euros.
As for the price of gold, there is no clear answer as to whether prices will rise amid an official ban. First, the embargo announced by the G-7 countries is more of a formality, symbolic.
Second, there are doubts that gold prices are now artificially constrained. “In 2020, an all-time high of nearly $2,000 per troy ounce was set. Now we are at the same level. However, it is obvious that the price of gold is being manipulated by the central banks of developed countries. They have an unspoken agreement not to let gold go above a certain level so that it does not become a competitor to their currencies, which the central banks of developed countries can print in unlimited quantities. When this level is reached, they start selling gold en masse from their vaults, which lowers the price. Plus, manipulation is possible through the “paper” gold market – derivatives, futures and so on. I am skeptical of these manipulations, but time will tell how long they can fool the market. But you can’t cheat endlessly,” says Alexey Vyazovsky.
Because of this, it is quite difficult to predict the price of gold. “If we theoretically assume that the Central Bank of Russia announces the transfer of oil dollars or in general the entire trade in gold, then prices will jump to $7,000 or even $10,000 per ounce.” And this will not be the limit,” says Vyazovsky.
As for domestic demand, the Russian government has removed the 13% personal income tax and 20% VAT on the sale of bullion until the end of 2023, so that people can keep their savings in gold.
A “boom” in purchases of physical gold by the population was observed in March when VAT was abolished, then there was a second “boom” after the abolition of personal income tax, but now there is no new demand.
“The turnover of bullion sales has increased, but it cannot be said to be strong. Much has been done, but much remains to be done. For example, legal entities cannot trade bullion. Individuals also cannot trade with each other. Bullion can only be sold to banks, and banks are very reluctant to buy back bullion, require appraisals, etc. We still need to work in this direction,” concludes Vyazovski.
Remember that gold miners still have a choice – to sell abroad or to the Russian Central Bank. But, first, the Central Bank of the Russian Federation buys gold at a 15% discount from the market price. Second, it pays in rubles. And gold miners have to make foreign currency loans and buy imported equipment, so they need foreign exchange earnings. Miners in general may find it difficult at first to rebuild their business, centered on London, the global center for gold trading.
“Sanctions on gold may be sensitive for the industry, as the majority of the metal mined in Russia – more than 80% in 2021 – is exported,” notes Puchkarev. According to him, all Russian gold mining companies may face the need to sell gold at a discount. Polyus will be in the best position as the share of export revenue in 2021 is below 2%. “Polymetal” in 2012 received about 12% of the revenue from exports to the EU and 56% in general from sales outside the Russian Federation. The main market of foreign sales was Kazakhstan – 35% of total revenues. It is not yet clear how Kazakhstan will react to the imposition of sanctions by the G-7 countries and possibly the EU. On the other hand, the effect of the sanctions can be reduced due to the fact that the production of “Polymetal” is diversified with silver”, notes Puchkarev.
Russia’s fourth gold company, Petropavlovsk, is already in trouble. In mid-May, it failed to repay $12.36 million worth of dollar-denominated Eurobond obligations on time. Before that, the company could not pay the loan to Gazprombank. The fact is that the gold mining company is registered in Great Britain, but had a loan from Gazprombank, which was included in the British sanctions list at the end of March. As a result, Petropavlovsk was unable to transfer money to a Russian bank to repay the loan.
Translation: V. Sergeev
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