Russia and the irresistible power of gold

Russian Prime Minister Vladimir Putin (C
Russian Prime Minister Vladimir Putin (C) holds a gold bar while visiting the Central Depository of the Bank of Russia next to Georgy Luntovsky (L), first deputy chief of the Central Bank of Russia, on January 24, 2011 in Moscow (Alexsey Druginyn/AFP/Getty Images)

No country leader to my knowledge other than Vladimir Putin posed with a gold bar in his hand. It was clearly intended to send a message to the world. Official pictures of the top country leader are always used for sending a message to the people and the world irrespective of the type of political system existing in the country. Then-Prime Minister Putin became the first Russian leader to visit the Gokhran complex in Moscow in January 2011 where Russia keeps about two-thirds of its gold stockpile. It was soon after the 2008 financial crisis and before the G7 imposed sanctions on Russia in 2011.

Gold has become through history a symbol of power but in modern history I know of no leader making such an effort to promote gold. Russia contrary to China made no effort to push the population to buy gold but it has been buying large amounts of gold for its official reserves.

The percentage of gold in Russia’s international reserves dropped to its lowest of 2.2% in 2005 but are now in 2016 back up at 15% where they were in 1999. In 2005, after the ratio touched 6.5% president Putin told the central bank to buy gold. He told Bank of Russia not to “shy away” from the metal. “After all, they (international reserves) are called gold and currency reserves for a reason,” Mr. Putin said, according to a Kremlin transcript as reported by Bloomberg.

Vladimir Putin also recently told foreign journalists at the St. Petersburg Economic Forum 2014 “For us [Russia and China] it is important to deposit those [gold and currency reserves] in a rational and secure way, … and we [China and Russia] together need to think of how to do that keeping in mind the uneasy situation in the global economy.” This sentence was the first signal that made me wander if there isn’t a coordinated strategy by Russia and China to use gold in their war on the “exorbitant privilege” of the “hegemon”. Recent sales of oil and gas were done by the third largest oil producer (Russia) to the largest oil consumer (China) in yuan and not in dollars and therefore bypassing the dollar. The Soviet Union viewed gold as a strategic metal and a matter of national security and President Putin does it too. I strongly believe Putin has the same objective as China of accumulating around 9,000 tonnes of gold as soon as possible which is a little bit more than the US (8,133.5 tonnes) and less than the Euro Area (10,788.8 tonnes). China has often mentioned a target of 8,500 tonnes.

“Technically, state metals depositary Gokhran has the exclusive right to buy all gold mined in the country. In practice, it lets commercial banks buy from producers directly, usually in the form of project financing, said Sergey Kashuba, chairman of the Russian Union of Gold Producers in Moscow” according to Bloomberg. China buys its gold reserves through the State Administration of Foreign Exchange (SAFE) and the China Investment Corporation (CIC). Both China and Russia could have more than doubled the quantity of gold stated in official international reserves by now. All it will take would be a simple accounting transfer from those institutions to the Bank of Russia and China.

There are currency wars with from time to time ceasefires and an appearance of collaboration but they don’t last long. Both the ruble and the yuan cannot challenge the US dollar dominance directly but with the support of gold they certainly can. You should not ignore also the role the European Union (euro area) can play as an ally to China and Russia against the dollar. It is not by accident or “tradition” that the European Area holds 10,788.8 tones of gold reserves and if we consider the whole European Union it holds around 11,552.0 tonnes. Several European central bankers have spoken very positively about gold as a reserve currency. The collapse of the Bretton Woods accord was triggered by the Europeans and when you read the note sent by Deputy Assistant Secretary for International Finance and Development (Sidney Weintraub) to the Under Secretary of the Treasury for Monetary Affairs (Paul Volcker) you understand how pro gold Europeans are and how anti-gold the US is. I think India also but in a different way is trying to monetise the enormous private gold which is expected to be around between 18,000 and 30,000 tonnes and is also targeting 9,000 tonnes. The US is becoming more and more isolated in the international monetary system and Russia and China are working hard to isolate it more and gold is evidently their preferred weapon.

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Russia can easily increase its gold buying from its gold mining paying for it in rubles. As you can see in the chart bellow Russia has not bought all its mine production.

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China is patient and has a long term strategy. I think Russia is much more impatient and would like to move much faster against the dollar. Recent social and political events in the US can also accelerate a major international monetary crisis.Donald Trump, now the most probable Republican presidential nominee, has given clear signals of moving away from any international collaboration (environment, trade and military) to more isolationism. Even though he talked positively about gold he also reversed and said it will not work showing no enthusiasm for gold at least in the monetary sense. The most probable Democratic candidate doesn’t have either a great record of international collaboration on the contrary. This can create a chaotic international monetary environment out of which only gold can profit.

An SDR is totally dependent on international consensus which is nowhere in sight right now on the contrary. The Russian economy mostly based on natural resources and the Chinese economy mostly manufacturing seem to complement each other very well creating a mighty alliance against the US. It would be a big mistake for the US to consider the US-EU alliance as a counter balance to China-Russia alliance. The US-EU alliance has been weakened recently by major US strategic errors. Even current US secretary of State John Kerry cautioned his compatriots against a collapse of the North Atlantic alliance. Negative sentiment in Europe vs the US is high and moving closer to Russia. Vladimir Putin has avoided attacking the EU even after the sanctions and continues to court European countries. Both US presidential candidates are not seen well in Europe. I expect EU sanctions to be lifted soon. Popular support for the sanctions is gone and more and more European political and business leaders are talking against the sanctions.

The recent US Treasury’s war has made the use of the dollar internationally very difficult and dangerous not only for individuals but institutions and states. An article by Hugo Salinas Price on difficulties by foreign banks to exchange dollars, the US vs BMP Parisbas case and recently the treat to confiscate Saudi assets have in my view jeopardised any advantage the dollar used to have. Holding dollars outside the US is not as safe and practical as it used to be. Trust in the US dollar is fading fast. The recent social and political unrest in the US has also taken away the advantage the dollar gained during the Greek and now Brexit crisis over the euro. A recent ECB report indicates a decrease in euro foreign exchange reserves but at the same time it indicates no increase in US dollar reserves. Forex reserves are moving instead into gold.

Gold seems to be the beneficiary at the individual, institutional and central bank level. Russia’s strategy of divesting from the dollar in 2007-8 is evidently paying of for Russia. The recent call by Kenneth Rogoff, former chief economist of the IMF and Professor of Economics and Public Policy at Harvard University, for emerging countries to sell US Treasuries and buy gold confirms and reinforces Vladimir Putin’s bet on gold in 2005. With 15% gold in international reserves Russia is far beyond the 10% Mr. Rogoff recommends and I don’t expect Russia to stop here. Gold has become for Russia not only a strategic asset but also a weapon in the new Cold War with the US.

 

Vladimir Putin and Gerhard Schröder 2003 2

Russian President Vladimir Putin and past German Chancellor Gerhard Schröder in the Amber room in Catherine Palace of Tsarskoye Selo near Saint Petersburg

Putin and Tracian Gold Sofia

Russian President Vladimir Putin at the National History Museum in Sofia, Bulgaria admiring fourth century BCE Thracian treasures

Putin Gold Door

Vladimir Putin in front of the doors of the Saint George Hall Grand Kremlin Palace, Moscow, Russia

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Russian rubles and gold bars
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