By Everett Millman – Gainesville Coins ……
New economic sanctions against Russia will target the country’s gold exports. Several of the Group of 7 nations (known as the G7) have banned any Russian gold from entering their countries as of Sunday, June 26.
Who is Banning Russian Gold?
In addition to the United Kingdom, the United States, Canada, and Japan have all agreed to stop importing any amount of Russian gold. The new sanctions were agreed to as part of the G7 summit being held in Bavaria, Germany.
The news comes just weeks after the discovery that roughly three tons of Russian gold were imported into Switzerland last month. The major Swiss gold refiners denied having any involvement in the importation of the gold. This meant the likely culprit was a member of the London Bullion Market Association (LBMA). The LBMA has already removed six major Russian refiners from its “Good Delivery” list since the conflict in Ukraine began in February.
You’ll notice that three of the G7 members are missing from the list above: Germany, Italy, and France. According to German Chancellor Olaf Scholz, discussions are still ongoing about expanding the sanctions to include mainland Europe. Scholz indicated that other member countries of the European Union (EU) would need to be included in the talks.
Why is Russian Gold Being Banned?
The most immediate rationale for the gold sanctions against Russia is to hinder its war effort in Ukraine. In terms of total value, Russia’s gold is the country’s second-most valuable export behind energy products (like oil and natural gas). Gold exports netted the Kremlin over $17.5 billion USD in 2021.
Reducing the available markets for Russian exports of gold will, in theory, constrain an important revenue stream for the government. Given that London is such an important global gold trading hub, this effect will go beyond the four countries imposing the sanctions directly.
Another overarching reason behind the sanctions is to counter an announcement by the Russian finance ministry that it would create a new reserve fund made up of precious metals and precious stones. This fund could be tapped in the event that Russia enters a full war mobilization (as of now, the Ukraine conflict is still only considered a “special military operation” by the Russian government).
If London refuses to accept any gold of Russian origin, it would be more difficult for the Kremlin to get a fair market price for the gold in its military mobilization fund. You can read more about the intent of the gold sanctions by following this link from the U.K. government.
What Impact Will Gold Sanctions Have on Russia?
Ultimately, the next several months will bear out what effect these sanctions will have on Russia, the Russian oligarchy, and Vladimir Putin’s regime. But we can forecast a few likely scenarios.
First, Russia may choose to keep more of its domestic gold production in the form of reserves. In spite of the figures cited above about the high value of Russia’s gold exports, Russia doesn’t ship all of its newly-mined gold out of the country. In point of fact, the Russian Central Bank has grown its sovereign gold reserves consistently over the past decade. So perhaps it simply chooses not to sell as much gold in foreign markets.
Second, and perhaps even more probable, the Kremlin may simply sell more of its gold to China and India. Both countries have a voracious appetite for importing gold, and both China and India have been somewhat more aligned with Russia during the Ukraine conflict. The drawback of this option is that the gold will almost certainly have to be sold at a discount to entice the Chinese and Indian governments to accept it.
Finally, the move will in all likelihood bring the Russian state closer to a default on its foreign debt obligations. While this development would have no real immediate impact—Russia already cannot borrow in international markets right now, after all—it could create difficulties down the road by raising borrowing costs for Russia in the future.
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About the Author
Everett Millman has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.
In addition to blogging, Everett’s work has been featured in Reuters, CNN Business, Bloomberg Radio, TD Ameritrade Network, CoinWeek, and has been referenced by the Washington Post.