Russia benefits from higher gold prices

By Rhod mackenzie

I am sure that most of you have noticed that the price of gold has been reaching new heights in recent months, with many central banks increasing their gold reserves plus investors buying gold for their portfolios as a hedge against inflation and other types of risks. Now some of you might know that Russia is vying with China in who is the current largest producer of the precious metal with only a around 40 tons seperating them and its expected that by the end of 2024 Russia could end the year as the number one producer.

Now recently Russian government decide on temporarily raising the mineral extraction tax for gold miners. However, in return they have abolished the exchange rate export duty on gold.
In October last year, the Russian government introduced export duties on a range of of goods, including gold, whose prices are tied to the dollar exchange rate to address concerns about filling the budget.
However, in response to a significant decline in gold exports, the government, through an executive order dated April 25, revoked the exchange rate duty on the precious metal. In return, President Vladimir Putin signed a law amending the Tax Code, which increases the mineral extraction tax (MET) for gold miners to 78,000 rubles per kilogram of gold from 1 June to 31 December 2024. ( that is around $ 800)
According to Deputy Finance Minister Alexei Sazanov, a fix 'patch' has been introduced to guarantee that 15 billion rubles ( around $180 million) will be collected, and not tied to the volume of exports.

According Alexey Kalachev, an analyst at FG Finam, the situation regarding the duty and the mineral extraction tax is pretty straightforward. "The budget requires additional revenue, and all exporters were subject to an exchange rate duty.
However, gold miners, having found themselves subject to sanctions, were unable to export their products to their traditional markets like the London Bullion Market Association)
Nevertheless, they sell gold domestically at prices close to those applicable to exports, taking into account world prices and the current ruble exchange rate. To address this imbalance, the Ministry of Finance is implementing a 78,000-ruble-per-kilogram surcharge on the mineral extraction tax for gold mining.
If this additional charge is intended to offset the loss of revenue from the export duty, it may be more efficient to eliminate the latter. Otherwise, the industry will be subject to double taxation. It seems that this strategy was negotiated with the industry and incorporated into the government's agreements with gold miners.

The export duty was ineffective and contributed to a reduction in export deliveries. Producers began to sell more domestically, which was confirmed by Dmitry Puchkarev, an analyst at BCS World of Investments. "Replacing export duties with an increased mineral extraction tax will allow the budget to collect the planned funds," he believes.

The initial objective of the exchange rate export duties was to replenish the Russian budget by a specified amount, according to Vasily Danilov, leading analyst at Veles Capital. Consequently, when the duties proved ineffective, they were replaced by a more guaranteed mineral extraction tax. "The initial objective of the authorities was to collect a fixed amount of 15 billion rubles from the gold mining industry," states Danilov.
When it became evident that the desired outcome could not be achieved through exchange rate export duties, the decision was taken to introduce an additional mineral extraction tax. However, given that the 15 billion rubles in question represent a one-off fee, the mineral extraction tax, as well as the export duties, were introduced as a temporary measure.
The additional mineral extraction tax will be in effect for seven months, from 1 June to 31 December 2024. During this period, approximately 193 tons of gold will be mined in Russia, which, with a mineral extraction tax rate of 78 million rubles per ton, will provide the desired 15 billion rubles.
From a financial standpoint, the situation will remain unchanged, as gold miners will transfer these 15 billion rubles to the budget regardless. However, the removal of export restrictions is a positive development for the industry, according to Danilov.

The additional fee of 78,000 per kilogram of mined gold is not a significant impediment to gold mining, given the elevated prices for this metal and the continued growth trajectory plus Russian gold miners have some of the lowest costs of production in the world.

On 20 May, gold quotes reached a historical record high of almost $2,450 per ounce, although the price has droped to $2,421 today.
The Trading Economics portal attributes the rise in the price of precious metals to the expectation of a reduction in interest rates by the US Federal Reserve System (FRS).
It is widely believed that the price of gold is directly influenced by the actions of the FRS, with a reduction in interest rates making gold a more attractive investment.

The introduction of an additional coefficient will inevitably impact the profitability of gold mining. However, it is important to note that this profitability is currently at a relatively high level, making the tax increase less critical for the industry.
In 2023, Polyus, the leading Russian gold mining company, reported an adjusted EBITDA margin of 72% (up from 61% the previous year) and a net profit margin of 44% (up from 36% the previous year).
Another company, Seligdar, which mines not only gold but also tin, reported a loss of 11.5 billion rubles in 2023. This was due to the non-cash revaluation of liabilities denominated in gold and US dollars, in the context of rising market prices for precious metals and the exchange rate.

Kalachev recalled that Seligdar is now actively involved in placing bonds denominated in gold. The growth of the gold market has an adverse effect on obligations denominated in gold. If we exclude the impact of exchange rates, the company would have generated a profit of 2.8 billion rubles and a net profitability of 5%. Concurrently, the company's EBITDA profitability remained robust at 38%, though this was partially offset by the resale of third-party gold, which contributed to revenue and EBITDA growth but had a lower profitability. These are excellent industry indicators, according to the analyst.

"One might even characterize the proposed rate as relatively low," Kalachev adds. The current gold rate set by the Bank of Russia is 7,002.57 rubles per gram or 7 million rubles per kilogram. Therefore, the mineral extraction tax of 78,000 rubles per kilogram represents only approximately 1.1% of the current gold sales price.

Puchkarev from BCS World of Investments has calculated that the growth of the mineral extraction tax is negative for gold miners, but not critical. He also expects the effect on the profits of large producers to be around 2%.

The outlook for gold mining is difficult to ascertain with any degree of precision, given the lack of access to official data on production and export.
Analysts are therefore forced to rely on estimates that vary significantly across different sources. I know this personally as I work with Metals Focus the world's leading authority on precious metals and provide them with the data for their Annual Gold Report.

"As demonstrated by historical data, the production of gold in Russia has exhibited a weak correlation with its price in recent years. Therefore, we do not anticipate significant deviations from the volumes produced in 2023, which were in the range of 330 to 340 tons of pure metal, excluding gold in concentrate," states Danilov from Veles Capital.
"Concurrently, domestic consumption and exportation have each accounted for approximately half of this total volume." It is widely documented that the primary destinations for Russian gold exports after the introductions of sanctions by the G7 are now the UAE, Switzerland, Hong Kong, Turkey and China.
. In the Russia domestic market, over half of the demand was from individuals, largely due to the abolition of 20% VAT on the purchase of precious metals and this lead to a surge in the purchase of gold in bullion or coins in 2023 and reached over 90 tons. This was due to Russians hoarding gold as opposed to dollars,euros or other foreign currencies and that trend has continued in 2024..
Rusian gold production in 2024 is expected to between 344 and 347 tons, including approximately 312-313 tons of primary and associated metal.
So the Russian gold sector is in good shape and the Russian budget also benfits