Russian gold flows to the East

By Rhod Mackenzie

The movement of Russian gold has suddenly changed direction. Instead of going to London, Russian precious metals are flowing to Asian markets where demand remains consistently high. What are reasons for this redistribution and change of direction, who currently requires gold and why, and how will demand change this year?.

Russia is turning to the East.

The global gold market is a dynamic and rapidly changing industry. The participants in the market sell precious metals in the West and buy them in the East, depending on their goals and preferences. Over the past two years, Russian gold flows that previously went to London have shifted to the East following the LBMA announcement of its ban on Russian gold in the summer of 2022.

Statistics confirm this new geography of supplies changes. The import of Russian gold to Hong Kong in 2023 increased by almost six times, reaching $5.5 billion. Its share of the local market has almost quadrupled.
Until 2022, London was the primary hub for trading Russian gold, with over 80% of all exports going there. However, after the conflict in Ukraine, the West imposed sanctions, and supplies to the UK ceased. The United Arab Emirates took its place as the main importer, with Dubai importing 96.4 tons of Russian gold in 2022, while Hong Kong only imported 16 tons.

Since the start of last year, the UAE has reduced its transactions with Russian metal due to Western pressure, while Hong Kong has increased them. According to Maxim Kuznetsov, co-chairman of the Association for Promoting the Turn to the East (ASPV), up to 69 tons passed through Hong Kong from January to September 2023.

This trend is also observed in London and other locations.
Over the year, the region of China, which holds a special position, increased its gold purchases by 1.6 times, mainly from Switzerland and the Emirates. These volumes are not only for domestic consumption, as gold from Hong Kong is distributed worldwide. While there is no exact information on the destinations of supplies from customs, it is evident that the primary importers are India, Turkey, the UAE, and mainland China.

Kuznetsov emphasises that the final aspect is the most crucial. Hong Kong serves primarily as a trading platform that facilitates financial connections between mainland China and the rest of the world. The People's Bank of China is one of the world's largest purchasers of gold, including Russian gold.
Meanwhile, mainland China does not directly account for a significant portion of Russia's supplies. However, Chinese residents have been purchasing precious metals more actively than any other population in the world for at least the past decade. In the last year alone, they bought 959.2 tons, which is ten times more than what Russians purchased. It is unclear what percentage of this volume comes from Russian supplies.

India is a powerful market for gold jewelry due to its traditional demand. Other Asian countries are also active in the gold market, with some forming reserves, meeting investor needs, and fulfilling consumer demand for gold jewelry.

It is possible that a significant portion of gold from Hong Kong is exported to the West. Companies that previously worked with Russian goods before the sanctions can diversify their areas of work at minimal cost.

Central banks are the main drivers of demand for gold as they need it to increase their reserves due to growing global uncertainty. Regulators are trying to avoid the risks of national currencies, and it is unprofitable to get involved with the dollar and the euro as they are subject to fluctuations, economic shocks, and political bias. The primary issue is the unpredictability of these movements, as well as the monetary policy shifts of the Federal Reserve and the ECB.

As a result, purchasing gold is becoming increasingly important for the financial security of nations. Central banks in countries such as Turkey, China, Singapore, Poland, and Russia have been accumulating gold at an unprecedented pace in the last 50 years. Since 2010, they have acquired nearly 8,000 tons of gold, with approximately a quarter of that being purchased in the last two years. Experts estimate that financial regulators currently hold approximately 36.7 thousand tons of global gold reserves.
In 2023, demand for gold reached an all-time high of 4,899 tons, according to the World Gold Council. This was a three percent increase from the previous year, driven by over-the-counter and stock flows.

Prices also hit record highs in 2022, with the price of a troy ounce reaching $2,135.4 in December and remaining above the psychological mark of $2,000 throughout this year so far. “Both the Central Banks and private traders acquired gold,” comments Vitaly Mankevich, the Chairman of the Russian-Asian Union of Industrialists and Entrepreneurs (RAUIE).

The question arises: why do they all need so much of this precious metal? Firstly, it is a safe haven asset. In an era of geopolitical cataclysms and global redistribution of the world economy, gold is the most reliable. The cryptocurrency is not subject to sanctions, as has been widely observed, and its value is steadily increasing despite negative news and expectations.

There are numerous reasons for this trend. For instance, the Federal Reserve has been too aggressive in raising its key interest rate and has no plans to reduce it in the near future. This is the primary cause of the current excitement, according to Mankiewicz. Even Washington's partners were not always pleased with the increase, considering the dollar's significance in global trade and the economy.

Gold serves another purpose, with up to half of the demand being for jewelry. The metal's chemical and physical properties make it essential in technological industries, particularly in electronics. In other words, a broad range of applications supports interest in gold in any phase of the economic cycle.

Finally, there is much speculation about the return of the gold standard. However, experts are skeptical about this possibility.
According to Alexander Abramov, the head of the laboratory for analysis of institutions and financial markets at the Institute of Applied Economic Research RANEPA, the scenario presented is unrealistic and unlikely to occur. However, there is a remote possibility of cryptocurrencies replacing gold, but this process will be lengthy due to the lower level of trust in cryptocurrencies compared to gold.

Mankiewicz agrees that the gold standard, which became obsolete in the last century, is unlikely to be revived. Instead, regulators are more likely to diversify and rebalance assets, adjusting the shares of currencies and gold to meet current challenges.

This theory is supported by the decline in demand for gold that began at the end of last year. In the fourth quarter, it decreased by 12%, as reported by the World Gold Council. The forecast for 2024 predicts a 200-ton reduction in central bank purchases. This is due to the fact that the demand for protective assets has been largely met, and current demand and production will remain high. Therefore, gold, whether Russian or otherwise, will continue to find buyers in both the East and the West.