Russia's Gold Card 2 .How the State and Banks play a major role in its development and success

In my last video on Russian Gold I focused on an overview of how the industry has developed from the 1990s to the end of 2021.and on the role of the state, the consolidation of the industry under Polyus and a group of second-tier producers.
Today I want to look in detail at the role of the State and the Banks in the Russian gold sector which is much more involved in it than in most other countries.

Compared to Russia’s role as a major producer of oil and gas, very little comprehensive information about Russia’s other commodities is available in English. What I am tryingt o do is to fill that gap with respect to Russia’s gold industry, which has had an important role economically and politically for well over a decade, and one that is set to increase as the country seeks to respond to Western pressure and sanctions.
What I want to talk about today is to give a sense of the scale of Russia’s gold industry, It is a major producer and will remain so based on its world-class reserves. Gold production has a special significance domestically. The state has been the most important sovereign gold buyer globally for over fifteen years, as part of a strategy to build up its foreign reserves, and has had first refusal on all gold produced. But gold is also crucial in bolstering state revenues, since it is Russia’s most valuable precious metals export.

For now, from the Wests perspective the prospects for the industry look negative, especially without access to the Western equipment and technology it has come to rely on. But Russia has endured crises before and the state needs gold as part of its response to economic pressure and it appears that China and other BRICS allies have stepped in and so called 'parrellel imports'have alieviated a major part of the problem of equipment and technology .
Russia’s most important natural resource-based industries are hydrocarbons, agriculture, mining and metals. Around 40 per cent of the country’s GDP depends on hydrocarbons in any given year, which gives them a special status. It is also one of the most important exporters of wheat and barley, and now sells grain to over 140 countries.

When the demand for minerals slumped from the end of Soviet era, the mining, metals and the extractive industries then focused on increasing exporting as the financial returns were good,they did this with so much success: exports topped $70bn in 2022, compared to $27.9bn in 2000.
In 2022, precious metals were Russia’s most important metals export category, with a value of $27.6bn, or 40 per cent of the metals sector. This compares to $20.9bn, or 30 per cent, for iron and steel. Precious metals have also been Russia’s fastest growing metals export, increasing by 48 per cent between 2015 and 2020, compared to just 2.4 per cent for iron and steel. Moreover, gold has become the most important of all

This two decade period of rapid growth means that Russia is now one of the world’s most important gold producers. In 2023, the world mined around 3,000 tonnes of gold and, while plenty of countries contributed to that total,China, Australia and Russia were the most important producers, together yielding one third A year ago, the rate of Russian production increases led, in fact, to reasonable predictions that Russia would overtake China to become the world leader in 2025.
This is despite that Russia has yet to exploit some of its most significant deposits, such as Sukhoi Log, the largest in the world. If you consider that new large-scale deposits of this kind are now found less frequently, the role played by Russia as a major gold producer will remain of long-term significance to the world market.
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It is interesting to note that Putin has continually supported an ‘economic bloc’ of senior officials, including Anton Siluanov and Elvira Nabiullina, who have delivered relative fiscal stability through a series of economic crises since 2008/9 to the imposition of the first sanctions in 2014. Through the actions of the Central Bank under Nabiullina Russia’s sovereign gold purchases has been worldleading, they represent only part of a wider policy of reserve accumulation that began in 2006 when the Russian state settled its external debts, which had been a major priority for Putin’s economic team, and became a net saver. In that year, Russia also achieved currency convertibility and, as capital inflows increased, the government began to accumulate foreign reserves, partly as a way to cool inflation

Later, foreign currency purchases were made according to the Central Bank's (CBR)so-called ‘fiscal rule’, created to protect the economy from oil price volatility. prior to the situation in the Ukraine, Russia’s gold represented a fifth of its overall reserves, in a diverse asset portfolio.
As Nabiullina stated to the State Duma on the launch of the Central Banks's s Annual Report last year, “it is crucial for our economy to have diversified reserves.”
Since the imposition of Western sanctions in 2014, Russia has more explicitly framed its reserve accumulation as a calibrated hedge against ‘external threats’ and ‘sanctions risks’. In practice this has meant de-dollarisation. According to Nabiullina, the CBR reduced the portion of US dollars fourfold between 2013 and 2021, raised its share of gold to over 20 per cent from 8 per cent, and its share of yuan from zero to 37 per cent. However, its reserves still remained diverse overall, and its hedging against the dollar in favour of gold and the yuan was meant to prepare the country for the wide-ranging isolation from Western economies it faces today the CBR is now actively increasing its gold and yuan holdings even more in the face of Western freezing of its foreign reserves.
Russia’s determination to build its gold reserves has shaped the development and structure of the domestic gold market, and its interaction with overseas markets. Until 2020, the state had first refusal on all gold produced in the country, and bought gold from domestic producers (albeit at world prices so as not to deter investment).

Even if the state declined to buy an offer of gold, producers were still obliged to provide purchase agreements to both the Ministry of Economy and Ministry of Economic Development which, theoretically, allowed the state to see where all Russian gold production was sold. Furthermore, Russian mining law includes the concept of a ‘deposit of federal significance’ which, in the case of gold, refers to a vein (lode) reserve of 50 tonnes. This limits the availability of such deposits to foreign owners and producers.
The state’s influence over the industry was also underlined by the fact that, until 2020,only a limited number
of preferred banks were licenced to trade gold, acting as middlemen between the producers, state and thirdparty buyers. This offered the Gold Mining companies advantages, including financial support, a steady source of demand and the convenience of leaving the transportation and sale of the gold to the banks. It has, however, limited their’ independence and the prevented them from developing their own customer base.
In the 2000s the licences were only available to a small number of banks, although this later increased as more banks came under state control. In the course of the consolidation of state control over the banking sector in the 2010s, some state banks gained special responsibilities for supporting the development of specific sectors. In the gold sector, the largest state banks apparently share this responsibility: Gazprombank, Sberbank, VTB and Otkritie appear tonhave a particularly significant presence,. (Anecdotally,however, VTB appears to have an outsized presence
behind the changes across the industry over the past few years which I will cover in another video on the mergers and acquisitions that have taken place in the Russian gold mining sector.)
In March 2020 the CBR began a change of course by suspending bullion purchases on the domestic market. This was probably due to a spike in the gold price when the coronavirus pandemic emerged (although the CBR did not link its decision to that event). A month later, the government began to grant export licences to miners, enabling them to arrange their own sales, rather than relying on the banks as intermediaries. In the months that followed, the value of Russia’s exports spiked. Whereas in 2019 the value of Russia’s gold exports was $6.4bn, in 2020 this nearly tripled to $18.6bn.
Moreover, $16.9bn of these exports were to the United Kingdom, underlining the significance of that market for Russian producers. Switzerland, Germany, Turkey, Kazakhstan and the UAE have also imported significant amounts by both value and weight. As a consequenceof this policy shift, it was no surprise that Russia’s official gold reserves shrank in 2021 for the first time in fifteen years. Obviously this situation changed after the ban by the LBMA on Russia on Russian gold and the suspension of their membership)
It is notable that when the Central Bank stepped back from its role as a buyer of Russian gold, the industry rapidly oriented itself to Western markets, as opposed to China, Russia’s ally. This mades some sense at the time: although China is a major gold producer, it is not, in contrast to Western markets like the UK and Switzerland, a centre for gold storage and trading. Russia and China did sign a ‘Memorandum of understanding in the Field of Gold Trading’ in 2017, designed to ‘intensify interaction in the financial sector, which in the long term will enable Russian players in the precious metals market to diversify their operations’. This meant that Russian traders were encouraged to trade with China if the CBR did not want their gold. However, in practice, Russian producers oriented themselves to Western markets as soon as they were free to do so. A decision they have now come to regret

This point was significant when considering how RussiaChina gold relations have now developed in light of the situation in Ukraine. China’s own gold stockpile represents just 3.6 per cent of its total reserves, by far the lowest proportion among the world’s large economies. Unlike Russia, which has bought gold in proportion to other assets, China has prioritised foreign currency purchases, especially dollars and euros, in an effort to manage its own currency and support its exporters. As such, China was not then a first-choice destination for Russian gold exports reserve gold, especially in exchange for foreign currency, which they prized more. Since Russia’s state banks are subject to sanctions and its foreign reserves have been frozen, it is almost certain that Russia will seek to increase its gold reserves once more. The Central Bank indicated as much when it resumed domestic gold purchases in late February.
So that was the role of the Russian State and the Banks in the Russian Gold Mining Sector. In my next video in the series I will look at the regions,mining companies and mines across Russia.