Why is Russia building up a record level of gold reserves?

By Rhod Mackenzie

Russia's gold reserves have reached a new historical record level and this is despite the huge number of sanctions imposed the the US and its allies. The Bank of Russia is buying more precious metal, plus the rising price of gold is contributing to this achievement.
This strategy was implemented to increase international reserves, which have grown from $592.4 billion as of December 1 to $598.6 billion as of January 1. This was the highest level of reserves since March 2022.

Russia's gold reserves also reached a new record at the end of last year, growing to $155.9 billion in monetary value and 2,350 tons in physical terms, an increase of approximately 35 tons, according to data from the Central Bank. This breaks the previous record set in last November.

It is worth noting that Russia did not always purchase physical gold to replenish its reserves. Between 2000 and 2009, gold reserves remained stagnant at 390-400 tons. However, their dollar value increased by over 200% due to the rise in the gold price on the global commodity markets,” according to Nikolai Dudchenko, an analyst at Finam Financial Group.

However, since 2008, Russia has been actively accumulating physical gold reserves. According to Dudchenko, inventory growth reached a plateau in July 2022. Despite this, the value of reserves has significantly increased by almost 15% from July 2022 to January 2024 in dollar terms.

The purchase of gold has increased the share of the precious metal in both gold and foreign exchange reserves.

Since 2014, the share of gold in Russia's gold and foreign exchange reserves has more than doubled, increasing from 12% to 26% by the end of 2023. In 2021, 18% of reserves were stored in gold. The main increase in gold reserves occurred in 2022-2023.

This is understandable as after February 2022, dollars and euros became 'toxic', and some of the state reserves in unfriendly currencies were frozen. In these conditions, gold is an obvious choice for regulators as it is an optimal protective asset in the context of foreign trade restrictions and geopolitical instability,” according to Alexander Bakhtin, investment strategist at BCS World of Investments.

It is interesting to note that at the end of 2022, the Ministry of Finance changed the rule on the maximum share of gold in reserves. Previously, according to IMF recommendations, gold in Russia's reserves should not exceed 20%. However, the financial authorities of our country no longer consider Western funds as authoritative. The Ministry of Finance has increased the maximum share of gold in reserves to 40%.

The Bank of Russia does not prioritize obtaining excess returns compared to reserves in foreign currency when accumulating gold reserves.
Gold reserves are a strategic asset that can be used in the event of a force majeure. The process of the dismantling the global economic system is currently underway, so the likelihood of such an event is not zero.

Therefore, there is a high demand for gold from global central banks,” notes Dudchenko.

Russia is not the only country that has realized the importance of having sufficient gold reserves. “Several countries, such as China and India, have started to increase their gold reserves during the initial rounds of quantitative easing policies implemented by the US Federal Reserve and the European Central Bank. Gold is traditionally used as a substitute for currency, and the unsecured issuance of reserve currencies has led to an increase in demand for precious metals,” explains Vladimir Evstifeev, the head of Zenit Bank's analytical department. In the current geopolitical climate, this strategy appears even more appropriate.
According to Evstifeev, 'Gold will remain a valuable asset even in the event of a new global crisis or problems in any of the world's largest economies.'

In the medium term, an important issue that needs to be addressed is how to integrate your national currency into the new emerging framework. The Bretton Woods system, which revolved around the US dollar, emerged in the 1940s due to the country's substantial gold reserves in the post-war era. Although Bretton Woods is no longer in effect, the dominance of the US dollar persists. Currently, the system is showing signs of significant strain, if not yet facing a complete collapse. Around the world regulators have long understood that central banks intend to increase their gold reserves, with up to 24% they were planning to do so in 2023, according to a report by the World Gold Council. While the final data for last year is not yet available, it is expected that demand for physical gold will continue to grow," says Nikolai Dudchenko.

Analysts predict that Russia will continue to accumulate gold in reserves, especially since the limit of 40% of gold and foreign currency reserves has not yet been reached.

It is expected that this discovery will provide further opportunities for replenishing reserves. In 2024, a new gold deposit, Sovinoye, was discovered in Chukotka, which is the largest since 1991.

The confirmed reserves of the deposit amount to 100 tons of gold. Nikolai Dudchenko believes that some of these reserves may be used to replenish gold reserves.

The monetary value of the gold reserves will also increase. Dudchenko predicts that gold could reach $2,100 per ounce this year, resulting in an increase in the value of reserves in dollar terms.

Bakhtin suggests that the price of gold may move towards $2,200 per troy ounce or higher. He believes that in 2024, gold will continue to serve as a hedge against currency and geopolitical risks, and may even provide an opportunity for further gains. Bakhtin also notes that the precious metal could receive fundamental support from the Fed's rate cut, and that acute geopolitical events may also contribute to a rise in the price of gold.
It is important to note that despite the impact of strong sanctions on Russian hydrocarbons, Russia as a whole is able to replenish the country's reserves. This is due to the financial authorities' prudent management of budget expenditures and the favourable price environment for key export items such as oil, gas, and metals. Bakhtin confirms that 'reserves can be increased thanks to the relatively favourable price environment for the main export items.'

Thirdly, Russia shocked the West by quickly overcoming the effect of the sanctions. According to Bakhtin, the collective West also failed to significantly limit Russia's export income. However, Russia promptly redirected its export flows and offered Asian buyers goods at an attractive discount. As for gold, its main increase in reserves was due to its positive revaluation. In 2023, the yellow metal rose in price by 13%, as the source explains.