Russia Gold gains replace frozen assets

Here’s one reason to own gold.

The appreciation of Russia’s gold reserves has nearly replaced the value of the assets frozen by the European Union when the country invaded Ukraine.

Based on calculations by Bloomberg, the value of Russian gold reserves has surged by $216 billion since February 2022.

The EU froze approximately €210 billion in Russian sovereign assets held within the bloc. That equals about $244 billion.

As Bloomberg put it, the surge in gold reserves “restores most of Russia’s lost financial capacity,” even if it never gets those assets back.

Russia has held its gold reserve steady throughout the war. Today, it stands at the ready as a sort of emergency fund. As Bloomberg noted, “While securities and cash immobilized in Europe cannot be sold or pledged, gold can still be monetized if needed.”

Russia launched a gold buying spree beginning in 2014. Over the next six years, the Bank of Russia increased its reserves by around 40 million ounces (1,244 tonnes).

During this period, the price of gold ranged from $1,100 to $1,500 an ounce.

When the war began, Russia held about half of its reserves in dollar, euro, and pound sterling assets. The other half was in yuan and gold, which remain accessible.

The Russians also made a shrewd move before the invasion of Ukraine, transferring their National Welfare Fund holdings into yuan (60 percent) and gold (40 percent). A RAND Corporation study notes, “This was an indication that Russia was preparing for increased Western economic pressure. During the war, Russia has been using these funds to support the budget.”

Bloomberg Economics analyst Alex Isakov noted that “Accumulating a gold pile was a hedge against geopolitical shocks — it worked.”

“The Bank of Russia’s approach to gold purchases addressed three different goals: (i) diversifying international reserve assets away from the risks of reserve currency issuing countries, (ii) boosting domestic local currency liquidity by exchanging physical gold for rubles, and (iii) providing a source of stable demand for local gold miners. The increase in the value of gold holdings proves the diversification and hedging value of gold reserves.
"Currently, the Russians appear content to sit on their gold cushion. According to Renaissance Capital Head of Research Oleg Kuzmin, the Bank of Russia has enough liquidity in yuan to deal with any potential shocks. Unless there is a major crisis, the Russians are unlikely to sell, given the ‘limited options to reallocate funds amid sanctions.’”

 Russia has another advantage. It ranks as the world’s number two gold producer, mining around 300 tonnes every year. That means the government can access and use gold to support the national economy without tapping into reserves.

According to the Kyiv Independent, Russia has exchanged gold for other currencies, including dollars and euros. The country has also used gold directly for purchases.

“There is little doubt that Russia is already using gold to pay for goods it cannot procure conventionally, or for transactions it wishes to obscure. An open-source investigation by Sayari, for example, revealed that unsanctioned banks were trading gold for cash in Turkey. Russia has also partly paid Iranian drone manufacturer Sahara Thunder in gold for 6,000 Shahed drones and related equipment.” 

Despite their best efforts, the West has found it difficult to stop Russia from using its gold due to its fungible nature (easy to exchange) and the global demand for the precious metal. 

Gold is money, and it is recognized as such everywhere. Even if they don’t want dollars or some other fiat currencies, everybody wants gold.

This is not to justify Russia’s wartime actions. It merely underscores the nature of gold as money and its important role in the global economy. When fiat currencies are cut off or fail, gold will always remain a viable alternative.

This is precisely why so many countries are accumulating gold at a rapid pace.