After last month’s hiatus when the Russian central bank added no gold into its reserves, it came back again with a vengeance in January 2017. According to figures released yesterday, the country upped its gold reserves last month by a massive 1 million ounces (31.1 tonnes), bringing its total reserve holding to around 1,645 tonnes. This keeps Russia in sixth place among global national gold holders, at least as far as reserve figures as submitted to the IMF tell us, still nearly 200 tonnes behind China in fifth place, but closing the gap.
Last year, Russia added a total of just short of 200 tonnes of gold into its reserves while China added around 80 tonnes (with nothing at all added in November and December) with the total at end-2016 standing at 1,842.6 tonnes according to the IMF-reported figure. At current rates of purchase by both countries, Russian gold reserves could surpass those of China by early to mid 2018.
We also learnt some other interesting data about the Russian economy in that the country, despite a U.S.-imposed economic war, supposedly to remain in place until Crimea is returned to Ukraine (which we don’t see happening), is probably in a better technical financial state than the U.S.. Unlike the USA which has trillions of dollars of debt, Russia has one of the lowest debt to GDP ratios in Europe and is bringing it down further. Yes, U.S. and European economic sanctions are damaging, but they are also mind-focusing and Russia is taking steps to rather more than just survive under the current sanctions regime. Buying gold and divesting itself of its holdings in U.S. Treasuries is part of its master plan for so doing.
Indeed the U.S. sanctions could be self-defeating in the long term — particularly with Russia and China aligned in moves to circumvent the petrodollar. Oil and gas are hugely important to the Russian economy in terms of exports, so the recent deal with China, which is heavily reliant on oil and gas imports, to trade oil and gas in rubles and yuan, thus avoiding the necessity for China to ‘buy dollars’ to finance the purchases, could be seen as hugely significant in the long term position of the US dollar in global trade.
While the U.S. establishment — or ‘deep state’ which is the current buzz phrase — seems strongly opposed to any détente with Russia, that may prove to be a shortsighted policy in the long term. At the moment it seems as if President Trump is bowing to these establishment views, despite strongly suggesting during his campaigning that his policies might involve maintaining a better relationship with President Putin for whom he has expressed admiration. But then Trump is unpredictable and ‘shoots from the hip’ so he could swing either way in time. In our view some kind of rapprochement between the U.S. and Russia could be beneficial for world peace long term and the fight against militant Islam short term, but we don’t really see it happening. Distrust of Russia, dating back decades, is too strongly ingrained in the U.S. psyche for the cycle of distrust to be broken.
So it looks as though we will see Russian continuing to buy gold for its reserves. It already claims to have around the best ‘gold-backed’ currency globally and sees the ruble as hugely undervalued with a domestic purchasing power several times that of the US dollar — with the currency held down largely due to sanctions. The nation is the second or third largest global producer of gold (it vies with Australia for these positions) so can source its gold reserve needs domestically, producing around 270 tonnes a year of the yellow metal. It looks as though a significant part of this is purchased by the central bank.