(Mike Maharrey, Money Metals News Service) Russia’s use of gold during its war with Ukraine reveals one of the reasons why so many countries are stockpiling the yellow metal.
Central banks around the world have bought thousands of tons of gold over the last several years. The pace of buying picked up after the U.S. and its allies froze Russian dollar assets and locked the country out of the SWIFT payment system.
This weaponization of the dollar was a wake-up call for many countries, especially those with strained relations with the U.S. and the West. Worried that the United States and its allies could use the dollar against them, many countries have attempted to diversify their reserves to minimize that possibility. An Indian economist summed up the thinking of many, telling the Times of India that the “reliability” of the U.S. dollar has “diminished” and noting the “noticeable decline” in confidence in U.S. dollar assets.
Gold provides the perfect alternative. It is recognized as money around the world, is accepted virtually everywhere, and comes with no counterparty risk.
Russia’s Gold Reserves
Gold has served as a lifeline for the Russian economy in the wake of aggressive sanctions after it invaded Ukraine.
The Rand Corporation, a global policy think tank, recently completed a study of Russia’s wartime gold use commissioned by the Sanctions Directorate in the UK’s Foreign, Commonwealth and Development Office.
The study found, “Gold has become a strategic resource for the Russian state.”
The Bank of Russia was one of the biggest central bank gold buyers in the years before it invaded Ukraine. At the same time, the central bank divested itself of most of its U.S. Treasury holdings.
The Rand study called Russia “the world’s most important sovereign buyer of gold” over the last decade. Over that time, the country accumulated more than 2,000 tones of gold. Its official reserves rank fifth in the world, and the study notes that, like China, the country holds “an undisclosed – and possibly sizeable – amount of gold and precious stones.”
Russia also produces a significant amount of gold. In 2023, Russia was tied with Australia as the world’s number two gold producer.
Prior to the invasion of Ukraine, the Russians transferred all its National Welfare Fund holdings into yuan (60 percent) and gold (40 percent). The Rand 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.”
How Is Russia Using Its Gold?
Russia has put its significant gold holdings to use during the war. According to the Rand study, “Gold has a bearing on Russia’s revenue generation capacity and its monetary policy; it is central to Russia’s international campaign for de-dollarization; and it plays an important part in Russia’s wartime trade relations, notably as a means of payment.”
“The Russian state is evidently encouraging barter and exchange-in-kind, and otherwise resorting to gold to secure hard currency and foreign goods, but the scale, terms and participants in these activities is unknown.”
According to the Kyiv Independent, Russia is exchanging 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.”
Last month, the United States and Great Britain announced a new round of sanctions targeting the illicit gold trade. The UK government froze the assets of four people it said were involved in gold smuggling and a fifth individual who allegedly bought $300 million in Russian gold.
“Russia uses the illicit gold trade to launder money and evade sanctions, in doing so bolstering Putin’s war efforts,” the British Foreign Office said in a statement.
Despite their best efforts, the West will find 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.
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.
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
