Possible Side-Effects of Plunging Commodity Prices – A Look at Russia

One of our readers wrote to us with a question on a topic that will surely be of interest to a wider audience. Here is what he asked:


“As FX reserves dwindle, surely there is some potential that Russia may be forced seller of Gold? I understand your views re gold market, but would be most interested to hear your thoughts on the possible impact? Are there other options? Talk of gold backed RUB, default on USD debts, etc.


It is clear that a number of major oil producers are in severe trouble. However, Russia’s central bank has actually increased its gold reserves in recent months. It is now the world’s 5th largest official holder of gold, after increasing its stock pile to 1,150 tons in September (the most recent data available).

To this it must be kept in mind that Russia itself is a major producer of gold, the third largest in the world in fact, mining about 250 tons per year. The central bank is involved in the marketing of this gold, acting as an intermediary for producers. In spite of increasing its gold reserves quite a bit, they still only represent about 10% of Russia’s total reserves. Here is by the way a chart of gold in ruble terms:


gold in rublesIn ruble terms, gold is at a new all time high – click to enlarge.


So why has Russia’s central bank actually accelerated its gold buying (i.e., has retained more of the gold it markets for local producers than normally) in the face of increasing pressure on its foreign exchange reserves? As one commentator remarked:


From the perspective of a sovereign which is concerned about aspects of geopolitical risk, it makes sense that they would have a bias toward physical gold,” Brian Lucey, a finance professor at Trinity College Dublin and formerly an economist for the Central Bank of Ireland, said today by phone. With lower gold prices, Russia may have viewed it “as good a time as any to pick it up,” he said.


Russian officials think about this exactly as Alan Greenspan does. When Greenspan was once asked why the US treasury shouldn’t sell its remaining gold reserves, he pointed out that in extremis, such as in times of war, gold is absolutely certain to remain a viable means of payment that will be accepted by everybody. He cited the experience of Germany during WW2 to buttress this claim empirically.

We would also note that while Russian reserves have been under pressure due to capital flight and misguided attempts to defend the ruble’s exchange rate with forex market interventions, its current account has been consistently positive since the mid 1990s:


russia-current-accountRussia’s current account remains in surplus – click to enlarge.


The current account surplus may come under pressure as well in light of plunging oil prices, but Russia has used the years of plenty to build up a “rainy day” fund amounting to about $470 billion in addition to its central bank reserves. The current situation is presumably precisely what Russia’s government had in mind when it did that.

Note as an aside that the Russian government is in a very strong fiscal position – the kind most developed nations can only dream of. This is now also bound to deteriorate somewhat (although not as much as one might expect, as the ruble price of oil has barely declined), but Russia certainly still has a lot of fiscal flexibility:


russia-government-debt-to-gdpRussia’s public debt to GDP ratio. The government is nearly debt free. As an aside, there is a flat personal income tax rate of just 13% in Russia – click to enlarge.


WTICWTIC crude oil, monthly – as can be seen, prices are now back to where they already were in 2005-2006, pressuring all major oil producers – click to enlarge.


Readers may also recall that Mr. Putin has recently been persuaded by the free-market oriented faction of prime minister Medvedev that he should finally do something about official corruption, as a means to counter the effects of economic sanctions (see: “Russia Moves Toward Increasing Economic Freedom” for details). Putin agreed, as he evidently understands that Russia’s economy needs every bit of help it can get. We recently had official confirmation of the new approach in Putin’s annual address to the Duma. Here are what we believe are the most important points:


I propose a full amnesty for capital returning to Russia. I stress, full amnesty. Of course, it is essential to explain to the people who will make these decisions what full amnesty means. It means that if a person legalises his holdings and property in Russia, he will receive firm legal guarantees that he will not be summoned to various agencies, including law enforcement agencies, that they will not “put the squeeze” on him, that he will not be asked about the sources of his capital and methods of its acquisition, that he will not be prosecuted or face administrative liability, and that he will not be questioned by the tax service or law enforcement agencies.


It is essential to lift restrictions on business as much as possible, free it from intrusive supervision and control. I said intrusive supervision and control. I will consider this in more detail later. I propose the following measures in this regard.

Every inspection should become public. Next year, a special register will be launched, with information on what agency has initiated an inspection, for what purpose, and what results it has produced. This will make it possible to stop unwarranted and, worse still, ‘paid to order’ visits from oversight agencies. This problem is extremely relevant not only for business, but also for the public sector, municipal institutions and social NGOs.

Finally, it’s crucial to abandon the basic principle of total, endless control. The situation should be monitored where there are real risks or signs of transgression. You see, even when we have already done something with regard to restrictions, and these restrictions seem to be working well, there are so many inspection agencies that if every one of them comes at least once, then that’s it, the company would just fold. In 2015, the Government should make all the necessary decisions to switch to this system, a system of restrictions with regard to reviews and inspections.

Concerning small business, I propose establishing ‘holidays from inspections’. If a company has acquired a good reputation and if there have not been any serious charges against it for three years, then for the next three years it should be exempted from routine inspections by government or municipal supervisory agencies. Of course, this does not apply to emergencies, when there is a danger to people’s health and life.

Business people talk about the need for stable legislation and predictable rules, including taxes. I completely agree with this. I propose to freeze the existing tax parameters as they are for the next four years, not revisit the matter again, not change them.

Meanwhile, it is important to implement the decisions that have already been made to ease the tax burden. First of all, for those who are just setting up their operations. As we have agreed, two-year tax holidays will be provided to small businesses registering for the first time. Production facilities that are starting from scratch will be entitled to the same exemptions.


(emphasis added)

It should be obvious that if this program of liberalization is successfully implemented, it will do a lot to halt capital flight – more than the capital repatriation amnesty would do by itself. However, the two proposals go hand in hand: if owners of “flight capital” can be persuaded that official corruption is going to be successfully tackled and state interference with private enterprise will be significantly reduced, they have a big incentive to bring some of their funds back.

We would conclude from all this that the danger that Russia will become a forced seller of official gold reserves is fairly low for the time being.


Venezuela under Great Pressure

Socialist Venezuela is under far greater pressure to sell or swap some of its official gold holdings. We recently showed this chart of the black market Bolivar rate, which is a reflection of the dire straits the government finds itself in:


Bolivar black market rateThe bolivar has collapsed in the black market in Cucuta (a border town with a flourishing foreign exchange trade) – click to enlarge.


Under both Nicolas Maduro and his predecessor Huge Chavez, plenty of welfare spending and other government handouts have been funded with the country’s oil income. This policy was combined with massive inflation of the local currency, fixed exchange rates and price controls. As a result there are now shortages of goods as well as a growing shortage of foreign exchange reserves. The government is increasingly unable to pay for imports and foreign debt coming due concurrently. Its social spending has become unaffordable too. So there is a good chance that Venezuela will eventually be forced to sell some of its official gold holdings.

However, as we always point out, such news can at most have a short term psychological impact on the gold market. The gold market is so big that Venezuela’s potential sales won’t even be noticed.

Besides, it should be obvious by now that central bank gold buying in recent years has not helped the gold price one bit – QED.



A few nations may indeed be forced to sell some of their official gold reserves as a result of plunging oil prices. It seems however not likely at this juncture that Russia will be one of them. Moreover, the impact on the gold market should be quite limited. We will discuss the other parts of the reader question above next week (i.e., the possibility of introducing a gold-backed ruble and the possibility of defaults on USD denominated debt).


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8 Responses to “Will There Be Forced Official Sellers of Gold?”

  • ManAboutDallas:

    Most simply don’t comprehend the strategic thinking behind the rapidly-coalescing China/Russia alliance. I don’t know how much chess Mr. Putin plays, but I think it’s safe to say it’s quite a bit more than the Sock Puppet now occupying the White House.

    China has Russia’s back and is more than happy to do so, because Russia has not one, but two things China needs : hydrocarbons and lots of them in various forms; and a consumer market for the output of Chinese factories.

    The current price of oil is going to last just long enough for the drowning-in-junk-bonds shale operators to topple, one-by-one, like so many dominoes. This is on the verge of starting even as I write these words; it will commence no later than early January, perhaps sooner. Once they’re relegated to the Ashbin Of History and the U.S. shale industry decimated, the price of oil will begin an upward ascent, once again.

    Learn Mandarin; learn Russian. Thank me later.

  • Carmel:

    I know what to “TALKING HEADS” have been saying that China will back it’s currency with gold But, that is a big lie / myth. Why should they back their currency with gold? All they have to do is look at our history and see why Nixon closed our gold window. A worthless country like France came with a fist full of U.S. dollars and wanted gold. The problem with that is worthless country, France problably got their U.S. dollars in some sort a aid. ( Now days the U.S. goverment give out aid, U.S.dollars, like candy.)( China doing this with African countrys. ) Get it through your heads, Russia and China aren’t planning to back their currency back gold. In every opportuntity you could challenge these talking head that are saying this.

  • bull_dozer:

    it was published about 4 months ago…

    Will The US Succeed in Breaking Russia to Maintain Dollar Hegemony?…

    In Why they are making an enemy of Russia? we looked at two of the key reasons why the US is making an enemy of Russia, namely the promotion of conflict by the powerful Defense industry lobby in order to keep its order books full, and the value of conjuring up an external enemy as a hate figure for the masses, in order to take the heat off the government. In this article we are going to look at what is arguably an even bigger reason, that was largely omitted in the earlier article, which is that Russia, in alliance with China, is threatening to bring an end to the dollar as the global reserve currency, which would mean the end of the American empire.

    We are witness to the greatest struggle of our age – the battle to maintain global dollar hegemony, and with it US economic, military and political dominance of the entire planet – and this struggle is now coming to a head.

    Expansion of Monetary Base

    Notwithstanding its undeniably great accomplishments of the past hundred years, the relationship of the United States to the rest of the world is parasitic. This is because it creates money and debt instruments out of nothing, requiring virtually no effort, which it then swaps for goods and services with other countries. Because the US dollar is the global reserve currency, it is able to rack up astronomic deficits that would be untenable for any other country. US debts are now at such levels that if the US dollar loses its reserve currency status, the United States economy will implode and it will quickly be reduced to the status of a banana republic – hence the sense of urgency in the face of growing threats.

    Any state that moves to opt out of using the dollar as a medium of exchange is dealt with, forcibly if deemed necessary. The tactics are threefold – economic blockade (sanctions), the funding of an internal revolution, perhaps assisted by US special forces, and an outright military invasion, or perhaps a combination of the three. This is what happened in Iraq and Libya, both of which planned to trade their oil in currencies other than the dollar. Perhaps the greatest irony of all is that the world’s savings, via the Treasury market, are used to fund the vast US military machine with its hundreds of bases spread across the world which forcibly makes sure they stay yoked to this system.


    Enter Russia (and China), the biggest threat yet to dollar dominance. These large powerful neighbors have entered into various major currency and trade agreements in the recent past that do not involve the dollar, and therefore pose a serious threat to the dollar’s reserve currency status that left unchallenged would bring it to an end. Once you understand that you understand the reason for the recent propaganda blitz against Russia. In addition China has been busy mopping up the global gold supply for several years, as early preparation for the eventual backing of its currency by gold, which will put the final nail in the US’ coffin, as the unbacked dollar will collapse completely when this happens.



    • No6:


      The attack on Russia actually started with Cyprus after the Syrian embarrassment and the Snowden affair.

      Sanctions and an internal uprising have now been tried. Is the US mad enough to try for option 3? I think they are!

  • jimmyjames:

    This isn’t really on topic but it’s something that i haven’t seen any discussion on .. or at least about this tin foil hat scenario ..

    Back when all this Ukraine/Russia/USA et al war drum stuff started .. from my understanding was that as soon as the coup d’état was complete .. the ukrainian gold was taken out of the country immediately (imminent russian invasion fears) almost panic like ..
    Of course any country we invade/intrude in .. we steal their gold but what if putin had swung or would have swung a deal with the overthrown prime minister to pay the enormous gas bill in gold .. or even if we just suspected that it might happen in the future with a collapsing UAH..

    Putin could have offered the ukraine any price he wanted above spot to pay for the gas bill and promise future delivery ..
    Bottom line is .. russia would have ended up with the ukrainian gold and they”re not so easy to steal from ..

  • No6:

    Selling US treasury debt and buying more gold would be my advice to Putin. With enough gold he can back his currency and watch the US panic.

  • Kreditanstalt:

    “Selling” gold – money! – would accomplish nothing except provide a short-term extension for the existing dysfunctional economies conducting it.

    I would think gold would be the last thing any central bank would be permitted to dispose of…

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