Keen observers of the global market have probably noted that Russia is buying up a steady stream of gold. Between January and June of 2016, the Kremlin has purchased an average of 14 tonnes of gold a month. That puts Russia as number seven in terms of national gold reserve rankings, although it dwarves most of the list of the biggest private owners of gold in the world.
So why is Russia buying gold now? What changed in their outlook that has made them turn to upping reserves.
Well to start with, this may be a game of catch-up. Even with this recent bullish purchase history, Russia still sits about 300 tonnes behind France and Italy. Those are number four and five on the list, respectively. Still, such a prolonged purchase has encouraged many to question the motivations behind Russia’s big expenditures. This is especially so given a less than stellar economic activity as of recent year.
Reaction to Western Sanctions
The annexation of Crimea began in 2014, and Russian military occupation continues today. In the wake of the occupation, Western powers levelled severe economic sanctions on the Russian economy. Chief among these sanctions was restricting access to “Western financial markets and services for designated Russian state-owned enterprises in the banking, energy, and defence sectors.”
Sanctions were an attempt to show Russia just how much they needed interaction with the Western market to survive. But knowing Putin, they should have expected something other than a quiet submission.
Indeed, the impetus of the sanctions has had an unexpected impact: Russia stocking up on gold.
The motive, though, is relatively clear. After being shut out of Western financial markets, where could Putin turn to gain some economic strength? Turns out that gold is pretty good solution because it allows Russia to invest and trade in something other than the USD (which they are essentially not allowed to invest in anyways).
Russia was already feeling the pinch before the sanctions were levied. They were finding it difficult (and ultimately not that profitable) to be trading in the USD or the Euro. Returns have not been good for either currency as the price of oil continues to rise and European economies seem to be lagging.
The value of USD is the centre-piece of the floating currency exchange system. That means the value of USD is the major determinant for the cost of doing trade, and for Russia, that means relying on the value of a foreign countries currency to make trades with the world. Thus, it makes sense for them to move away from dependence on the USD because it will allow them more self-determination with their own currency, the ruble.
John Butler described the situation quite eloquently. According to the ideas proposed by Mr. Butler, we can only answer why is Russia buying gold if we pay attention to Russia-USA tensions. The best way for Russia to gain independence from the USD is to invest in a non-dollar currency that has more value than the USD. And that leads Russia to gold.
Edit: Is another answer to why is Russia buying Gold related to on the USA?
A comment from Mr. Mac Roberson reminded us of a great 2003 Fortune article by Warren E. Buffett and Carol J. Loomis on the US trade deficit. Mr. Roberson noted that gold purchases may be part increasingly stronger hedges against by Russia and other countries against the hegemony of the US Dollar.
Buffett and Loomis noted how "our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than we produce--that's the trade deficit--we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own." That's quite a scary thought. And in-fact, we need to ask if countries like Russia and China are becoming increasingly skeptical of US paper?
Russia is also heavily invested in oil distribution throughout the East, and especially the Middle East. The global oil industry has been hit with rising prices since 2002, and there is little the United States can do to stabilize the situation.
So, it is quite possible Putin is seeking a way out of the American-controlled oil industry via gold investment. If Russia can back the ruble with gold reserves, they can reap a number of benefits.
For example, they can offer a more stable deal to the Saudi’s because of it, then the Saudi’s will probably agree.
Much like the global financial system, the entire oil economy has been set up to run based on
a US Dollar valuation.
However, it appears Russia is making a move away from the dollar. Given the political struggles between the United States and Russia (we’ve seen how the North Korean crisis impacted precious metal prices) there is a strong incentive for Russia to move away from the USD and do most of its trading with the gold-backed ruble or yuan. Also, consider that Russian gold reserves can back 27% of the ruble money supply, which by all accounts is pretty secure already.
Given all these factors, it’s understand Russia’s considerable investment in gold. So what does that mean for the average investor? Pay attention to what world actor are doing, especially when they are not advertising.