Gold is pouring out of Russia, representing a new form of legal capital flight

In the final days of 2021, Russia’s State Duma asked a seemingly straightforward question: “Why did the central bank stop buying gold?”

The Bank of Russia, which for several years gobbled up all the gold it could get its hands on, stopped purchasing the shiny metal in March 2020. In fact, the central bank even sold some of its gold holdings.

There are various theories about what motivated this abrupt policy change: Russia needed cash to prop up its economy, which had been maimed by lockdowns and other useless, suicidal “public health” measures; the price of gold was shooting up, which meant it was time to sell, not buy; the Bank of Russia already had a mountain of gold—and how much gold does a central bank really need? Etc.

Sounds reasonable enough. But here’s the catch: In the good ol’ days, the Bank of Russia would scoop up most of the gold mined domestically. But the central bank is no longer a buying customer. Now, gold producers are allowed to sell their precious metal abroad—and are under no obligation to send the proceeds of these sales back to Russia.

We mentioned this not-so-reassuring fact when we wrote in December about Russia betraying its reputation as an insatiable goldbug. This is not a Bullion Blog so we sort of just shrugged and left it at that. The whole thing seemed very fishy but we had other priorities, like researching clot-shots and tracking the latest cattle-tag developments.

So imagine our surprise when we came across a provocative article published by Topwar.ru—one of Russia’s largest military/geopolitical analysis sites—explaining how Russia has essentially fallen victim to a massive gold heist.

The article is available in English although it looks like it’s an auto-generated translation from the original Russian. Below are some excerpts:

When [cold-like symptoms] began spreading around the world [in March 2020], gold, as expected, rose in price. It always rises in price during such periods of uncertainty. This is fine. In 2009, the Central Bank bought gold at 1300-1400 dollars per troy ounce, today it sells for 1800.

But the main concern was not the sale of gold, but the cessation of its purchase. Indeed, if the Central Bank stops buying metal from miners, this can have a very negative impact on the gold mining industry as a whole, since after all the Central Bank is the main buyer.

And as a result, a very strange move turned out: instead of conducting transactions with gold itself through the Central Bank, the Russian government, represented by Prime Minister Mishustin, allowed industrialists to sell gold abroad directly, bypassing the Central Bank and commercial banks. […]

And so Russian gold was sent abroad… And most importantly: now the sellers are not only able to independently sell gold abroad to anyone, but last year [in June 2021] Putin also made it so foreign exchange earnings from the sale of gold did not have to return to Russia. […]

If you carefully read a short note about Putin’s decree, then the following conclusions can be drawn from it: now it will become very easy for Russian miners of gold and diamonds to sell their products abroad. Previously, the state obliged all proceeds to be credited to accounts in Russian banks, now the currency from the sale of gold can be immediately credited to accounts in any banks convenient for the buyer and use the money at your discretion. Absolutely without any control from the state.

And yes, this money can be invested in anything. There, behind the cordon.

Well, if you look at all this from the side of a simple layman, then Mr. President simply legalized the export of capital from the country. To offshore, to foreign banks, anywhere. That is, now what they fought so hard against is legalized. […]

Now it will be easier for Russian companies to sell resources abroad. Previously, the proceeds had to first be transferred to accounts in Russia. Now they can simply transfer money to a foreign account and immediately start using it at their own discretion. […]

The gold reserve of the Russian state is administered by the Bank of Russia, which is not a Russian bank. This, let me remind you, is a legal entity about which we know nothing. No authorized capital, no property, no founders.

The exchange rate of the ruble speaks best of all about how effectively the Central Bank of the Russian Federation fulfills its duties. But this is a subject for a separate discussion.

In the meantime, the bottom line is that Russian gold, everything that is mined, will go to replenish the bins of other states.

In other words: gold leaves, nothing returns. Isn’t this textbook capital flight? Flagrant resource pillaging? Not good, at all?

If someone has a logical explanation for this strange turn of events, we would be happy to publish your thoughts. But frankly, this looks like a robbery-in-process.

Russians will just have to make due with the digital ruble and Sbercoin as all tangible assets that aren’t nailed down get shipped abroad.

It is what it is.

Edward Slavsquat

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Central banks. They’re a touchy subject for a lot of people and with fairly good reason. Like all other central banks, the Bank of Russia enjoys a special legal status making it independent from the Russian government while simultaneously giving it access to the full machinery of state power in order to carry out and enforce its wish…

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a month ago · 35 likes · 36 comments · Edward Slavsquat