The month of May witnessed a further intensification of the western world’s sanctions against Russia.

These new moves bring to the front burner again questions that have been on the financial stovetop ever since the war in Ukraine began: questions about Russia’s likely responses as the west’s sanctions do ever-greater damage, and questions about whether and to what extent those responses may hurt owners of gold throughout the world.

Our short answer here will be that Russia may well soon sell large amounts of gold through difficult-to-trace transactions. But even if that happens, the consequences for the value of gold will not be devastating. The best advice may be a cliche from another war: “Keep Calm and Carry On.”

Fleshing this out requires some history.


Russia Becomes “Radioactive”

Russia invaded Ukraine in February. Almost right away, nations and international organizations began imposing economic sanctions on Russia in hopes of depriving that country of the economic wherewithal to wage a sustained military campaign.

One very important example involved the Society for Worldwide Interbank Financial Telecommunication (SWIFT). SWIFT is headquartered in Belgium and is owned by member financial institutions. It exists as a cooperative society under Belgian law.

The SWIFT messaging system is central to cross-border financial transactions.

On February 26, the United States, the United Kingdom, the European Union, and Canada all agreed to block the access of Russian banks to SWIFT. On the same day, Ross Delston, an American lawyer and a former consulting counsel with the International Monetary Fund, said, “It’s going to result in Russia being viewed as radioactive by US and EU banks, which in turn would be a major barrier to trade with Russia.”


Gold as Russia’s Answer

Russia’s central bank, though, has more than $140 billion in gold. It may draw upon this stash to mitigate the consequences of that radioactivity.

Within two weeks of the action regarding SWIFT, the mainstream media saw a rash of speculation about how President Vladimir Putin and those around him could liquidate their gold reserves in order to raise the cash to keep paying the interest on those bonds.


Delston was Right

The exile from SWIFT, and other sanctions, have in fact had the predicted consequences. One manifestation: according to a report by the Congressional Research Service (CRS), the volume of Russia’s imports has contracted and will continue to contract. Russia’s imports by volume, the CRS projects, will fall by 22% in 2022.

Another impact is that more than 750 multinational corporations have limited business with China beyond what legal/regulatory changes require.

Many factories in Russia have suspended production because the supply chain difficulties have become insuperable.

What the elite in Russian society and government probably care about even more than any of that, though, is the country’s ability to continue to make payments on its bonds. If their bonds, too, become radioactive, they will not be able to go into the international credit markets in support of an increasingly expensive war.


If Gold is the Answer, What Are the Questions?

Russia’s central bank has been a net buyer of gold in recent years. In 2014, it picked up the pace of its gold purchases. That was also (not coincidentally) the year that Russia occupied Crimea. The stepped-up purchases were likely to prepare, precisely, for a contingency in which an unfreezable asset would be critical to a face-off with western countries.

This raises some obvious questions:

  • More than three months into the sanctions, have there been any big Russian sell-offs?
  • If not: might there be yet, as the pressure ratchets up further?
  • Could Putin and the Russian elites pull off a scaled-up gold sale?
  • If so: what would be the likely impact of those sales on the value of gold?

By the time the first month of the war was out, the United States was reacting to the speculation on such subjects. It announced, in effect, that it wasn’t going to allow the Russians to sell their gold.

Gold traders expressed skepticism immediately about the ability of the United States, or even the broad coalition of sanctioning nations, to prevent such sales.


Russia Can Likely Still Sell Gold

There is a general consensus that Russia could sell the gold. Specie can be moved about the world physically without leaving a paper or digital trail for sanctions-enforcing officials to track.

If Russia did this, it would be following in the footsteps of Venezuela under Hugo Chavez and Nicolas Maduro, who took over after Chavez.

In 2011, Chavez repatriated 160 tons of gold reserves from Europe. The US Congress passed a law in 2014, early in the Madura period, mandating sanctions with the goal of regime change. President Barack Obama complied with this law in 2015, and the sanctions were tightened later by President Donald Trump.

The Venezuelan financial system has been increasingly isolated from the rest of the world since then, over a period of eight years. But there has been no regime change because the regime has its gold.

It is worth observing that Putin assisted Maduro in this. Gold bars have traveled from Venezuela to a number of gold-buying destinations, where such transactions can be kept off-book (Uganda, the UAE, and Turkey among them) in Russian charter planes. Venezuela exchanged the gold for euros and used the cash infusion to purchase imports.

Russia, then, knows the playbook and could follow it with its own gold stash. For the sake of the re-enactment, the third-party currency it receives for its gold would not be the euro. But Russia might well trade physical gold for Chinese yuan or Turkish lira.

Why has it not done so yet? Since, as noted, such things can be difficult to track, it is not clear that it hasn’t. But gold sales on a scale necessary to counter the sanctions would be sure to become common knowledge and would be a blatant sign of desperation. Understandably, the Putin circle is less than eager to send such a signal.


What Are the Consequences for Gold’s Value?

After that long trip, we have arrived at our destination. If Russia does in fact liquidate much of its gold in order to continue its war, what impact will that have on the gold in investors’ safes in the US and elsewhere?

A priori one might expect that such a development would depress the value of gold. There would be a larger supply of gold circulating around the world and no extra demand for it. Doesn’t that situation definitionally depress value?

Perhaps. But Russian sales would not necessarily mean a larger supply of gold circulating in any very strong sense. Whoever purchases such Russian gold is unlikely to sell it on the open market anytime soon. The transaction may amount in effect to what happens when one hoarder sells part of a stash to another hoarder. The impact on third parties of such a trade can be slight and (unless those third parties happen to be selling at just the same moment) largely hypothetical.

In broad strokes, the recent discussion of the fate of Russia’s gold may remind us that the value of gold is not driven by short-term supply and demand in the manner of a commodity. It is determined, rather, by financial factors and longer-term expectations.

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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.

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