Russian Gold Helps Sanctions-Laden Moscow Thrive

• Russia stockpiled gold for more than a decade in anticipation of Western sanctions.
• Analyst: Gold reserves helped Russia’s economy grow significantly in 2023 and 2024.
• Moscow has purchased cash, weapons, and other goods with its gold stash.
• Macquarie Group says investor desire for counterparty risk protection will help push gold to $3,500 shortly.

——————————————

Gold has had an extraordinary run for many years now, receiving price support from a multitude of sources on a wide variety of bases. One of the more interesting — yet underreported — angles to what has become a historic run by gold is the way in which Russia has managed to use the metal to not only economically survive, but thrive, despite being subject to positively draconian economic sanctions imposed by the West. In recent years, Russian gold has emerged as a dramatic illustration of just how potent the combination of the metal’s political and national neutrality and lack of counterparty risk can be in enabling a sovereign country to functionally operate in the global geopolitical theater. And now, with the price of gold reaching unprecedented heights as geopolitical instability is intensified by ongoing tariff tension, including acute fears of an all-out global trade war, Russia could find itself in a particularly charmed position precisely because of its choice to bet big on gold.

To be sure, all those who own gold right now are benefiting from the dramatic surge in the safe-haven metal’s price as trade-related dynamics continue to be hit by stunning levels of volatility. The latest score: From Inauguration Day through Thursday, each of the major U.S. equities indexes are down by or near double-digit percentages and the U.S. stock market has lost roughly $11 trillion, overall, while gold has climbed about 17%.

Gold Has Climbed 1,000% So Far this Millennium

But the truth is that gold’s realized potential in outperforming mainstream assets goes back further than the latest dose of hyper-uncertainty. In fact, since the beginning of the millennium, gold has been among the world’s best-performing assets, rising roughly 1,000% over this period.

That kind of robust momentum over such an extended period of time beckons this question: What has sustained gold to such a degree that the metal has managed to put up such formidable growth numbers despite the fact it’s not a growth asset?

Among the answers, experts say, is that in what has become a climate of great geopolitical uncertainty, gold’s status as a politically neutral and sovereign-neutral asset, along with its lack of counterparty risk, gives it a safe-haven appeal not found in mainstream instruments.[1]

(Counterparty risk refers to the risk that the value of an asset fails to be realized because one party to a given transaction fails to perform. The nature of gold as an asset is such that it is not reliant on any parties for its value; an ounce of gold is always worth whatever its market value at any given time.)

These unique properties of gold, particularly when viewed in concert with its other attractive properties, such as its obvious physical nature and its scarcity, have made the metal exceedingly popular with central banks and sovereign wealth funds. These official institutions rely on gold to hedge and effectively diversify their reserves and otherwise help to bolster their national strength and independence.

And the pace at which these institutions have been purchasing gold is significant; central banks have been net buyers of gold for the last 15 calendar years and have accumulated the metal at or near all-time record levels since 2022.

Half of Russia’s Foreign Reserves Were Frozen by the West Following Moscow’s Invasion of Ukraine

But it is Russia that serves as the most prominent “Exhibit A” of why, ultimately, nations see great value in stockpiling gold: Gold’s various and valuable characteristics as a real, neutral, and inherently valuable asset can help a country to not only persist, but prosper, even during periods of great distress.

In 2022, Russia saw roughly half — $300 billion or thereabouts — of its dollar- and Western-currency-based reserves frozen in 2022 as punishment for Moscow’s invasion of Ukraine. And yet despite these significant constraints, Russia’s economic momentum actually has gathered steam, even as it prosecutes Europe’s largest ground war since World War II. Numerous analysts say Russia’s gold reserves are a material reason why the country has managed to thrive against all odds.

This week, we’re going to take a look at how Russian gold has managed to actually strengthen Moscow at a time when many have expected to find the country’s economy forced to its knees. And as we do, we may find valuable insights for safe-haven-minded individual investors who, while not poised to suffer the same sorts of economic sanctions burdening Russia, might be interested in learning more about gold’s potential to help reinforce the economic soundness and stability of those who possess the metal, come what may.

Academic: Russia Stockpiled Gold for More than a Decade in Anticipation of Western Sanctions

In hindsight, it seems clear that gold’s political neutrality and lack of counterparty risk have been important considerations for Russia going back well over a decade.

“Since 2013, Russia has been preparing for western sanctions and managed to isolate its economy from transactions requiring American dollars,” Professor Robert Huish of Canada’s Dalhousie University noted last year.[2]

Russia began a focused effort at shoring up its gold reserves shortly after the country’s annexation of Crimea in 2014, an act which saw the West sanction Moscow and expel Russia from the Group of Eight (G8) nations. From 2014 to 2020, a period during which the price of gold effectively ranged from about $1,100 per ounce to around $1,800 per ounce, Russia increased its gold reserves by roughly 40 million ounces.

The RAND Corporation notes it is during this period that Russia explicitly sought to lower its exposure to the U.S. dollar, as well as led the rest of the world in the amount by which it increased the quantity of gold in its foreign reserves:

“Since 2014, the year it occupied and annexed Crimea, Russia appears to have acquired more gold than any other country in the same period. It is in the top five gold reserve holders in the world with at least 2,322 metric tons stockpiled, and it is the world’s third most important producer of the metal.”[3]

The utility of gold for Moscow is twofold in what has become a particularly complex economic era for Russia.

As with all nations, Russia relies on gold to diversify its reserves and help keep the economy and currency insulated from the impact of financial shocks.

But Moscow’s reliance on gold is far more strategic given the country’s current status as a pariah among the West. Gold’s universal acceptance, political neutrality, and lack of counterparty risk together have enabled the metal to serve Russia in the capacity of a direct medium of exchange with some of its trading partners, helping the country to remain economically viable despite being forced to operate under an onerous sanctions regime.

As an interesting sidenote from the consumer side, even Russian gold jewelry purchases have risen markedly since the Ukraine war began a couple of years ago. It seems even Russian citizens recognize the power of gold to preserve value.[10]

To receive comprehensive information about gold investing for retirement, request our free gold IRA kit.

Russian Gold Used to Buy Cash, Weapons Since Sanctions in Effect

There is, in fact, ample evidence that since the application of sanctions stemming from its incursion into Ukraine, Russia has nevertheless been able to use gold as a medium exchange for hard currency as well as for weapons and foreign goods.

Last year, a report by financial intelligence company Sayari indicated that in the first quarter of 2023, Russia had succeeded in trading gold with entities in Turkey and the United Arab Emirates (U.A.E.) for $82 million in U.S. dollars, euros, and dirhams (the official currency of the U.A.E.).[4]

Additionally, RAND cites credible reports alleging that Russian drone manufacturer Alabuga paid in gold for 6,000 Iranian Shahed UAVs (unmanned aerial vehicles) along with related equipment.[5] A separate report by The Telegraph on the transaction says Iran received nearly $2 billion in gold for the weapons.[6]

Gold Has Helped Russia’s Economy Grow in Spite of Onerous Sanctions

“There are more than 16,000 sanctions imposed against Russia,” Professor Huish wrote last year. “Yet the Russian economy and war machine grew by 3.6 per cent in 2023 and is projected to grow another 2.6 per cent in 2024.”[2]

As it turns out, Russia’s economy grew by 4.1% last year.[7]

“Billions upon billions of dollars of Russian gold is being freely traded at top dollar while avoiding every one of those 16,000 sanctions,” Huish added, noting, “That’s why global sanctions against Russia haven’t derailed a thing.”[2]

Professor Huish suggested last year that in order for Moscow to be able to depend on gold as a functional medium of exchange for the long term, “gold needs to increase in value.”[2]

At the time he wrote that, gold was around $2,150 per ounce. Now, it’s about $1,000-per-ounce higher.

It seems Russia’s gold gamble is paying off … in a big way.

According to a new report by Bloomberg, the value of Russia’s officially listed gold reserves – the 2,300 or so tons previously noted, which hasn’t changed much over the past few years – has jumped by about 72% since the beginning of 2022.[8] That would make sense, because that’s by how much the price of gold has increased over this period.

What it means, in terms of dollar value, is that Russia’s gold reserves have increased by about $96 billion over this period, to total roughly $230 billion, currently.

Bloomberg notes that as of April 1, Russia’s total international reserves were around $650 billion, which is close to an all-time high.[8]

At this point, then, Russia’s total reserves appear to be a little higher than what they were when the roughly $300 billion was frozen in 2022. And while the ultimate resolution of those reserves-in-limbo remains unclear, Bloomberg notes, “Should U.S. President Donald Trump’s efforts to end the war lead to the unfreezing of all of the remaining reserves, the Kremlin would sit on a financial cushion the likes of which it has never had before.”[8]

Geopolitical Instability Impacts to Moscow Have Been Effectively Hedged by Russian Gold, According to Analyst

“Accumulating a gold pile was a hedge against geopolitical shocks — it worked,” noted Alex Isakov of Bloomberg Economics, who added:

“The increase in the value of gold holdings proves the diversification and hedging value of gold reserves.”[8]

To be sure, the stunning increase in the value of gold, which likely has been to an extent that not even officials at the Central Bank of Russia nor other Russian policymakers could have anticipated, looks to be a stroke of genius, clearly has gone a long way to enhancing the resilience of what should be a significantly burdened economy.

But aside from the surge in the price of gold, the real “workaround” for Russia is the nature of gold as an asset; once again, a valuable real asset, universally prized, that isn’t subject to control by any government and which has, for all practical purposes, no real counterparty risk. It is these features, in combination with others, such as gold’s scarcity and portability, that have enabled Russia to use the metal as a critical financial lifeline within an onerous sanctions environment.

And as it turns out, these are features which may be useful to individual investors, as well … even if they’re not facing the threat of international sanctions.

Desire for Counterparty Risk Protection Will Push Gold to $3,500 Shortly, Says Macquarie Group

When Macquarie Group, an Australia-based global financial services company, recently raised its third-quarter price target for gold to $3,500 per ounce, it explained its rationale this way:

“We view gold’s price strength to date, and our expectation for it to continue, as primarily being driven by investors’ and official institutions’ greater willingness to pay for its lack of credit or counterparty risk.”[9]

Notice that Macquarie analysts refer here not only to the appeal of diminished counterparty risk as it pertains to governments and government entities … but also as it pertains to investors.

So, what is Macquarie saying? That just as a nation has to be concerned about the fundamental reliability of assets, including currency, issued by other governments and entities … individuals have to be concerned about the same issues?

Yes and no. Individuals typically don’t have to worry about suffering at the hands of government-instituted economic sanctions the way sovereign nations do. But individuals may be inclined to give some thought to the safety and stability of the currency and paper assets issued by governments, especially when those nations are running massive annual deficits and increasing their national debt at a pace of $2 trillion to $3 trillion per year as the U.S. has been doing recently.

“Challenging Fiscal Backdrop” Could Keep Gold Prices “Historically Elevated”

And it is these substantial fiscal concerns to which Macquarie Group was referring when invoking “investors” as a party that also perhaps should pay some mind to counterparty risk.

“Our base case assumption is that CBO (Congressional Budget Office) projections for the budget deficit will deteriorate relative to current law,” Macquarie clarified, adding:

“Against this challenging fiscal backdrop, and that of many advanced economies, gold prices are likely to remain historically elevated.”[9]

The underlying point Macquarie is making … and one of the overarching lessons provided by Moscow’s success in using Russian gold to thrive amid sanctions … is that there’s a certainty associated with owning precious metals that’s not reflected in mainstream assets. Even all those citizens who have been buying Russian gold jewelry seem to know this! A person who owns physical gold — no matter what form (coins, bars, ingots, etc.) — possesses a highly transactable asset that retains its value everywhere and under any and all circumstances. And that immutable truth may be worth remembering not only for governments seeking to deftly navigate geopolitical instability, but also for individuals who are acutely interested in taking meaningful steps to ensure their own economic viability, including retirement investors who want to own gold IRAs.

Ask about scheduling a one-on-one conversation with one of our education department agents to get more insight into the economic lay of the land and how it affects gold investments.

800-700-1008