Will Western Sanctions Drown Russia’s Gold Industry?

On July 14, both Western (Euractiv.com, July 13) and Russian (Rbc.ru, July 14) sources reported that the European Union’s seventh sanctions package will put an embargo on Russian gold imports. If this happens, the EU will join the United States, the United Kingdom, Canada and Japan, which each already banned Russian gold imports some time ago (Interfax.ru, June 28). While Russian officials have attempted to ridicule the EU`s gold-related package, arguing that previous experience with anti-Russian sanctions has only led to EU citizens’ lives becoming more difficult, this rhetoric appears to be more unsubstantiated bravado, than based in fact (Rbc.ru, June 21). That said, Russia`s gold industry (and precious metals in general)—in the case that these sanctions are implemented in full—may indeed be entering a period of serious turbulence.

Gold’s role in the Russian economy is crucial: The precious metal represents Russia`s biggest non-energy export. According to the Federal Customs Service of Russia, in 2021 alone, the Russian Federation exported more than 302 tons of gold (worth between $17.4 billion to $20 billion). Importantly, the UK—which was the first to introduce sanctions against Russian gold back in March 2022—for its part, purchased 266 tons, worth $15.4 billion (Epravda.com.ua, July 5). The partial international embargo on Russian gold has already brought some notable results: one of Russia`s key gold producing companies, Petropavlovsk—used to produce 14 tons of gold annually, primarily concentrating on deposits located in the Far East—has filed for administration, unable to repay loans.

In general, since March 2022, when the London bullion market refused to grant Russian gold producers the Good Delivery specification, Russia`s export of the precious metal has de facto stopped. Specifically, since then, between April and May, Russia has managed to sell slightly more than 100 tons (at a daily production rate of almost 1 ton per day) (Moscowtimes.nl, July 12). Now, with the UK refusing to purchase Russian gold, potential buyers—based on 2021 statistics—have been reduced to Kazakhstan (imported 8 tons of Russian gold in 2021), Switzerland (7.25 tons) and Germany (5.5 tons), which could also soon discontinue buying from Russia (Tass.ru, accessed July 18).

In the meantime, the Union of Gold Producers of Russia (UGPR) is reportedly in a state of panic. In a recent open letter, the union noted that, if the situation in the Russian gold industry does not change soon, “it might suffer irreparable damage.” Specifically, the letter stated that, without massive support from the government, the fate of at least 400 small- and medium-sized artels (employ approximately 40,000 workers each) may be sealed. As underlined by UGPR Deputy Head Sergey Koshuba, it is not only Western sanctions but also policies of the Central Bank of the Russian Federation that are “killing” the industry. He stated that current conditions put forward by the central bank (its willingness to purchase gold at a significant discount) makes it unprofitable—and sometimes even detrimental—for gold producers to continue operations (Nezavisimaya gazeta, July 10).

With the prospect of more gold-focused Western sanctions becoming a reality in the near future, Russia`s actions (up to date) to mitigate the potential impact of these sanctions can be broken down into three central strategies.

The first strategy involves making all available information pertaining to Russia`s gold industry classified to bereave the West of information that could be used to strengthen and diversify sanctions. A corresponding bill has already passed a vote in the Russian State Duma (the lower chamber of Russia’s parliament), and further actions will almost assuredly follow soon (Forbes.ru, June 22).

Second, Moscow will cultivate a reliance on counterfeit trading, which, given Russia`s so-called “parallel import” strategy, is a viable option. In fact, Russian experts are already citing the example of South Africa, which—when subjected to international sanctions in the 1970s amid Apartheid—evaded gold-related sanctions that prohibited exports of gold bullion bars by starting to mint its own coins (Krugerrands), which crippled the sanctions’ effectiveness (Nezavisimaya gazeta, July 10).

The third approach focuses on diverting gold exports to “friendly” countries—such as India, China, and the United Arab Emirates—that did not introduce anti-Russian sanctions or shifting the minting process to one of Russia`s partners, including Kazakhstan. Some experts and Russian government officials are certain that, while the collective West is imposing sanctions on Russian gold, other “more pragmatic countries” will not miss this opportunity and could benefit from gaining access to Russia`s precious metals (Nezavisimaya gazeta, July 10).

Others—primarily hands-on professionals and subject matter experts—express much more cautious opinions. For instance, an analyst on commodities markets from Russian company Otkrytiye Investitsii, Oxana Lukicheva, has stated that no matter the plan Russia relies on—either selling gold to friendly countries or trying to mitigate the crisis via stimulating internal demand—the central budget will still lose between 15 and 25 percent in revenue (Forbes.ru, June 29). Koshuba went even further. In an interview, he characterized notions regarding prospects of rapid diversification of exports to Asia and elsewhere as “nothing but fantasies” and amateur talk, since establishing the necessary infrastructure for such a move cannot be done quickly (Goldminingunion.ru, July 5).

Finally, a review of Russian sources that analyze Russia`s four-largest gold producers present the following picture (Forbes.ru, June 29):

• Polyus—with its 104 million ounces of proven gold reserves, the largest gold producer in Russia and one of the top five globally—is unlikely to be severely affected by sanctions, as its main end-users are located in Russia and the company enjoys low production costs.
• Polymetal International—the second-largest producer of Russian gold—could also weather most damage, as it is already actively cooperating with Kazakhstan and has a well-diversified product portfolio that, in addition to gold, contains a substantial portion of silver.
• Petropavlovsk—whose current market value is lower than its amount of cumulative debt—is likely to face some tough times that might result in complete bankruptcy.
• Seligdar Prospectors Association—with 277 tons of gold reserves—is also not expected to suffer huge losses, as its main partners are located in Russia.

Yet, even given the above landscape, the Russian gold industry’s actual ability to withstand sanctions will be contingent on its ability to overcome sanctions without the use of loopholes and to appease third parties.