Thursday, November 13, 2014

Reuters — Here's Why Russia is Buying So Much Gold Lately

Most Russian gold mine production is sold to domestic commercial banks, such as Sberbank or VTB, which can then sell the metal on to either the central bank or to foreign banks. 
This year, sources say, foreign banks are holding off buying Russian gold after Western powers implemented sanctions against the country over the Ukraine crisis.The central bank has therefore had no choice but take domestic mine production that cannot be sold to foreign banks, two sources said, and has bought most of the metal that commercial banks had available. 
"This is one measure that the central bank has taken to go through this difficult period for commercial banks and most importantly to boost liquidity," a source close to the situation said on the sidelines of the London Bullion Market Association annual conference in Peru.
The central bank buying gold domestically injects currency into the economy. This is similar to deficit spending that transfers real resource to public use in exchange for currency in excess of tax withdrawal.

This is different from OMO or POMO that involves swapping central bank reserves for bonds, leaving the amount of aggregate nongovernment net financial assets unchanged. The central bank buying gold domestically increases the amount of nongovernment net net financial assets in aggregate.

Russia is running a fiscal surplus, so this injection of net financial assets by the central bank offsets the effects of the surplus on reducing the amount of nongovernment aggregate net financial assets. This amounts to offsetting a tight fiscal stance.

This does not affect the fx rate directly since the gold buying is domestic and the amount of rubles is not increased in international markets.

5 comments:

mike norman said...

The problem is it adds to financial balances in a very narrow way. It basically makes teh gold mining industry the fiscal "conduit." But will the gold mining industry's consumption and investment be broad enough to lift the whole economy? Highly doubtful. Like tax cuts for the rich. Even worse. Plus it's environmentally destrucive.

Matt Franko said...

What price in rubles is the Russian CB paying for the gold? This is the price of gold in rubles.

When they lift the sanctions, what price will the Russian gold sellers take for gold in USDs? This will set the new exchange rate or what a USD will buy in ruble terms.

Tom Hickey said...

You are presuming that the gold miners are private companies as in the West that don't take orders from the government. :o

If Putin & Co know what they are doing, they can just use the mining companies and banks as an alternative treasury the way that China uses its banks and resources to direct investment.

I am sure that the Russians are aware that the government needs to fund domestic growth and that if they do this through the fiscal channel it will depress the ruble further and more quickly, risking destabilization. They have likely already figured out that they can do the same thing directly through the central bank and the government's control over resources.

Essentially what's happened is that the neoliberal agenda for Russia was to liquidate its manufacturing and convert it to a supplier of natural resources. Putin has seen through that strategy and has decided to go for Russian independence from the neoliberal West through developing self-sufficiency and pivoting to Asia and the Global South.

Ignacio said...
This comment has been removed by the author.
Ignacio said...

China and Russia are really different (not saying if worse or better) systems than the West.

There is no 'free market' worshipping there, are mostly state-controlled economies (like XIX cent merchantilist nations, including USA!), different animals.

Westerns bankers/big biz don't understand, that's why all this free market and trade agreements will end in disaster and the only ones benefiting in the long run are the non 'neoliberal worshipping morons in the west'.

France is starting to understand (as a traditionally state-run economy, just like most continental Europe) and that's why LePen is rising (the only party preaching sensible economic policy in the west right now probably).

Morons in the west are in for a rude awakening IMO in the next 10 years (could start as soon as 2015 in Europe though). The pathetic attempts to undermine Putin and China leadership just reinforce them even more. We are gonna get crushed by the weight of demographics in a post-oil world if we don't wake the fuck up really fast and start investing right now that we yet can to overcome the real problems in the future.