21 March 2022
From Russia Briefing:
US analysts had better have had their sums right in casting out Moscow when it comes to Russian global dominance in precious metals, diamonds, and rare earths, while the US dollar continues its decline against global gold reserves
by Chris Devonshire-Ellis
Back in early February, just prior to the start of the Ukraine conflict, the Russian ruble had been valued as one of the world’s most under-valued currencies. The Economist’s annual ‘Big Mac Index’ showed how on average, the Ruble was undervalued in terms of what it should be by 2/3. Only two, relatively smaller currencies, were valued at a higher ranking than the US dollar, the Swiss Franc, and the Norwegian Krona. Today, of course, the Ruble has deteriorated still further. What this does is make domestic products in Russia very good value, while making imported products extremely expensive.
To counterbalance this, local Russians have been turning to another commodity Russia has plenty of – gold, other precious metals, and diamonds. To some extent, Russia’s gold reserves help prop up the Chinese RMB Yuan, as I pointed out in this article here. Russia has by far the world’s largest uptapped gold reserves, at 12,500 tonnes. Russia also has the world’s second largest platinum, fourth largest silver deposits, the fourth largest rare earth deposits, and is the world’s largest diamond producer with the largest reserves. These have both commercial as well as added value potentials, and is one reason the United States in particular is keen to reduce Russia’s market superiority in these products.
What happens in times of global turmoil is that these types of commodities rise significantly in value as currencies, more impacted by politics than real value, depreciate. At present, this is trickling down into the Russian population, but the impact of Russia’s massive reserves will soon be felt elsewhere – rare earths are a critical component in many of todays high technologies, including semi-conductors. This could backfire on Washington as the world’s top suppliers of rare earths are not under US supervision, being, in order, China, with reserves of 44 million tonnes, Vietnam, with 22 million tonnes, Brazil, with 21 million tonnes, Russia with 12 million tonnes, and India with 6.9 million tonnes. The United States has reserves of just 1.5 million tonnes. This means that for high-tech industries, Washington analysts had better have drawn up alternative supply chains and begun reactivating dormant supplies or they will catch a serious development cold later.
At present, the situation concerning the demise of the ruble is the most apparent, with ordinary Russians clamoring for gold. Russia abolished VAT on gold on March 9th, while domestic demand, according to Investia has shot up by a multiple of ten since then. Domestic household purchases of gold in Russia are expected to reach 60-65 tonnes this year. Gold has now become more valuable than the US dollar with Central Banks worldwide now buying up reserves – and dumping dollars. According to a study by the German precious metals company Solit Kapital, the US dollar has lost more than 80% of its purchasing power against gold over the last 21 years, dropping a further 4% in 2021. In fact, last year, the United States was buying up Russian gold. That has now come to a halt, leading us to an interesting conclusion: the Russian ruble has been severely diminished, but Russian proven gold reserves, the highest in the world (including non-yet circulated gold), are skyrocketing in value.
Meanwhile, the US dollar is dropping in value against gold – meaning that at some Washington will need to sell off some of its hard asset reserves to prop up the dollar. The US has significant gold reserves, meaning any short-term impact will be negligible. But a longer Ukraine conflict, and the longer-term imposition of sanctions upon Russia, would over time start to make the US dollar position uncomfortable. A concerted attempt to undermine the US dollar could seriously damage its own value and see calls for a return to a gold standard rather than US dollar supported debt. Again, an underlying issue with the Ukraine
conflict is the inherent value of the US dollar and its position as a global currency. That is also now under stress.
Back to Russia: on March 14, a law was passed allowing authorized banks to sell gold bars to individuals for foreign currency. Many citizens who have cashed dollars will want to take advantage of this and diversify their portfolio, easy enough when the country is one of the world’s largest producers. It also means that to some extent, the Russian currency has partially converted back to a gold standard. Russia has consistently reduced its holdings of US dollars to negligible amounts, and last year expelled the USD from the Russian Sovereign Wealth Fund. It is possible that elements of the US dollar strength have been talked up by Washington. At the very least, US analysts once again had better have done their calculations precisely.
in the first two weeks of this month, Russia’s VTB bank (one of the US sanctioned banks) customers opened five times more unallocated metal accounts than is normal, an increase of 64%. In 2022 thus far, Russian nationals have opened 57,000 such accounts with VTB alone. Another US sanctioned bank, Promsvyazbank has reported a ten-fold increase in Russians opening precious metal and gold accounts since the beginning of March, while the demand for specially struck gold and platinum investment coins quadrupled.
The current suspension of the Moscow Exchange and the introduction of restrictions on foreign exchange transactions has also greatly spurred demand for Russian precious metals. Russia is also starting to produce smaller bars for circulation with some talk of them being made available for special ATM machines. A struggle between the value of gold and the value of the US dollar may yet be about to materialize if increasing numbers of other national Central Banks start to hedge bets and increase their gold and other reserves. Russia will be only too happy to see US reserves be spent in support of the dollar while it continues to supply global gold demand. It may be quite a global battle.
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