Russian gold: Doubtful effect of a gold embargo

Russia is one of the world’s largest gold producers. But would an import stop for Russian gold affect the government in Moscow at all? Experts are skeptical.

Will the gold embargo against Russia come after the coal and oil embargo? If the US had its way, an import stop for Russian gold would have been a done deal as soon as the G7 summit ended. But it shouldn’t come to that: the EU countries Germany, France and Italy held back. After all, they have to coordinate possible new sanctions against Russia with the other 24 member states of the European Union.

Russia is the second largest gold producer

This does not mean that a possible gold embargo by the G7 with the participation of the EU against Russia is off the table – on the contrary. The arguments of the proponents are too convincing. Cutting off the government in Moscow from this source of income is important, stressed US Secretary of State Anthony Blinken in an interview with CNN.

In fact, Russia ranks second in the list of the world’s largest gold producers. According to data from the World Gold Council, Russia mined 331 tons of gold last year. Only the mines in China delivered slightly more at 332 tons.

Russia not among the top 5 gold exporting nations

But it is also a fact: You won’t find Russia among the really big gold exporting nations: According to the statistics portal, Russia exported in 2021 WorldsTopExports.com the equivalent of $17.4 billion in gold. This put the country in seventh place worldwide.

For comparison: in the same period, Russian revenues from the export of oil, petroleum products and natural gas amounted to around $241 billion. From the beginning of the war against Ukraine alone, energy exports brought around 93 billion dollars into the Russian coffers up to the beginning of June.

In contrast to oil and gas, the yellow precious metal plays a rather subordinate role as an export good and thus as a source of foreign exchange income for the Russian state. Commerzbank commodity expert Carsten Fritsch emphasizes that only a small part of Russia’s gold production went to the West. “Most of them stay in their own country anyway.”

Evasive maneuvers towards China and India?

According to experts, in the event of a gold embargo by Western nations, Russia could easily switch to other trade routes that remain open. The collapsing demand from the west could be compensated for by other countries.

Thorsten Polleit, Chief Economist at Degussa Goldhandel, explains that Russia still has the option of redirecting its gold exports to China, India and Turkey, for example, which in turn serve the global demand for gold. “From this point of view, it is more than questionable whether the gold import boycott can actually cause Russia the financial damage that the West wants.”

The gold embargo would have a primarily symbolic character

In addition, the London Bullion Market Association (LBMA) had already banned gold from Russia from the trading venue in London in March. This means that Russia’s most important trading center for gold collapsed months ago. 90 percent of the annual global gold production is traded in London.

“An import ban by the G7 should therefore only be a symbolic act,” says that commodity exports Fritsch is convinced. York Tetzlaff, managing director of the trade association Fachvereinigung Edelmetalle, is of the same opinion: Such a step would have “above all political and symbolic character”. Russia is already effectively cut off from the world market.

Divided gold market as a future scenario?

Particularly noteworthy: The LBMA decision in March did not cause any visible disruption to trading and price events on the gold market. Not least against this background, the effects of a possible Western import stop for Russian gold on the gold price should be very limited.

However, according to gold expert Polleit, it is conceivable that a fragmented, i.e. divided, market could also arise for gold, analogous to oil. Like Russian oil, Russian gold could possibly be traded at a discount to the world market price in the future.

Real interest rates remain the most important factor for the price of gold

Commodity experts agree: A gold embargo against Russia is unlikely to have a lasting effect on the gold market price. The development of inflation and interest rates remains significantly more important for the price of gold.

The so-called real interest rate, i.e. the nominal interest rate minus the inflation rate, is relevant for the price of gold. According to the expectations of analysts and economists, the current high rates of inflation are likely to fall over the course of the year.

At the same time, central banks are likely to raise interest rates. According to CME Group’s Fed Watch Tool, US interest rates are likely to be around 3.5 percent in December. The logical consequence: the real interest rate rises. However, a rising real interest rate makes gold less attractive for investors, as the yellow precious metal itself does not yield any interest.