Evaluating the Advantages Russia Gains From Amassing Gold Reserves

At the end of 2022, Russia’s gold reserves reached the highest level they’d been in the last two years, based on World Gold Council data. This gold-buying spree was not random. As one of the top oil-producing nations that become deeply entangled in geopolitical tensions, Russia reaped numerous advantages by stockpiling all this gold. 

At the end of last year, data showed Russia’s central bank carrying around 2,332 tons of gold. This level of bullion put Russia in fifth place for the most gold reserves carried by a central bank, with the U.S., Germany, France, and Italy being in the lead. 

By September 2023, Russia’s gold reserves amounted to approximately $144.7 billion. For reference, the central bank’s total foreign exchange reserves are at $581.6, according to the Central Bank of the Russian Federation. 

To put these figures into perspective, in February 2022, Russia’s total foreign exchange reserves reached $643.2 billion, a record-breaking figure. This record came right after the conflict with Ukraine began. 

The record was short-lived, though, as numerous Western nations quickly froze half of these funds within a month in response to the conflict with Ukraine, leaving Russia with just the remaining half. The other half of the funds included gold, yuan assets, and foreign currencies. 

Russia’s freezing of assets, of course, created much tighter conflicts. Moscow referred to this action as “theft” and an obvious violation of international law. 

In the last year, conflicts between Russia and Western nations have only worsened, leading to numerous national regulators taking over foreign currency exposures, according to Aleksandr Potavin of Finam Financial Group. Essentially, nations like Russia are choosing to store their assets in gold rather than other currencies in hopes of preventing further depreciation, additional seizures, and more conflicts.

Gold is a far more neutral asset that cannot be weaponized the way the U.S. dollar currently is. Following the reserve seizure in early 2022, Russia shifted to the safe-haven asset not only for added security but also as a means to further devalue the U.S. dollar. 

“The purposeful creation of significant reserves in the precious metal means that the country does not spend a large amount of money on its development but is salting it away. Quite often, governments do this when they see growing geopolitical risks,” Potavin explained.

Aside from using gold to protect itself from rising geopolitical tensions, Russia may gain another advantage from its bullion-padded reserves. With more nations stockpiling gold, analysts are now forecasting the possibility of a gold-backed universal currency to replace the U.S. dollar in international trade. BRICS (Brazil, Russia, India, China, and South Africa) nations are currently forging this path, purchasing gold in bulk to begin the de-dollarization movement. 

Nations like Russia have already stopped accepting the U.S. dollar in major oil trades, opting for local currencies or gold instead. As this becomes more regularized, we may see gold transform into the global currency of choice. If this occurs, Russia will be one of multiple powerhouses that have already stocked up bullion reserves in preparation. 

“Now it’s the only rational choice for Russia and for Putin,” Alexander Gabuev, a member of the Carnegie Endowment for International Peace, explained. “If depending on renminbi is the lifeline that helps you to be less exposed and less dependent on hostile currencies, then you take this route.”

“The more countries you force to find those alternatives, effectively what you’re going to do is increase economies of scale and experience in those areas,” Daniel McDowell, a professor at Syracuse University, weighed in.

With trade shifting on a global scale and central banks like Russia stockpiling gold, bullion continues gaining much-needed price support amid rising interest rates. Gold prices have increased by around 8% since the beginning of 2023. Gold closed last year at around $1,800 per ounce and just hit $1,946 per ounce about a week ago. 

Analysts expect this trend to continue as nations like China and Russia continue efforts to devalue the U.S. dollar. 

“It is very likely for the People’s Bank of China, the country’s central bank, to further boost its gold reserves,” Huang Jun, an analyst at FXTM, explained. “As China reduces holdings in U.S. debt, the country needs to increase holdings in other assets, and gold is a rare, high-quality credit asset in the current environment.”

It’s clear that nations are challenging the U.S. dollar, though whether gold will actually take the crown is still undecided. In the meantime, numerous central banks show no signs of pumping the brakes on gold buying yet. Clearly, the race for gold is still in full swing as the U.S. dollar’s future remains uncertain.

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