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Putin Is the Biggest Gold Bug

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Switzerland is preparing to hold a referendum on whether to keep 20 percent of its international reserves in gold. Meanwhile, Russia, which would never ask its citizens to weigh in on such matters, is increasing its gold holdings. It accounted for 59 percent of net gold purchases by central banks in the third quarter of 2014, according to the World Gold Council. Russia has been increasing its stockpile since the global financial crisis, and the more recent Western sanctions -- - which the European Union said today might be strengthened -- have only confirmed to Russian policy makers that they're doing the right thing.

Central banks have been net buyers of gold since 2010:

World Gold Council

Emerging economies drove the change: The 2008 financial crisis and Europe's debt woes undermined faith in reserve currencies such as the dollar and the euro. Economists who are close to the Kremlin, and far removed from the global academic mainstream, have been telling President Vladimir Putin that the dollar was doomed because the Federal Reserve was printing too much money and that Russia needed to reduce its dependence on the shaky Western financial system. Those ideas may be convincing; they echo the reasoning of the Swiss populists who initiated the gold referendum.

After the annexation of Crimea in March, Putin's economic adviser Sergei Glazyev made "financial sovereignty" a hot subject for the country's paranoid security elite. In an interview in May, Glazyev said:

Of course, all the freely convertible currencies are today under American control: The euro through NATO mechanisms, the pound through the U.S. alliance with Great Britain, the yen through Japan's political dependence from the U.S. Nevertheless, assets in our trade partners' currencies are, to a certain extent, a replacement [for keeping international reserves in U.S. Treasuries]. So are precious metals. I believe that in a situation of growing military and political confrontation the gold price will go up again. And let's not forget that Americans' refusal to honor their debts will undermine trust ion the dollar not just in this country but in others. It will be a step toward the end of the American financial empire. It will give us a chance to be among the first to suggest a new configuration for the world financial system, in which the role of national currencies would be significantly higher.

Glazyev's forecast was wrong: Russia's newly confrontational relationship with the West didn't cause the price of gold to recover. The spot price is down 16 percent from this year's high, reached March 14, even though Russia's purchases have increased. After buying just 6 metric tons of the metal in the first quarter, it acquired 109 tons in the next six months, more than in each of the previous two full years, according to the World Gold Council.

Russia's gold stockpile is now bigger than China's, and fifth in the world after those of the U.S., Germany, France and Italy. In dollar terms, gold made up 10.5 percent of the country's international reserves on Nov. 1, up from 8.4 percent a year earlier. That figure also reflects the fall in the ruble's value, as well as the decline in currency reserves caused by the central bank's efforts to fund Russian borrowers that can't refinance foreign debts because of the sanctions. Nonetheless, the central bank's data, which value the country's stock of gold at $45.3 billion, don't appear to accurately reflect the purchases reported by the World Gold Council.

Between April and September, the dollar value of Russia's gold reserves only increased by $1.6 billion, though the additional 109 tons of the metal acquired in the second and third quarters had a value of $4.2 billion on Oct. 1. The price drop in that period doesn't explain the discrepancy.

In other words, Russian statistics appear to underestimate the value of the country's gold, even as the metal accounts for a growing share of its international reserves. The central bank buys gold for rubles from local producers who before the sanctions sold much of their output to Russian banks, which exported it. Since the imposition of the sanctions, exports from Russia's state-owned banks have stalled, even though gold isn't covered by the restrictions. The decline in foreign demand has allowed the central bank to replenish its reserves at lower cost.

The growth of Russia's gold reserves is evidence of both the leadership's paranoia about the West and the country's resilience. Few other nations are able to extract relatively liquid foreign reserves from the ground.  

If the Swiss vote to increase their country's gold reserves above 20 percent, the Swiss National Bank will be forced to make huge purchases in the market, driving up the value of the Russian stockpile. The Swiss People's Party, if it succeeds, will have helped Russia weather the sanctions and the recent decline in the price of oil. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net