Bank of Russia reduces spending on gold

After several years of unrelenting gold buying by Russia’s Central Bank, the precious metal has reached a fifth of the country’s total reserves. Now the proportion should stabilise, as there is “no need to buy gold in such volumes anymore”, believe analysts.

Russia, the world’s biggest buyer of gold, is losing interest in the precious metal, says Bloomberg. The country’s Central Bank, which spent an estimated $40 billion on gold in 2014-2018, is starting to reduce purchases. In the first 11 months of 2019, the regulator bought 149 tonnes of gold (44% less than the year before), so annual purchases are expected to be the lowest in six years. Analysts consider that the Bank of Russia has reached the maximum proportion of gold it wants to keep in reserve.

After his inauguration for a fourth term in 2018, President Vladimir Putin stated that Russia was seeking to “break” from the dollar and diversify to bolster “economic sovereignty”. The country’s gold holding has increased fivefold since 2007. Currently, bullion amounts to around 20% of total reserves, which is the highest share since 2000. Russia owns 2,262 tonnes of gold worth $106 billion.

Analysts note that Russia’s need for a buffer against economic shocks is now diminishing. “If gold is protection against the toughest sanctions, then it’s logical to assume that there’s no need to buy gold in such volumes anymore,” says Denis Poryvay, an analyst at Raiffeisenbank PJSC. The proportion of gold relative to other assets held by Russia’s Central Bank should stabilise, agrees Sofya Donets from Renaissance Capital. She expects purchases to continue at a slower pace.

Despite lower purchases in 2019, Russia still ranks at the top of the world’s biggest gold buyers. In recent years, the country’s relentless interest has been a key pillar of support for the precious metal. In 2019, gold price increased by 20% to a six-year high of $1,557 an ounce. Now the key question is whether Russia’s decision to reduce purchases will hurt gold demand and prices. According to head of Commodity Strategy at Saxo Bank A/S Ole Hansen, investor appetite for gold financial products caused by geopolitical turmoil and economic growth fears is high enough to offset the drop in physical gold demand from Russia.

The situation is also changing for Russia’s gold producers and banks, as they are now selling more gold abroad instead of relying on the Central Bank to be the main buyer. Bullion exports increased to 100,5 tonnes last year, while in 2018 they totalled only 16 tonnes, reads custom data. Besides, future exports may come directly from mining companies, which are currently not allowed to sell gold overseas. Russia’s biggest gold producer Polyus PJSC expects the government to provide miners with this possibility in 2020.

By Anna Litvina