Russian Sanctions and Precious Metals Markets: What’s the Strategy?

- April 13, 2022 -

By Lisa Murray-Roselli

In March of 2022, the London Bullion Market Association (LBMA) and the CME Group, Inc barred six Russian precious metal refiners from the London Good Delivery Lists for gold and silver. This move coincided with the US Treasury Department’s declaration that any transactions involving gold from Russia’s Central Bank are included in the full spectrum of US sanctions against Russia. In addition, US Federal legislators have proposed secondary sanctions which would block the transportation of gold from Russia’s Central Bank.

Russia’s invasion of Ukraine, beginning on 24 February 2022, sparked a unified global response—some of the harshest sanctions in history against any one country. The goal of these sanctions is to cripple the Russian economy, dispirit its population, and severely weaken Vladimir Putin’s ability to continue military actions against Ukraine. Russia has approximately $140 billion worth of gold, according to the World Gold Council, which comprises one fifth of its foreign exchange reserves. Its supply of gold is roughly the fifth largest in the world and, therefore, could be a major source of funding for the Russian military. Prohibiting Russia from selling its gold serves to limit its ability to raise money for such purposes.

There are, of course, loopholes-not every major economy in the world has joined the effort to sanction Russia into submission. It is still possible for Russia to sell its gold in countries such as China, India, and Kazakhstan. The LBMA and CME Group, Inc. regulate and track gold transactions via hubs located in London and New York, but they cannot monitor unofficial channels. Therefore, Russia may be able to find other routes to accommodate the sale of its gold. Additionally, the country may have supplies of gold that are not part of its official reserve but have been held in its oldest coffers and, therefore, not traceable.

Impact on the Gold Trade

Global sanctions against Russia have reverberated back out into the world, causing higher gas prices and further disruptions to the global supply chain. Ukraine’s economy has also been paralyzed by the war. It is one of the world’s largest suppliers of wheat, corn, barley, and sunflower oil and shortages caused by this disruption have caused prices to soar, which has caused overall food prices to soar. Could sanctions on Russian gold trade have a similar impact on gold prices?

Recently, the market has seen an uptick in gold prices, close to the records set in 2020. Yet, given the economic conditions in the US and global economic instability caused by the war in Ukraine and continuing concerns over the latest SARS-Cov19 variant, analysts expect the gold market to be volatile. Contrary to major commodities markets, gold prices are not typically influenced by imminent supply and demand. Therefore, restricting supply from six of Russia’s major produces may not cause prices to rise.

In the view of Jack Hunt’s Deputy Director of Wholesale Trading, Denis Yacinthe, “I think what we’ve seen in the gold market of late has been driven in larger effect by macroeconomic forces like inflationary pressure than immediate ones with regards to Russia and Ukraine.  Since the middle 2020, we have seen an increased flight to safe havens and this crisis and the knock-on sanctions will likely only exacerbate this effect and create another tailwind for the metal.”

Palladium and Platinum: Strategic Outliers

It has not gone unnoticed within the precious metals industry that certain Russian suppliers have been deliberately left off of the list of sanctioned companies. Two prominent examples are the Gulidov Krasnoyarsk Non-Ferrous Metals Plant (or JSC Krastsvetmet) and the Prioksky Plant of Non-Ferrous Metals. They continue to be listed as accredited refiners of palladium and platinum on the COMEX. Why? Because global manufacturers are dependent upon those two metals for some of the world’s most costly/profitable and essential goods.

Russian mines source only 10 percent of the world’s platinum supply but they source 40 percent of the world’s palladium, but it is impossible to sanction one without the other—they are mined together and palladium is often derived from platinum. Palladium is used in the manufacturing of catalytic converters, which are vital to the auto industry as they reduce exhaust emissions. Platinum and palladium are also used in the manufacturing of computer chips, electronic devices, and jewelry. In addition, they are used as investment precious metals in the form of bars and coins (physically-backed ETFs).

At this point, nations imposing sanctions on Russia are not willing to risk the higher costs and increased disruption to the global supply chains involving these critical metals by including them on their list of banned goods and transactions. Sanctions are a political tool, one in which the economic stability of those imposing sanctions is sometimes given priority over the potential impact those sanctions might have on the offending nation. Even though sanctions have put severe restrictions on Russia’s gold trade, the influence on the domestic and global gold trade will likely be minimal.

In reflecting upon Russia, sanctions, and precious metals, Jack Hunt Coin Broker’s President, Scott Hunt, stated. “When it comes to gold and silver, Western sanctions clearly have more bark than bite. There are just too many ways for Russia to circumvent traditional markets. Even worse, the West is ostensibly turning a blind eye to Russian sales of platinum and especially palladium because Russia is one of the world’s dominant suppliers. Just like oil and natural gas, until the world halts purchases of all Russian commodities Putin will continue to find ways to finance his war machine.”