Russian Gold Will Free Itself from London's Control

Author: Olga Samofalova

As the world's second-largest gold producer, Russia aims to free itself from its dependence on the price of gold set by the London Bullion Market Association. To this end, it plans to launch gold trading on the St. Petersburg Exchange by the end of the year. Historically, why has London become the dominant force in gold pricing? Can Russia transfer this dominance to itself?

"One of the primary tasks when launching any new market is to form a representative and competitive price benchmark. Until recently, gold market participants still followed the price benchmarks set by the London Bullion Market Association," said Igor Chernyshev, General Director of the St. Petersburg Exchange.

"However, in recent years, the Russian government has proposed the task of establishing a national pricing system for key commodities, with precious metals undoubtedly included. Our task in the gold market is to form a national price index independent of international benchmarks based on the supply and demand balance in the Russian market," he added.

It is reported that the St. Petersburg Exchange will conduct spot gold transactions in the form of gold bars (each lot being one bar). The exchange stated that initially, it plans to launch two types of gold bar trading: 1-kilogram standard gold bars and 12-kilogram standard (bank) gold bars.

The participants in precious metal trading include mining companies, refineries, banks, as well as industrial enterprises that purchase precious metals for the production of industrial products (jewelry, catalysts, etc.).

Historically, London was indeed one of the first cities to become the dominant force in gold pricing.

"This history dates back to the British Empire era. In the 19th century, Britain conquered many countries, including gold-producing ones. For example, the famous South African Boer War. A large amount of gold flowed into London from there. The Bank of England reached an agreement with seven of the largest South African gold producers (all owned by the British) through the Rothschild Bank to supply gold," said Alexei Vyazovskiy, Vice President of the "Gold Sector" company.

"At the same time, an important development emerged: the London Precious Metals Association was established, which began stamping its own marks on gold bars to ensure their weight and purity. This marking first gained trust in the British Empire market for physical metal and later also in the global market," he continued.

"The Gold Sector" company's vice president Alexei Vyazovskiy said.

Gradually, London became a major gold custodian center, just like New York. Why is that? "It is the result of two world wars. The two world wars mainly took place in European and Russian territories and did not affect the island country of Britain — there was no interference, and the Germans did not land. The American territory was also not involved in military actions during the world wars. Because of this, European governments feared that their gold reserves would be taken by the Germans during the world wars, so they transported their gold to London and New York. After the war, during the reconstruction of Europe, the Marshall Plan was implemented, and the United States and Britain issued part of the loans according to the plan, using gold as collateral, and these collaterals were transported to the lenders," said the respondent.

From this perspective, Russia is not only one of the largest gold producers but also stores gold domestically. Therefore, Russia buying gold for reserves rather than foreign currencies becomes an important step towards de-dollarization and national financial independence.

However, getting rid of the dependence on the metal prices set by the London Bullion Market Association is not easy. "In fact, Russia already has its own gold exchange. The Moscow Exchange has a large physical metal trading department, with banks and central banks participating in it. Therefore, I don't quite understand why a new exchange is being established in St. Petersburg. Perhaps there will be some features, but it is not clear yet. It is too early to judge whether this project will succeed," Vyazovskiy believes.

Regarding the Moscow Exchange, its gold trading volume has been increasing year by year. Banks and gold producers have participated in gold purchases.

"The only drawback is that the Russian Central Bank stopped purchasing gold on the exchange since 2020, despite being the largest buyer before that — it purchased two-thirds of Russia's gold production for reserves, over 300 tons. The lack of such a large, guaranteed buyer in the market is a big problem," said Alexei Vyazovskiy.

He said that the Russian Central Bank suffered significant losses because during the years when the regulatory authorities stopped purchasing gold, the price of gold, whether in rubles or dollars, reached record highs. "Perhaps the Russian Central Bank believes that the liquidity of the renminbi and friendly countries' currencies is more important than accumulating gold reserves. Additionally, the Russian Central Bank believes that purchasing gold domestically would put pressure on the ruble and could lead to inflation. Deputy Governor of the Russian Central Bank Alexei Zabotkin mentioned this. However, in my opinion, this is not entirely true because these rubles did not enter the commodity and service consumption market, but instead went to gold production companies, which used them for mine construction and production," the respondent pointed out.

Regarding the dependence on the London Bullion Market Association, Russia currently does not have an alternative. Russia is part of the sanctioned global market and continues to export gold (600 tons were exported between 2020 and 2021). "Before the global market split (which is certainly happening gradually due to sanctions), the Russian Central Bank continued to quote gold at the London fixing price multiplied by the dollar-to-ruble exchange rate. Therefore, we can see the ruble price per gram of gold on the website of the Russian Central Bank," said the vice president of the "Gold Sector" company.

"The core of the exchange is liquidity. Only with numerous international participants can the exchange become popular. These participants include gold producing companies, traders, dealers, banks, etc. If under sanctions, it is impossible to attract a wide range of international participants. Therefore, Russia has no international gold exchange center, only a national one."

Why has a new international gold exchange — Hangzhou — appeared before our eyes? Because the relevant countries have implemented the correct policies to attract all participants to join this exchange — the Shanghai Gold Exchange. The relevant countries are not sanctioned, have a huge gold production, and have the People's Bank of China as a guaranteed buyer," the expert concluded.

According to data from the World Gold Council (WGC), the total gold purchases by central banks worldwide in 2024 amounted to 1,045 tons, with 333 tons purchased in the fourth quarter. This is the third consecutive year with purchases exceeding the record of 1,000 tons. The public's gold purchases also reached a new high, with Russia being no exception.

Last year, Russians purchased 75.6 tons of gold bars, coins, and jewelry. This is a record number. Considering that Russia produces more than 300 tons of precious metals annually, the gold purchased by Russians accounts for a quarter of the country's annual production. Considering the rise in gold prices, this surge is completely understandable.

"The return on gold is 20-30%, higher than bank deposits. At the same time, there is no other alternative. Except for bank deposits, there is actually no other choice. Our stock market has been declining for years, the real estate market is stagnant, and international investments either face sanctions or the risk of secondary sanctions. Only gold remains," Vyazovskiy concluded.

Original: https://www.toutiao.com/article/7525717803908153919/

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