Ukraine war turns Russia into a nation of gold bugs

After Russian President Vladimir Putin announced the country’s invasion of Ukraine last February, Natalia Smirnova’s phone started ringing off the hook. The financial adviser’s Russian clients were panicking. “Should I buy gold?” one asked her. “If worst comes to worst, at least I can bury it.”

That attitude was shared by many — and turned Russia into an unexpected nation of gold bugs almost overnight.

Demand for gold bars and coins last year grew faster in Russia than in any other country, rising to nearly five times the level of the previous year, according to data from the World Gold Council.

While Russia has long been one of the world’s largest gold producers, accounting for almost a tenth of global production, its retail investors have historically shunned the metal, partly due to a 20 per cent value added tax on purchases of bars.

People usually turned to dollars and euros during times of trouble. But that has all changed.

“Private citizens are looking for a way to save money, and euros and dollars are in short supply, so the popularity of gold has surged,” said Vitaly Nesis, chief executive of Polymetal, an Anglo-Russian gold producer. “As long as we experience geopolitical instability, the demand for gold may be significant.”

The switch to gold has been strongly encouraged by the Russian government.

The central bank in March restricted sales of foreign currency, and on the same day Putin scrapped VAT on gold bar purchases, sparking a surge in buying.

Finance minister Anton Siluanov told Russians that the dollar was “volatile” and exposed to “various risks”, highlighting that precious metals were an attractive alternative. “Investing in gold will be a great alternative to dollars amid an unstable geopolitical situation,” he said in a press release in March.

Russian buyers were soon queueing for gold. As banks rushed to meet demand for the smaller bars preferred by retail investors, Sberbank, a giant state-owned bank, warned its customers about a potential shortage of the smaller sizes. Sberbank accounts for about 80 per cent of gold bars and coins purchased in Russia, according to its press office.

In Russia, many authorised dealers can distribute coins but only banks are allowed to sell bars. Despite this, personal advertisements of second-hand bars flooded Avito, the country’s leading online marketplace for used goods.

To calm the frenzy, the Russian central bank stopped buying gold on March 15 — two weeks after its first gold purchase in two years — but resumed 10 days later. “The market was disoriented,” the bank’s first deputy governor, Alexei Zabotkin, said later by way of explanation for the bank’s activity.

In 2022, global gold demand rose 18 per cent to its highest level in more than a decade, propelled by large purchases from central banks, as countries sought to diversify away from the dollar.

Industry analysts believe the Russian central bank was a significant buyer, but they are not certain because the institution stopped reporting its reserves soon after the war in Ukraine began.

Gold prices rose almost 20 per cent from their trough in November to the end of January, fuelled in part by purchases from Asia and Russia, according to Bernard Dahdah, commodities analyst at Natixis.

“There is a lot of effort by Russia and China to make the dollar [less influential] — to stop it from being the petrodollar,” he said.

The price has fallen 4.4 per cent this month as euphoria about China’s post-coronavirus reopening has waned.

The recent policy changes in Russia are similar to the way China opened up its gold market at the beginning of the 2008 financial crisis, he said. “The Chinese made it much easier for investors to buy into gold. And that is when we saw the boom.”

Despite last year’s surge, Russian demand for gold bars and coins last year was only 2 per cent of the global total, according to World Gold Council data. China, at 19 per cent, remains the world’s biggest buyer, followed by Germany and India.

Russian gold miners are also desperate to find new buyers as people seek to diversify their savings. Before the war, Russia consumed just a fifth of its gold, exporting the rest.

Towards the end of 2022, Russia succeeded in redirecting gold exports to Asia, specifically China, said Valery Yemelyanov, stock market analyst at BCS World of Investments. Russian gold exports to China skyrocketed by 63 per cent, growing $150mn year on year, Chinese customs data shows.

Under-developed infrastructure for retail gold investment may, however, dampen public enthusiasm. People can only sell the bars back to banks, for example.

Storing gold is another issue because many people store gold at home. Every scratch can reduce the value of a gold bar, said Smirnova, the financial consultant. “Not everyone understands they cannot keep bars in a shoebox.”