Russia Bolsters Its Balance Sheet With Gold
Its been a rough past couple of years for the Central Bank of Russia as international sanctions and plummeting oil prices have taken their toll on the rouble and the inflation rate has flirted with double digits. Despite the weakness in the Russian economy, the Russian Central Bank has bolstered its foreign reserves from about $350 billion a year ago to over $387 billion at the end of March 2016. The Russian Central Bank has a stated goal of increasing reserves to about $500 billion in the coming years.
U.S. Treasuries as Part of Russia’s Foreign Reserves
In January 2014, Russia’s U.S. Treasury position was $131 billion. In reaction to U.S. inspired sanctions being placed on her, Russia sold a substantial portion of her U.S. Treasury holdings. Russian U.S. Treasury holdings reached a low of $66.5 billion in April 2015. Since then Russia has added back a portion of its U.S. Treasury holdings. As of February 2016, Russia held $87.6 billion in U.S. Treasury Securities.
The Gold Option
Russia also has built its reserves by going on a gold buying binge. In 2015, Russia added a record 208 tonnes of gold to her reserves. In March, Russia added another 15.5 tonnes of gold to reserves bringing her 2016 total to 46.6 tons, a pace about 11% lower than 2015’s. Russia’s pace of adding gold to reserves is the greatest in the world, surpassing China whose gold buying over the past year is the second highest. Since 2009 Russia has added more than 837 tons of gold to its reserves more than China who added 743 tons during the same time period.
The decision to add gold to reserves has paid off as the price of gold has risen nearly 20% over the past year, with most of the gain coming in 2016. Russian gold mining produces the third largest annnual output in the world. Exchanging depreciating Roubles for a good portion of their gold mining output has helped increase the value of Russia’s reserves. By retaining an increasing percentage of its gold mining output the Central Bank of Russia has been in effect converting roubles into gold.
As a result of Russia’s gold buying binge, Russia is now the sixth largest gold holding nation in the world.
The price of oil and gold have increased significantly in 2016 and have helped Russia improve its financial situation. According to the World Gold Council, Gold now represents about 15% of Russia’s total foreign reserves. According to the World Bank, oil is by far Russia’s largest export and represents about 15-20% of Russia’s GDP and the majority of government revenues. A reversal in the price of either or both gold or oil could quickly reverse the improving financial fortunes of Russia.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.