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Russian central bank tries to fan gold exports by paying below market price

The Central Bank of Russia revealed early in July that it has been buying gold at below market prices domestically since May 1 to encourage exports of the precious metal.

On June 21, the price of gold rose above US$1,400 per ounce for the first time since 2013, reaching a closing price of US$1,410.50/oz on July 10, according to the London Metal Exchange.

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"We introduced discounts for the purchase of gold because we saw that vendors were selling gold mainly to the central bank," Reuters quoted Gov. Elvira Nabiullina as saying July 3.

The bank has more than doubled its gold reserves since 2014 to over 2,000 tonnes as it diversifies away from the dollar. Meanwhile, exports of the yellow metal have crashed from 75.66 tonnes in 2014 to just 17.05 tonnes in 2018.

The central bank spent an unprecedented US$10.4 billion on gold in June, taking the value of its gold reserves to US$100.28 billion, an almost 12% rise from US$89.88 billion May 31. The record spending means the value of the bank's overall international reserves hit US$518.36 billion June 30 as foreign exchange reserves also rose, albeit to a lesser extent.

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"I suppose that the BoR estimates the current market price of gold to be too high for sustaining purchases at earlier levels and is hedging its price risks," George Voloshin, who heads the Paris office of consultancy Aperio Intelligence, said in an interview. "The BoR has traditionally snapped up most of the domestically produced gold, and I believe it's been really comfortable for Russian gold producers to sell most of their output to the national central bank on simplified terms. They will have to change some of the habits from now on."

Russia's largest producer, PJSC Polyus, with output of 2.4 million ounces in 2018, currently sells its gold to Russian commercial banks, which then sell it on to the central bank or international buyers. While it does not sell directly to the central bank or international market, there are ways the company could partially diversify from selling to Russian commercial banks if demand from the central bank falls, according to a company representative.

"We're sure the global market will be able to absorb the potentially increased gold exports from Russia," the anonymous representative said in comments seen by S&P Global Market Intelligence "The global gold run-of-mine production is decreasing, and potential additional volumes of gold from Russia will not impact the balance."

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Polymetal International PLC, Russia's second-largest gold miner, said, "We do not see a significant impact on our business or on the overall market. The purchase terms and prices vary across the commercial banks, and some of them offer better prices than the Bank of Russia." The FTSE 250 constituent's output rose 9% year over year in 2018 to 1.56 Moz.

Privately owned GV Gold, also known as Vysochaishy, only exports about 10% of its output — 304,300 ounces in 2018, according to its deputy head of corporate finance and precious metals sales, Igor Korepanov. "We expect a significant increase in the export of gold by Russian banks by the end of this year," Korepanov said in an interview, but cautioned that the procedure for exporting gold is complicated.

Highland Gold Mining Ltd.'s head of communications, John Mann, said in an interview that the central bank's decision to buy below market price would not affect the London-listed miner because it sells to commercial banks at the spot price. "None of them has approached us regarding any changes to our existing sales contracts. If there's a knock-on effect, I think we would have seen it by now."

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In 2018, the Russian central bank became the world's fifth-largest official sector holder of gold, with 2,183 tonnes, overtaking China with 1,904 tonnes, as the prospect of a further round of sanctions targeting its access to international money markets prompted it to move away from dollar-denominated holdings.

"Russia was the largest official sector buyer in 2018 and is the largest official sector buyer so far this year, notching up 70.3 [tonnes] as of April," HSBC's chief precious metals analyst, James Steel, wrote in a July 8 research report. "But the pace of Russian purchases seems to be moderating slightly from last year's tempo, when the reserve bank accumulated 274 [tonnes]. The decline in oil prices may temporarily cut Russia's foreign exchange earnings, limiting Russia's purchase of bullion until such time as oil prices recover."