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Russian gold miners' union urges state support with exports still paralyzed

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Russian gold miners' union urges state support with exports still paralyzed

The Union of Gold Producers of Russia urged the government to use funds from the recent sale of a controlling stake of PAO Sberbank of Russia to bolster the country's beleaguered gold industry, Kommersant reported April 14, citing a letter from the union's head to the finance ministry.

The industry group's members account for 70% of Russia's gold output.

The association joined calls for greater government support for the Russian gold sector, which is facing a sharp decline in exports brought on by the coronavirus pandemic, after the Russian government restricted commercial flights, used to ship gold abroad, while the spot price of the precious metal broke past US$1,700 per ounce April 14.

Cargo flights are available but are more expensive than the passenger flights usually used and require banks to coordinate shipments and pool their gold.

The gold miners' association suggested that funds raised from the Sberbank stake sale be allocated to repository Gokhran to support the domestic industry.

On April 10, the Russian government bought 50% plus one share of Sberbank from the Central Bank of Russia for 2.139 trillion rubles, equivalent to about US$28.97 billion, using National Welfare Fund reserves.

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Sergey Kashuba, chairman of the gold producers' union, said Gokhran's support was necessary to ensure uninterrupted gold production.

Russia's gold exports rose more than sixfold to 123.6 tonnes in 2019 as the central bank bought less of the precious metal and began paying below market rates to encourage shipments abroad in May 2019. Purchases ceased altogether from the start of April 2020 as the bank grappled with a plunge in the value of the ruble alongside the price of oil, triggered by the spread of the coronavirus.

However, the ruble's roughly 18% loss against the U.S. dollar since the start of the year has buoyed the margins of exporters with revenues in foreign currencies and costs largely denominated in rubles.

"So far in April, there have been 90% fewer passengers than a year ago [while] we had modeled a 70% decline," state-owned VTB Capital's analysts wrote in an April 14 note. "We therefore switch from our base case of a 17% traffic decline in 2020 to our bear case of a 35% decline, with almost a full cut of traffic in the next two months."

The rate of new infections in Russia continued April 15 with 3,388 new cases recorded in the prior 24 hours, bringing the total number to 24,490 with 198 dead so far, according to the Russian government's official website covering the pandemic.

Russia's largest gold group, PJSC Polyus, has been discussing refined gold sales with foreign companies, which could be made possible by granting general export licenses directly to mining companies, according to a company representative. George Voloshin, head of consultancy Aperio Intelligence's Paris office, recently told S&P Global Market Intelligence that a proposal was submitted in 2019 and that only banks licensed by the central bank can sell gold abroad.

"We currently do not recognize any material negative impact from the weaker transportation flows and Central Bank of Russia's lower gold purchases in the base-case scenario for Polyus," S&P Global Ratings associate director Sergei Gorin told Market Intelligence on April 14. "The company boasts low-cost production, sizable level of production, strong financial metrics and, what is important for investors, a clearly articulated dividend policy." Gorin noted that Polyus' total cash costs were US$365/oz in 2019, with low costs supported by the weakening ruble in 2020.

Many Russian banks have long-term supply contracts with gold mining companies and will have to continue purchases. The Central Bank of Russia is unlikely to resume buying gold itself because it already reached its target of 20% of overall reserves, especially with those of foreign exchange decreasing, according to Voloshin. Moreover, it is now safer to keep reserves in foreign currencies rather than gold for liquidity reasons, not least the current physical constraints linked to the transportation of gold.

Some Russian banks aim to meet with the central bank next week to discuss export issues, analysts from Moscow brokerage BCS Global Markets wrote in an April 13 note.

Global mine supply declined in the fourth quarter of 2019 at the fastest rate since the first quarter of 2017, and the trend could accelerate in the first half of 2020 due to disruption from the coronavirus, according to VTB Capital.

"Physical demand was down 14% due to lower jewelry and central bank purchases, [while exchange-traded funds] purchased a record amount of gold in March during the price dip," the bank's analysts wrote, adding that "inflation expectations continue to hover around multiyear lows, while speculative positioning in futures remains elevated."

As of April 14, US$1 was equivalent to 73.09 Russian rubles.