Imagine a 20 foot-by-20 foot cube of solid gold, weighing 2,300 tons. This is what you would get if you melted down the approximately $140 billion in gold reserves held by Russia’s central bank. This gold stash — not actually a giant cube, but around 150,000 gold bars — is as much a weapon in Russia’s invasion of Ukraine as any fighter jet or tank. Or at least, it was supposed to be.
As with other commodities, the international sanctions targeting Russia’s gold holdings have been more stringent than expected, meaning the Russian government is likely struggling to find anyone who actually wants to buy its gold. On June 26, the countries that make up the G-7 announced a ban on the import of Russian gold. But compared to other commodities, the gold market is a murky one. There are signs that willing buyers are emerging — and that’s a boon for Russian President Vladimir Putin and his war.
The war in Ukraine has exposed gold’s unique position at the nexus of high finance and black markets. It has also provided a perfect illustration of the precious metal’s advantages for governments facing hard times, the loophole it offers dictators under sanction and the often nightmarish damage it does where it is mined.
Russia’s gold-buying spree
Many countries keep sizable gold reserves and not necessarily for nefarious reasons. Gold is seen as a way for central banks to diversify their holdings and maintain a more stable and reliable store of wealth than paper currency can provide. Governments hold gold in the event of crisis and as a hedge against inflation. What makes it particularly attractive as a hedge for countries is the fact that its value often has an inverse relationship to the U.S. dollar, the world’s dominant reserve currency.
About one-fifth of all the gold ever mined — 35,000 metric tons — is currently held by central banks, according to the World Gold Council, with U.S. reserves being the largest. But given the dollar’s dominance as the currency of choice for foreign exchange reserves, geopolitical rivals of the U.S. — Russia among them — have an additional incentive to look to stockpile gold. As Putin has put it, “the monopoly of the U.S. dollar is not reliable enough. It is dangerous for many.”
Russia has been building its gold reserves for more than a decade and in 2019 overtook China as the world’s fifth-largest holder of gold. This buildup was motivated by a desire to diversify away from the dollar and to hedge against the potential for a drop in oil prices.
The Russian gold-buying spree really took off in response to the Western sanctions that followed the annexation of Crimea in 2014. That year, the percentage of Russia’s reserves that were held in gold jumped from 8.4 percent to 10.6 percent. By this year, just before the invasion of Ukraine, the figure stood at around 20 percent.
The rationale behind the gold stash became evident shortly after the war began, when Western countries imposed sanctions on Russia’s central bank, blocking its access to currency reserves held in the U.S., Europe and Asia. In an instant, Russia effectively lost access to half its reserves, according to Russian Finance Minister Anton Siluanov. Had those reserves been held exclusively in U.S. dollars, it would have lost access to even more.
“For a country like Russia that finds itself facing these kinds of sanctions, your traditional reserve assets can be rendered effectively useless,” Daniel McDowell, a political scientist at Syracuse University, told Grid.
Some countries also keep their gold reserves in foreign banks to lower transaction costs and maintain easier access to international financial markets. Venezuela — another country under heavy U.S. sanctions — has launched a legal case to force the Bank of England to return about $1 billion of its gold, which has been frozen due to the sanctions. But nearly all of Russia’s gold sits in Russian vaults. Because of that, McDowell said, “Right now, those reserves are out of reach of the U.S., Europe and any potential adversaries that might want to cut off its assets.”
Another advantage of gold for Russia: The country has access to a lot of it. Russia doesn’t just hold large reserves of gold; it’s also the world’s third-largest gold miner with an output of about 330 tons per year. This gold is bought by commercial banks that then sell it either abroad — gold is Russia’s second-largest export after energy — or to the Russian central bank.
Gold for guns
While most of Russia’s gold is mined domestically, there’s evidence it’s coming from other places as well. In recent years, Russian companies have been expanding mining operations for gold and other minerals in Africa, and these operations sometimes appear directly linked to Russia’s efforts to build political influence abroad. As CNN, the New York Times and others have reported, around 2017, a Russian company owned by billionaire oligarch Yevgeny Prigozhin was granted gold mining concessions in Sudan in return for security services provided to Sudanese dictator Omar al-Bashir. Those services included a disinformation campaign aimed at opponents of Bashir’s regime during mass protests in 2019. (Bashir was ousted that year, but the relationship seems to have continued under the country’s new government.)
Prigozhin, the sanctioned oligarch known as “Putin’s chef” for his close relationship to the president, is the owner of the Wagner Group — a private mercenary organization currently fighting with Russian forces in Ukraine — and the Internet Research Agency, which was accused of an online misinformation campaign targeting the 2016 U.S. presidential election. While official gold exports from Sudan to Russia are minimal, some reporting suggests several dozen tons are shipped between the two countries each year.
Another Prigozhin-linked company was awarded diamond and gold concessions in the Central African Republic, where the Wagner Group has assisted the country’s military in its fight with various rebel groups and has been accused by the U.N. of human rights abuses including extrajudicial killings and torture.
Black market gold
There’s one big problem for countries hoping to switch to gold when they lose access to U.S. dollars. “The original theory that gold could be a substitute for foreign exchange reserves was that they’d be able to use it,” Stephen Cecchetti, the Rosen Chair of International Finance at Brandeis University’s business school, told Grid, referring to Russia’s prewar gold purchases. “The problem is that if you want to use it, you have to sell it.”
The fact that gold is a physical object makes it more secure as an asset but also harder to move. A recent report from the Global Initiative Against Transnational Organized Crime noted that $1 billion worth of gold — a tiny fraction of Russia’s reserves — weighs more than 15 tons and would require six 20-foot trucks to transport it.
“The logistics of this are not trivial,” Cecchetti said. “And then if there are sanctions, you have to find people who are willing to do it for you.”
Despite these hurdles, Hans Merket, a researcher on natural resources and conflict at the Brussels-based International Peace Information Service, noted that there are ways around them. Gold’s physicality means it can be moved outside electronic networks. So while that movement may be cumbersome, it’s often impossible to trace. “It’s not so easy to close the nets entirely,” Merket told Grid. “You have big challenges in origin tracing, so it’s not always easy for customers to know where the gold that comes into their country is coming from.”
Other nations under sanction have taken advantage of this. In 2016, U.S. authorities arrested Turkish gold trader Reza Zarrab, who allegedly set up a system that allowed Iran to sell natural gas in exchange for Turkish gold, which Iran then sold to prop up its exchange reserves. It may have been one of the most profitable sanctions-evasion schemes in history. Another sanctions-busting effort that involved gold came a decade ago in Libya, where Muammar Gaddafi’s regime was able to sell about 20 percent of its gold reserves in the last days before it was overthrown.
Then there’s Venezuela. On Jan. 31, 2019, the Russian investigative newspaper Novaya Gazeta, citing publicly available flight data, reported that a Boeing 757 owned by the Russian company Yerofei flew from Caracas to Dubai in the United Arab Emirates — a major global gold market. There, according to the newspaper’s sources, the plane was met by vehicles owned by the Central Bank of the UAE. After that, “gold was removed from the plane, which was then loaded with containers filled with cash in U.S. dollars.” The Venezuelan flight came several days after an opposition lawmaker alleged that the government was planning to fly 20 tons of gold from its central bank out of the country. The following year, according to the Venezuelan opposition, the government shipped more gold to Dubai on Russian planes via Mali, a major gold producer.
These reports are difficult to verify — and both Russia and Venezuela deny them. But Venezuela’s central bank, which once held among the world’s largest gold holdings, does appear to be rapidly spending down its reserves. According to the bank’s statements, the country’s gold reserves dropped 79 tons last year, to a 50-year low. The bank did not reveal where that gold had ended up, but beyond the UAE accounts, there are other indications. In 2019, a refinery in Uganda was raided by police on suspicion that it had imported 7.4 tons of Venezuelan gold.
Why is Venezuela doing this? Gold is one of the few hard assets the Venezuelan government still has access to. The U.S. does not officially recognize President Nicolás Maduro’s government and in 2019 slapped sanctions on the country’s state oil company, cutting off access to its main source of revenue.
Like Russia, Venezuela had been taking steps to build up its gold stash for some time. In 2016, as the country’s economy was going into free fall, Maduro opened about 12 percent of the country’s territory to mining. Some of the mining activity in the Orinoco Mining Arc, as it’s known, is carried out by state-owned enterprises. But much of it, according to international NGOs, is also mined by criminal syndicates and guerrilla groups, which smuggle the gold out of the country, with the government taking a cut.
“Martin,” an activist with the local NGO SOS Orinoco who spoke on the condition of anonymity given the political climate in Venezuela, told Grid that he believes that rather than aiming to build up central bank reserves, Venezuelan officials “are just trying to make more money available to themselves as individuals. To make this possible they have to find a way to convert gold into cash, and to do that they need to evade sanctions. They can’t do it through open and legal ways. Mining of the Orinoco Arc is a way of financing those personal needs.”
The gold mining in southern Venezuela has contributed to mass deforestation in the Amazon, human rights abuses by illegal miners operating with government acquiescence and the spread of disease — including a resurgence of malaria. The Venezuelan opposition has protested the mining and asked that foreign governments officially label the country’s exports as “blood gold.”
Venezuela is hardly the only country where gold mining is a dirty business. Most gold around the world is drawn from open pit mines. The NGO Earthworks has estimated that to produce enough gold to make just one ring, 20 tons of rock and soil are discarded, much of it carrying toxic chemicals such as cyanide and mercury that are used to extract the metal from the rock.
Small-scale “artisanal” mining in dozens of countries throughout Asia, Africa and South America gets the most attention for damage to the environment and the miners themselves, but gold mining has caused water contamination in the American West as well.
Those 150,000 bars of gold
When we talk about Russian gold, we’re talking about two things: gold from Russian mines that is sold abroad by private companies, and gold that sits in the central bank’s reserves — those 150,000 bars of the precious metal. The latter doesn’t appear to be going anywhere right now. With the former, it’s less clear.
On March 7, the London Bullion Market Association banned gold bars from Russian refineries from entering its market. This is significant not only because London is one of the world’s most important gold markets, but also because many global refineries won’t accept gold that’s not from a London-accredited source. While it’s not technically illegal for other countries to trade in Russian gold, many countries are choosing not to do so. Refineries in Switzerland, which process about a third of the annual gold supply, are officially refusing any bars of Russian gold produced after March 7, when the London market made its announcement.
Despite those restrictions, roughly three tons of Russian gold were imported to Switzerland from London in May. Again, this is not technically illegal, but none of Switzerland’s major refineries have owned up to the purchase.
This may be only the tip of the iceberg. The NGO Swissaid has highlighted the fact that in March, Switzerland imported 36 tons of gold from the UAE, more in one month than at any other time in the last six years. The organization is calling for an investigation into whether any Russian gold was included in these shipments.
But the origin of gold is relatively easy to disguise by transferring it through an intermediate source. And under current regulations, refineries can list an intermediate country as the gold’s country of origin. “The risk is that this gold is going to China, India or the UAE, and then it’s re-refined and then sold to, for example, Switzerland,” Marc Ummel, head of commodities for Swissaid, told Grid. These three countries, all major gold trading hubs, have not imposed sanctions on Russia over the invasion of Ukraine. In other words, Russian gold may well be moving around the world, despite the London ban and others.
The Russian gold being imported to Switzerland likely comes from Russian mining companies. And Ummel said there’s also a risk that Russia, as Venezuela and other countries have done, could use black or gray markets to sell its central bank gold reserve — breaking off a chunk of that 2,300-ton cube.
“Of course there’s a huge risk that this gold will also come onto the market,” Ummel said. “We can say that we have strong sanctions against Russia, but we’ve seen the same thing with Venezuela and Sudan.”
For now, Russia is probably not desperate enough to move its central-bank gold. Unlike Venezuela, Russia is still raking in substantial profits from the sale of its oil. Countries in Europe are only belatedly taking steps that will dramatically reduce their Russian energy imports in the coming months, and many experts don’t expect the real impact of sanctions on the Russian economy to be felt until later this year.
As Syracuse’s McDowell noted, “Right now, Russia’s not in nearly as dire a situation [as countries like Venezuela]. That doesn’t mean it won’t be in the future.” At which point, some of those 150,000 bars of solid gold may well find their way to the global market — and the Kremlin will have found one more way to fill its coffers.
Thanks to Lillian Barkley and Alicia Benjamin for copy editing this article.