By Jeff Clark, Senior Precious Metals Analyst
With Russia rising to the forefront of world affairs as well as natural-resource-related events, we thought it timely to find out more about Russians’ attitude toward gold. We’ve been in touch with Russian bullion expert Dmitriy Balkovskiy for over a year and decided to get his take.
Here’s the view from Russia…
Jeff Clark: Thanks for joining us, Dmitriy. Tell us about your background.
Dmitriy Balkovskiy: I live in Moscow, but have studied and worked in both the US and New Zealand. I edit Goldenfront.ru, a Russian bullion investment news service. We translate and publish commentary about precious metals from English-speaking sources, including many of your articles. We’ve been online since June 2010, and our site is libertarian oriented. Our archives now have more than 2,400 articles from 520 authors.
Jeff: You mentioned to me previously that Russia is not quite as bullish on gold as the West portrays.
Dmitriy: It seems to me that Western gold investors are too optimistic about Putin’s love affair with gold. The reality is not as straightforward as it’s sometimes portrayed by Western media.
First, a little background. The old Soviet Union viewed gold and silver as strategic metals and a matter of national security. Private ownership of precious metals in any form except jewelry and numismatic coins was strictly forbidden. People went to jail for merely owning a gold bar.
The official gold content in one Soviet ruble equaled 0.167674 grams in 1936, 0.222168 grams in 1950, and 0.987412 grams in 1961. Here’s a picture of a Soviet-era 50-ruble banknote, which amounted to the average weekly wage in the 1980s.
The writing at the bottom says, “Banknotes are backed by gold, precious metals, and other assets of the State Bank.” Of course, gold was not exchangeable for rubles; it could only be bought in jewelry form. In 1989, it averaged 50-60 rubles per gram.
Jeff: But the USSR has been gone for a quarter-century. Hasn’t the situation with precious metals changed?
Dmitriy: Repressive Soviet laws are still on the books in modern-day Russia. It is illegal to buy or sell bullion bars anywhere except at banks that have a precious metals license, and very few have them. So if you buy or sell a gold bar from your friend or relative, you commit a criminal offense.
There are also special rules for transportation of bullion bars, and breaking them entails a prison term. Taking bullion bars out of the country is illegal. Selling and buying of foreign-made bullion bars is also illegal. To top it off, there are enormous hurdles for bullion coin importers.
I hasten to add that these laws are not strictly enforced; there are no gold owners languishing in Russian jails. But the laws remain on the books.
To make matters worse, bullion bars are subject to 18% VAT, and as a result, spreads are enormous. For example, one major bullion bank—Nomos—on May 29 sold 50-gram gold bars for 85,938 rubles ($1,547 per ounce) and bought them back for 67,890 rubles ($1,222 per ounce). The gold pm fix that day was $1,255.
Jeff: Wow. Is it the same for coins?
Dmitriy: Coins are the only reasonably priced bullion vehicle available for ordinary Russians. They are not subject to as many restrictions, are VAT free, and sold in banks and licensed numismatic shops.
The quarter-ounce gold St. George is popular, with four million minted in just the past several years. However, as many as 50% of these coins have serious quality issues—reddish spots and even small “craters,” as you can see here.
There is also a one-ounce silver St. George, with a 600,000 mintage.
Jeff: Are American Eagles or Canadian Maple Leafs available?
Dmitriy: Not at banks. And what is available is extremely expensive. As an example, the only reasonably priced gold bullion at the Russian Agricultural Bank, one of the top 10 rated banks in Russia, is the St. George coin. On June 5 it was quoted at 12,650 rubles per quarter-ounce ($1 = 34.5 rubles), which equates to $1,467 per ounce.
The cheapest one-ounce silver coin costs $55. However, most silver coins on offer are actually a half-ounce, with some priced at $100 an ounce or more. A one-ounce silver St. George is not available, and as with gold, there are no Eagles.
I would estimate that about 75% of coins sold are silver commemoratives. They are bought mainly as business or personal gifts, not as an investment.
Since only banks can transact in bars and they aren’t competitive on price or selection, private investment coin dealers fill the gap. Today Moscow boasts five or six small companies offering gold and silver investment coins at prices comparable to Europe or the US. They have appeared over the past four to five years, but are still absent in less populated areas.
Jeff: So banks are the main source for buying bullion?
Dmitriy: Yes. I’ll note that banks are allowed to charge premiums based on spot prices for bars, but not with coins. Regulations list bars as “raw gold,” but banks are stuck with what they paid for coins because they’re considered a “finished” product. If a bank paid $1,700 for a batch of gold coins, it must resell them at this price until the whole batch is sold off. So the banks frequently end up selling coins with markups of 100% or more.
The vast majority of bullion outside Moscow and St Petersburg is mostly of local mintage.
Jeff: You told me about a creative angle for smuggling.
Dmitriy: In 2012, one of our Siberian contacts, an owner of a small gold mining operation (8,000 to 12,000 ounces annual production), was in Moscow looking for ways to “export” his gold. Since he operates without a mining license, he turned his metal into very crude cutlery and smuggled it to China as “forks and knives.”
The miner estimated that China receives about two to three metric tons of gold per year this way, saying he knows other “tableware makers” like him. It may be a relatively small amount compared to official imports from Hong Kong, but it shows the opacity of gold supply and demand here.
The Russian government still has not liberalized small-scale gold prospecting, in spite of prior promises.
Jeff: So how does the average Russian view gold?
Dmitriy: To be honest, without any enthusiasm. Russian Business TV does regular polls on our investment and savings preferences, and the latest poll from May showed that of 13,442 respondents, 523 were in favor of “investing in precious metals”—less than 4% of those surveyed.
You have an established gold bug community in the English-speaking world, with thousands of articles and personalities, whereas the topic here is a complete unknown to over 95% of the population.
I should mention that political ideology also plays a role in shaping Russians’ perception of gold. For liberals, the West is flawless and will reign forever, so there is no sense in betting against the masters of the universe and, consequently, no point in buying gold.
For conservatives both communist and nationalist, the West is evil and forever scheming to undermine Russia. The Rothschilds and the CIA rule everything, and gold investment is another one of their frauds to rip off the Third World. It is amusing to note how both extremes view the West as all-powerful.
Jeff: I’ve seen a photo of Putin holding a gold bar, and I think he looks pretty appreciative. I’m not holding my breath that I’ll see Obama holding a bar of gold anytime soon…
Dmitriy: Yes, I know; it was the first picture of a major politician holding a gold bar since De Gaulle. And yes, the Russian central bank bought another 900,000 ounces of gold in April. We now have more gold than the Swiss.
But does it make Putin a gold bug? No. He is a hardcore pragmatist above all else. And frankly, the picture of him holding the gold bar was done to make him look manly and prosperous. He has an excellent PR team.
The Russian leadership is perfectly aware of gold’s disruptive role to the US dollar. But to them, the yellow metal is just another tool. They don’t care about sound money at all—they are conservative statists, all of them.
For example, Elvira Nabiullina, Putin’s recent appointee at the Bank of Russia, is familiar with Ludwig von Mises and is well known in Moscow’s libertarian circles. Yet even she is about to introduce inflation targeting… not exactly a libertarian thing to do.
The best refutation of Putin’s alleged gold bug sympathies is the fact that he has not abolished the VAT on bullion bars, though there were rumors of such several years ago. Russia is overburdened with social obligations, and the people in charge do not wish to draw undue attention to the real alternative to the existing monetary regime. Western gold bugs should keep in mind that the US dollar is not the only fiat currency around.
Jeff: Is Putin as aggressive with Ukraine as portrayed in Western media?
Dmitriy: Putin wishes to save Russians from extinction, restore our pre-revolutionary glory, and destroy NATO in the process.
It seems that many in the liberty crowd view the situation there as something akin to Germany and USSR taking over Poland in 1939. It is nothing of the sort. Ukraine is the most artificial state in the whole of Eastern Europe, held together only by foreign subsidies and with zero chance of long-term survival. There is no internal cohesion.
This is not to say that everyone in the southeast of the country wants to join Russia, although I would estimate at least half probably wouldn’t mind. The standard of living in Russia is higher and there is no silly “Ukrainization” sponsored by Western taxpayers. I would be surprised if this country lives to see the New Year in its present form.
To give a fresh example of the situation there, a couple of weeks ago I had lunch with a lady in charge of Crimean affairs in the Customs Ministry. She told me, “It is unbelievable, the whole place seems to be frozen in the 1980s, there’s nothing there, no terminals, no equipment…”
Jeff: Do you anticipate Russians ever getting involved in precious metals?
Dmitriy: Yes. There is actually huge potential for this to occur. Russians are extremely adaptable, built to survive, and they’re on a constant lookout for new opportunities.
Here are a couple compelling statistics. First, in 1989, it was illegal to own foreign currencies and 99% of the population never even saw American dollars or German marks, let alone owned them—but five years later, every grandma in the country had one or two $100 notes for a rainy day.
Second, there are about 200,000 millionaires in Russia today. Yet if you scour every coin dealer and online auction in Russia, you will not find more than 500 one-ounce gold investment coins at any one time. The supply is minuscule.
I firmly believe that when the existing world financial system finally crashes and burns, as it inevitably will, Russians will rush into precious metals. Mini-rushes, as in the fall of 2008 and August of 2011, were just a foretaste of things to come. And when Russians stampede, I can tell you it is a sight to behold.
So I wish patience to my gold-owning colleagues all over the world. Our time will come.
Jeff: As the saying goes, we live in interesting times. We appreciate your input, Dmitriy.
Dmitriy: You’re welcome, Jeff. We’ll talk again soon. If any of your readers would like to contact me, I can be reached at email@example.com.
Source: Casey Research
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