Russia's central bank said on Tuesday that it would suspend purchases of gold from banks from Tuesday to meet growing household demand for the precious metal. And many industry insiders pointed out that this may also be the latest attempt by the Russian central bank to deal with Western sanctions and withstand the Russian market storm.
"the growing demand for physical gold from households has prompted the bank to stop buying gold from banks to ensure an adequate supply of local buyers," the Russian central bank said in a statement on the same day. "
The bank also said the removal of the 20 per cent VAT on gold purchases also spurred deals. Russia's central bank did not specify how long the policy of stopping buying gold from banks would last.
Russian people have a strong demand for gold.
Gold has long been seen as a safe haven in tough economic times, especially when people are worried about the safety of local cash. Gold is almost universally accepted as an asset, making it the equivalent of foreign exchange when the government is restricted to other currencies.
(Sberbank), the largest bank in Russia and eastern Europe, said last week that its customers' demand for gold and palladium had quadrupled and that it planned to increase the number of offices selling the precious metals to "help people protect their savings".
Asset management company LoomisSayles&Co. KseniaMishankina, a research analyst, pointed out in an email that "since the beginning of the conflict between Russia and Ukraine and Western sanctions, there has been a run on Russian banks and people have withdrawn their deposits." They also see gold as a safe asset to store their savings. "
Shortly after the outbreak of the full-scale military conflict between Russia and Ukraine, the Russian central bank announced an emergency increase in interest rates on February 28, raising the benchmark interest rate from 9.5% to 20%, when the rouble plummeted to an all-time low and Russians withdrew money from banks.
The move comes after Western countries imposed unprecedented financial sanctions on Russia, including expelling Russia's main central bank from the SWIFT payment system and freezing nearly half of the central bank's foreign exchange reserves. Earlier this month, the London Gold and Silver Market Association and Zhishang Group also suspended the certification of all Russian gold refineries, equivalent to banning the country's newly minted gold bars from entering the world's two largest markets.
Behind "give money to the people" or get more with one stone?
In response to the central bank's decision to stop buying gold from banks, analysts at (VTB Bank), the Russian foreign trade bank, said the central bank's decision seemed logical because it was effectively equivalent to the loss of $300 billion in foreign exchange reserves, meaning that gold's share of available foreign exchange reserves had risen from 21 per cent to 40 per cent.
"in order to diversify the central bank's reserves, there is no need for the Russian central bank to increase its gold reserves at present," VTB analysts said. "
By the beginning of this week, the structural liquidity deficit of Russian banks had narrowed from a record Rbs7000bn to less than Rbs4tn ($36 billion), meaning the critical phase of the liquidity deficit was over, they added.
In this case, it no longer makes sense for central banks to buy gold from banks to maintain liquidity, VTB said.
Analysts at Russia's BCS Financial Group said that the purchase of precious metals by Russians will help reduce the influx of cash into the economy and will also help increase the liquidity of banks.
In fact, in the view of some people in the industry, the Russian central bank is likely to sell some of its gold holdings to obtain foreign exchange in the future. According to statistics, as of mid-February this year, the Russian central bank has $132 billion in gold reserves, most of which are stored in the underground vault of the central bank in Moscow, Russia.
