By Swann Collins, investor, writer and consultant in international affairs. Eurasia Business News – March 13, 2022

The House of the government of the Russian Federation, Moscow. Photo credits : Eurasia Business News.

Russia, because of the sanctions taken by the United States, Europe and their allies, which blocked Russia’s access to part of the gold and foreign exchange reserves, cannot use almost half of them – about $ 300 billion.

“That’s about half of the reserves we had. We have a total reserve of about $ 640 billion, about $ 300 billion of reserves are now in a state in which we cannot use them,” said Russian Finance Minister Anton Siluanov in a TV interview with the author of the program “Moscow. Kremlin. Putin” (TV channel “Russia-1”, VGTRK) to Pavel Zarubin, noting that part of the gold and foreign exchange reserves, including the National Welfare Fund, are also frozen.

Anton Siluanov also recalled that part of the gold and foreign exchange reserves of the Russian Federation is in yuan, in connection with which the West is trying to get China to also limit Russia’s access to the Chinese currency.

“And we see what pressure is exerted by Western countries on China in order to limit mutual trade with China. Of course, pressure is being exerted to limit access to those reserves that are placed in our yuan,” added the Russian Finance Minister.

As Anton Siluanov emphasized, “I think that our partnership with China will still allow us to preserve the cooperation that we have achieved, and not only to preserve, but also to multiply it in conditions when Western markets are closing.“

According to the minister, due to the freezing of half of the state reserves, the Russian Federation had problems with the fulfillment of obligations, including paying debt.

Anton Siluanov repeated the previously voiced thesis: Russia will service sovereign debt in rubles, including one denominated in foreign currency, until part of the Russian monetary reserves is unfrozen by Western authorities :

“It seems to me that it is absolutely fair when we say that we do not refuse to fulfill state obligations, we will pay them in rubles until the moment when our gold and foreign exchange reserves are not unfrozen.”

“We need to pay for critical imports. Food, medicine, a number of other vital goods. But – I repeat – the debts that we have to pay to countries that were unfriendly to the Russian Federation and made such restrictions on the use of gold and foreign exchange reserves – it is in these countries that we will pay debts in ruble equivalent,” Siluanov said.

On March 1st, the United States issued a directive prohibiting Americans from any transactions with the Bank of Russia, the Russian Federal Ministry of Finance and the Russian National Welfare Fund (NWF). Similar decisions were announced by the UK, Japan, Canada, and Switzerland.

Earlier, on February 28, the European Union approved the decision to freeze the assets of the Central Bank of the Russian Federation.

Freezing of international reserves of the Central Bank of the Russian Federation was also included in the sanctions package of Australia.

The current structure of Russian monetary reserves is not known – the Bank of Russia discloses detailed information with a lag of at least six months. Recently, the Russian authorities have been actively changing the structure of reserves, leaving geopolitically risky, in their opinion, assets. True, there are very few safe reserve assets in the world from this point of view, so it would be impossible to completely solve the problem before it arises.

Since 2014 Russia has more than doubled the amount of gold in reserves. Also, the Bank of Russia was the largest consumer of gold in the country. Russia was the second largest producer in the world in 2020 and accounted for 9.88 per cent of total global production, with 331.1t of mined gold. Russia’s international monetary reserves rose by $3.6 billion from February 21 to 24, reaching a new all-time high of $643.2 billion. 

At the end of January, the value of monetary gold in Russia’s international reserves was $ 132.26 billion, the share of gold in reserves was 21%.

Read also : How to invest in gold

In the situation of the deep shock of foreign exchange liquidity that the Russian banking system is now experiencing, gold will once again serve to store value and protect wealth against inflation. In early March, Russia amended its Tax Code adoptiong a law abolishing VAT on the purchase by individuals of precious metals in bullion with their withdrawal from bank vaults. Previously, the VAT tax rate was 20%.

Inflation in Russia in 2022 will be +20% and should decrease to +8% in 2023, according to the Macroeconomic Survey of the Bank of Russia. Analysts surveyed by the Russian central bank expect that the national GDP could decrease by 8% by the end of 2022, but in 2023 it would grow by 1%. To protect their wealth against high inflation, Russians will buy gold and silver, as buying foreign currencies such as dollars and euros is already not possible anymore in Russia.

The Russian central bank imposed restrictions from March 9 to September 9 for withdrawal of foreign currencies from banking accounts from Russian citizens. Withdrawals amounting to more than $ 10 thousand in foreign cash currency are banned.

Few possibilites remain for Russian investors and families to safe their wealth against inflation and economic crisis.

Read also : How will Russia respond to Western sanctions ?

Obviously, under the conditions of sanctions, hard currency ends, if there is no alternative, real estate and just durable goods become a means of saving for Russians. The current situation in Russia is a lesson for all countries that could see their national economies deprived of dollars and euros. China, which has been advocating for a monetary system based on alternative currencies, sees its proposals approved by the current events. Will this situation fuel a Russia-China Alliance in the building of a new monetary system based on gold, with yuan as the monetary standard backed by the yellow metal ? The strenghth of the US economy may postpone the implementation of a successful alternative monetary system.

The yellow metal has always been a great hedge against inflation because it rises in price when the cost of living standards rises. Gold can store value efficiently, when paper currency loses purchasing power because of inflation.

We must admit that Western sanctions pressure on Russia has led to serious problems within the Western economies themselves. The sharp rise in oil and gas prices, problems with fertilizers and wheat, titanium and palladium caused enormous disproportions in the world economy. And if each specific one could still be solved, then together they become absolutely critical for Western economies.

We often hear that, U.S. sanctions will now be lifted from Iran and that the Iranian oil will replace Russian one. Everyone forgets that this will not happen “here and now”, but after some fairly long time, if it happens at all. And all this time it is necessary to live and maintain the standard of living of the U.S. an European populations with very high inflation. How will the U.S. and Europe deal with it?

Read also : Russia moves to regulate crypto economy

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© Copyright 2022 – Swann Collins, investor, writer and consultant in international affairs.