Russia To Economize on Purchases of Precious Metals

I saw this piece in VZGLIAD this morning.  It is an important topic, one of those things that go on behind the scenes, but few people take notice, except for economists.

The lede to the story is that the Russian Ministry of Finances plans to spend 5 billion rubles less than was originally budgeted for purchases of Diamonds, also economizing on the purchase of Gold and other precious metals for the State Armoury.

The Russian tradition is to economize (скупать) on Diamonds during lean years.  But the author of the piece, Olga Samofalova, wonders why the Ministry is also dubious about purchases of Gold and other precious metals.

Russian Deputy Ministry of Finances Alexei Moiseev announced that the Ministry, for 2016, will purchase 5 billion rubles worth of Diamonds.  A total of 12 billion had been budgeted for overall purchase of precious metals, the other 7 billion will remain in reserve.  “It is still being discussed, whether we will use this [extra 7 billion] for purchases,” Moiseev remarked.  “In truth, I do not believe that it is necessary to spend this money on additional purchases [of precious metals].”

The Role of “GoKhran”

Since 2003 a Russian institution called “GoKhran” is charged with the mandate of purchasing Gold and other precious metals for the State Armoury.  “GoKhran” (Гохран) is short for a very long Russian name:
Государственное Учреждение По Формированию Государственного Фонда Драгоценных Металлов И Драгоценных Камней Рф, Хранению, Отпуску И Использованию Драгоценных Металлов И Драгоценных Камней.

(State Institution for Maintaining the State Fund of Precious Metals and Precious Stones of the Russian Federation; the Preservation, Sale and Use of Precious Metals and Precious Stones.)

Tsar Peter and his brother Alexis shared a double throne made of gold and silver.

GoKhran was founded by Russian Tsar Peter the Great in 1719.  Peter was a man who understood the value of precious metals, and their importance to the wealth of a modern State.  Tsar Peter ordered an audit of the state’s precious metals and jewelry, and had them all collected together in a room called the Imperial Renteria.  This Renteria was guarded well and locked up, literally “behind three locks”.  Apart from Peter himself, only three trusted individuals were ever allowed into this room.  Each individual had the key to just one lock.  (Hence it would take all three of them together to open the door.)

After Peter’s death in 1725, he was followed by a succession of Lady Empresses.  Being ladies, they needed to wear lots of jewelry.  Hence, the state fund was beefed up with ever more treasures.  An entire chamber, called the “Diamond Room” was filled entirely with diamonds.  With the beginning of World War I, the treasure hoard was moved to a more secure location, within the walls of the Kremlin itself.

Exhibits from the Kremlin Armoury

In 1917 the Soviets took over the governmental functions from the former monarchy.  By decree of the Council of Peoples Commissars, the Tsarist treasure hoard was fully nationalized (Decree #414, 3 February 1920).  GoKhran was revamped at that time and charged with curating the treasure hoard.  GoKhran cooperated heavily with other Soviet institutions such as the Hermitage Museum, the Academy of Sciences, the Ministry of Finances, and the Ministry of Foreign Affairs.

During the Great Patriotic War, all the USSR’s diamonds and its entire gold hoard was moved out of the capital (just in case the Nazis succeeded in taking Moscow) and secured elsewhere; returning to the Kremlin when the war ended.

Since 1992 GoKhran comes under the purview of the Ministry of Finances, but is under the disposition personally of the President of the Russian Federation.

The Rules Of the Game

According to the current rules, GoKhran is supposed to compete with commercial banks, which also buy up precious metals.  The rule is that private companies are supposed to initially present the gems to GoKhran for potential sale; and only if GoKhran doesn’t want them, then to go out onto the open market.  This is how it is supposed to work in theory, but the reality is different.  GoKhran actually purchases 100 times fewer gems than do banks.  For example, in 2010 GoKhran purchased only 3.4 tons of Gold, as opposed to almost 150 tons purchased by commercial banks.

In recent years, the pattern has been for GoKhran to buy Gold and sell Diamonds.  The Diamonds are sold by auction, but the winning buyer must propose at least a minimal price, as determined by a diamond specialist employed by GoKhran.

Diamonds are sold in order to acquire currency to purchase more liquid metals, such as Gold, Platinum, etc.

Why Help Alrosa?

The VZGLIAD piece then goes on to ask the question, Why is the government laying out money to buy Diamonds, but is only “thinking” about buying more Gold?  The theory is that domestic diamond markets are low now, and the government is attempting to help them out.  [yalensis:  I think what they are trying to say is that, with the economy in recession, sales of luxury goods such as diamonds are down.]  And in fact, this is exactly how the Russian government behaved, during the 2008-2009 recession years, when such domestic diamond companies as “Alrosa” (which is partially state-owned) almost went out of business.

Alrosa’s largest diamond mine

The Russian government at that time, in order to save Alrosa, bought up 8 billion rubles worth of diamonds; or 6% of the company’s inventory.

Yury Trutnev (right) oversees the diamonds for President Putin.

This time as well, it is speculated that 5 billion rubles of government money will go into Alrosa’s coffers.  In return for bags of diamonds into the modern-day Renteria room.  This theory was partially confirmd by Yury Trutnev, who is Deputy Prime Minister of Russia, and the Presidential Envoy to the Far East Federal Okrug, and one of whose job duties is to oversee the Alrosa Company.

Currently the Russian government owns around 44% of the shares of Alrosa.  Dmitry Lukashov, who is an analyst for IFC Markets, speculates that the Russian goverment is helping Alrosa in order to beef up its own stock shares before a planned partial privatization.  Recently President Putin signed a decree approving the privatization and sale of an additional 10% of government-owned shares in the company.

Diamonds for the State Armoury are purchased solely from Russian producers, of which Alrosa is the main player.  Alrosa mines 95% of all the diamonds mined in Russia.  In 2015 it mined 38.3 million carats of raw diamonds, and for 2016 the plan is to mine around 37 million carats.  Another important diamond producing company is “Archangel Geological Mining Company”, which belongs to Lukoil.

Russia’s Hard Currency Reserves

Gold and other precious metals constitute the hard currency reserves of the nation.  The Ministry of Finance is not the only state organ which purchases gold.  The Central Bank does so as well.  In 2015 the Central Bank purchased more than 200 tons of Gold.

The economic crisis and the drop in oil prices have combined to deplete Russia’s hard currency reserves.  At the start of 2014 Russia’s hard currency reserves totalled around 510 billion dollars.  But by the middle of that same year, the reserves had dipped to 382 billion dollars.

Hence, Russia has set itself a goal, within the next three years, to raise the currency reserves back up to the 500 billion dollar level.  In addition to precious metals, another source of hard currency is to buy up the paper money of developed nations.  However, this is not a good source of income.  For example, American bonds maturing at 10 years, only give 1.7% annual interest.  According to Lukashov, purchasing gold and precious metals is a better way to go, than buying up paper bonds.

In fact, Diamonds and Gold, are the best hedges against inflation of the U.S. currency.  Gold in particular is a stabilizing factor.  According to Lukashov, our planet has been charted so completely, that nobody expects the discovery of new sources of Gold, at least sources which are easy to mine.  Due to this, the value of Gold is fairly stable.

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