New EU Sanctions Target Russian Gold. Shows How Valuable Gold Really Is.

The economic sanctions war against Russia has been going on as long as the War in Ukraine. The U.S. and EU have taken the lead in imposing sanctions, but U.S. allies including Canada, the UK, Australia and Japan have been just as aggressive.

Interestingly, a lot of large developing economies have maintained a neutral status and have not gone along with sanctions including Brazil, India, Saudi Arabia, China, and Turkey. The sanctions have been a failure.

It’s true that Russian growth has gone mildly negative, but it now seems to be recovering. The Russian ruble took a tumble immediately after the invasion but has since bounced back and is now stronger against the U.S. dollar than it was before the invasion. Russian oil and natural gas revenues are up because of higher prices and because lost sales to Europe have easily been replaced with sales to new customers in Asia.

The West has suffered more from its own sanctions than Russia in the form of inflation, supply chain disruptions, and shortages of strategic metals, fertilizer, grain, and other critical Russian exports. Seizures of yachts and mansions from Russian oligarchs have actually been a favor to Putin because he considers them a rival power center and doesn’t mind seeing their financial wings clipped.

Still, the EU seems to be following the old adage – If at first, you don’t succeed, try, try again. EU sanctions have not succeeded and so they are trying again with a new round.

As reported here, the EU’s new target for sanctions is Russian gold. The EU plan to sanction Russian gold is ill-formed. The Europeans can’t decide if they want to ban Russian exports, Russian imports, or both. This confusion shows a complete lack of understanding of how gold markets work.

For over a decade, Russian gold mines have been free to sell their gold on world markets. Likewise, the Central Bank of Russia has acquired over 1,700 metric tonnes of gold with steady monthly purchases from bank dealers scaled so that they did not disrupt global markets.

Gold is fungible and is an element (Atomic Number 79) so it can easily be melted and re-refined. This makes it impossible to trace.

Russia has ample refineries and gold mines of its own. If Russia is cut off from global markets, it can simply require Russian mines to sell to the Central Bank of Russia and use Russian refineries to convert ore from those mines to 1-kilo gold bars of 99.99% purity.

The miners still get paid. The refineries are kept busy. And the Central Bank of Russia still gets the gold (at least the 350 metric tonnes per year that Russia produces).

European gold sanctions become irrelevant. It’s a bit less efficient than the current system, but it does little or no damage to Russia’s gold holdings or to Russian miners.

After failing with six rounds of sanctions, Europe is set to fail for the seventh time. Meanwhile, the war goes on.

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