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What the ban on Russian gold imports means for its economy

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NEW YORK (NYTIMES) – The decision over the weekend to ban the purchase of newly mined and refined gold from Russia is the latest effort by the United States, Britain and their allies to notch up the wave of sanctions concentrated on Russia in response to its four-month-old invasion of Ukraine.

The announcement, made as US President Joe Biden and other leaders from the Group of 7 (G-7) nations gathered for meetings this week in Germany, builds on steps already taken to cut off Russia from the international financial system, deprive it of additional revenues that are helping fund its war in Ukraine and punish President Vladimir Putin of Russia and wealthy business executives in his circle.

Ukraine’s allies have already prohibited most trade with Russia, frozen hundreds of billions of dollars of assets belonging to the Bank of Russia held in their own financial institutions and blocked Russian banks from using the messaging system, known as Swift, that undergirds the system of international payments.

Russia, one of the world’s biggest producers of gold, cranked up the mining of new gold to compensate for some of the paralysed assets, said Mr Christopher Swift, a national security lawyer at Foley & Lardner.

The Bullion Market Association in London, a major hub of the global gold trade, had already suspended transactions with six Russian silver and gold refineries in March.

Mr Swift, who previously worked at the Department of Treasury’s Office of Foreign Assets Control, said: “In order to make up for reserves held by Russian companies and oligarchs, they brought new gold online. The G-7 is shutting down access to this new gold.”

Russia’s billionaire business magnates have been buying gold bullion in an attempt to blunt the impact of the sanctions.

Prime Minister Boris Johnson of Britain underscored the point Sunday (June 26), saying the move would “directly hit Russian oligarchs.”

Whether this latest move will also – in Mr Johnson’s words – “strike at the heart of Putin’s war machine” is more debatable.

Ukraine’s allies have struggled to keep the pressure on and deprive Mr Putin of resources for his war machine without putting their own economies at too much risk. The balancing act is particularly difficult for the European Union, which heavily depends on Russian oil and gas.

Last year, Russia earned more than US$15 billion (S$20.78 billion) from its gold exports, according to the British government. Since gold is widely held in reserve by central banks around the world, Russia had a ready market.

“Russia is a big producer of gold, and it is a reserve asset,” said Dr Lucrezia Reichlin, a professor at the London Business School. “If they cannot sell, then that source of income is gone.”

After the early rounds of sanctions had stopped much of its existing international gold trade, Russia’s central bank announced that it would resume buying domestically produced gold, which was also seen as a way of helping to prop up its currency. The gold held by Russia’s central bank is estimated to be worth US$100 billion to US$140 billion.

“Fundamentally this is an incremental tightening of the sanctions rather than a significant escalation,” Mr Swift said. “If your goal is to undermine Russia’s economic ability to wage war in Ukraine, this is a necessary but not sufficient measure.”

But he added, “If the G-7 wants to have a strategic effect then they really need to think about what they’re going to do about Russian gas.”

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