In the aftermath of last year’s outbreak of war, the Western nations swiftly implemented sanctions against Russia. Consequently, Western buyers began to steer clear of Russian gold, causing a significant shift in the bullion market. This created a void that was swiftly filled by other countries, with the United Arab Emirates emerging as a pivotal trade hub for Russian gold.
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The UAE’s prominence in Russian gold trade grew, particularly after sanctions disrupted Russia’s more traditional export channels. Reports indicate that the Gulf State imported a substantial 75.7 tons of Russian gold, valued at $4.3 billion, during the period following the onset of the Ukraine conflict. This marked a significant surge from a mere 1.3 tons in 2021. The next major destinations for Russian gold are China and Turkey, each importing around 20 tons between February 2022 and March 2023. Remarkably, these three countries, including the UAE, collectively accounted for a staggering 99.8 percent of Russian gold exports during this timeframe, based on customs records accessed during that period.
The United Arab Emirates has assumed a pivotal role in the trade of Russian gold, capitalizing on disruptions caused by Western sanctions. Despite warnings from the West, the allure of Russian gold remains strong, with potential consequences for global markets and geopolitics.
However, a significant risk looms for the Western nations.
If Russian gold is melted down and recast, it could potentially re-enter U.S. and European markets, its origin cleverly concealed. To deter countries like the UAE and Turkey from engaging with Russian gold, the West issued a stern warning – either abandon Russian gold or face exclusion from G7 markets.
Notably, the UAE has long maintained a thriving gold industry, importing an average of 750 tons of pure gold annually between 2016 and 2021. Thus, shipments recorded in Russian records would represent only about 10 percent of its total imports. Furthermore, Russian firms had been selling bullion in the UAE at a discount of approximately one percent compared to global benchmark prices, providing an incentive for trade. Reports from Reuters suggest that a substantial portion of the gold destined for the UAE was intended for refineries, where it would be melted down and recast. However, the Emirates has vehemently denied these claims, asserting that it had not purchased any Russian gold and operated in full compliance with applicable laws, subsequently ceasing any transportation of such gold.
However, there are risks involved in buying Russian gold, as it could be sourced from sanctioned entities. Due diligence is instrumental for end buyers wishing to ensure they respect sanctions regimes. The US Treasury has also sanctioned illicit gold companies funding Wagner. The short-term impacts of sanctions on Russia’s gold trade are constrained by the fact that they largely do not impact transactions to Russia’s energy sector, the country’s lifeblood, and because the EU has not sanctioned some of Russia’s largest banks.
The Shifting Landscape of Russian Gold Trade Amidst Sanctions
The stranglehold of sanctions imposed by the UK, US, and EU on Russia in response to its invasion of Ukraine has substantially curtailed Moscow’s and other sanctioned entities’ ability to access and maneuver finances. As these sanctions grow increasingly stringent, questions arise about how Moscow and the targeted entities, including Russian individuals and companies, will secure funds, facilitate international money transfers, and access foreign exchange in the future. Illicit gold networks are emerging as a possible avenue to address these challenges. As Moscow finds itself isolated from foreign currency and financial systems, illicit gold markets and gold laundering present a potential means for Moscow and other sanctioned actors to generate profits and facilitate cross-border financial transactions.
Navigating the Illicit Gold Trade:
Gold, with its unique characteristics, offers an alternative route for Moscow and other entities subject to sanctions. Unlike digital financial networks, such as SWIFT, gold can be physically transported worldwide, evading traditional tracking mechanisms. Furthermore, gold’s origins can be concealed or disguised, making it an appealing vehicle for illicit financial activities. Moscow could potentially leverage foreign exchange reserves acquired through illicit gold markets for various purposes, including imports, funding military operations, or compensating sanctioned Russian oligarchs for their losses. Beyond Moscow, other sanctioned actors may also tap into criminal networks to launder and smuggle gold.
Evolving Strategies Amidst Sanctions:
The illicit gold market, already well-established and resilient, offers a range of economic options to Moscow and other beleaguered sanctioned entities. Recognizing the potential use of criminal networks to exploit gold markets and evade sanctions is paramount. Developing targeted responses to counter the abuse of gold markets serves not only to enhance the effectiveness of sanctions but also to mitigate unintended consequences.
The Shifting Landscape of Russian Gold Trade:
Despite Western sanctions, Russia has sought alternative channels for its gold exports. The United Arab Emirates, Turkey, and China have emerged as key trade hubs as Russian producers adapt to the changing geopolitical landscape. These countries remain open to dealing in Russian gold due to the absence of secondary sanctions. Nevertheless, the EU and G7’s restrictions on Russian gold imports may not entirely safeguard member countries from inadvertently entering sanctioned metal markets. Ensuring due diligence in trade operations becomes essential for end buyers striving to adhere to sanctions regimes.
Closing Off Global Gold Markets:
The global gold market, particularly the UK market, plays a pivotal role in Russian gold flows. In 2020, Russia exported a substantial $16.9 billion worth of gold to the UK, making it the primary destination. However, new UK sanctions prohibit dealings in money-market instruments, and gold falls under this category. London’s gold market, one of the world’s most significant bullion centers, strictly adheres to rules that prohibit trading with entities violating economic and trade sanctions. Consequently, Russian gold bars are effectively barred from entering London’s market, a hub for trillions of dollars in precious metal trade annually.
As the sanctions landscape continues to evolve, Moscow and sanctioned actors explore unconventional avenues to navigate the financial blockade, raising concerns about illicit gold trade networks and their impact on global markets.
Impact of Secondary Sanctions:
Secondary sanctions, which target third parties conducting transactions with sanctioned entities, pose significant challenges to Russia and its allies. The prevalence of the US dollar in international transactions gives the US a powerful jurisdictional advantage. Even transactions made outside the US can be subject to US authorities’ scrutiny if they involve sanctioned entities. The EU and UK are also tightening the noose, with restrictions blocking access to foreign exchange markets, especially in London, a global financial powerhouse.
The Switzerland connection emerges in the Russian gold investigation.
Since the beginning of Russia’s war on Ukraine last year, 75 tonnes of gold of Russian origin have ended up in Swiss gold refineries and foundries. The gold was probably also processed in Switzerland via London in recent years. The Swiss gold industry has played a role in helping fund Russian President Vladimir Putin’s war of aggression against Ukraine. However, in Switzerland, there is a ban on “buying, importing or transporting” gold from Russia, which was decided by the Swiss government in August 2022. The fact that this gold was probably also processed in Switzerland is problematic and ethically questionable.
Swiss public television, SRF, in partnership with Die Wochenzeitung WOZ, conducted an extensive investigation into the Swiss gold industry’s potential links to Russian President Vladimir Putin’s aggressive actions in Ukraine. Their findings unveiled a disconcerting revelation: Swiss gold refineries have actively processed substantial quantities of Russian-origin gold, routing it through London in recent years.
Surge in Russian Gold Imports to Switzerland. Since 2021, Swiss refineries have processed an astounding 110 tonnes of gold, valued at over CHF 6 billion ($6.6 billion). Remarkably, since the outbreak of the Ukraine conflict in March 2022, Switzerland has processed an impressive 75 tonnes of Russian gold, corroborated by data from the Federal Office for Customs and Border Security.
An investigative report reveals Swiss gold refineries processed substantial Russian-origin gold, raising questions about links to Putin’s Ukraine actions. Since 2021, 110 tonnes of gold, valued over CHF 6 billion, passed through Swiss refineries. Switzerland processed 75 tonnes since the Ukraine conflict started in March 2022. The Swiss government promptly banned Russian gold imports in August 2022, in line with EU and US sanctions.
Swift Response: Ban on Russian Gold Imports
In response to this influx of Russian gold, the Swiss government, aligning with the European Union and the United States, swiftly enacted a ban in August 2022 on the importation of Russian gold and gold products, encompassing “buying, importing, or transporting” such assets. Notably, the ban excludes gold processed within Swiss borders before its implementation.
Complex Gold Route via the UK.
Russian gold takes a convoluted route to reach Switzerland, utilizing the UK as a key transit point. It’s worth noting that Russia’s export of gold to the UK remained negligible until 2018, after which export volumes surged dramatically. Between 2019 and the onset of last year’s conflict, Russia channeled over 700 tonnes of gold to London, amassing a substantial total exceeding CHF 34 billion, as confirmed by British foreign trade data.
Drivers of Gold Exports and Ethical Concerns. Bernhard Schnellmann, a Swiss precious metals expert, attributes the surge in exports to Russia’s central bank’s decision to halt gold purchases in mid-2019 and the subsequent removal of value-added tax (VAT) on gold, which catalyzed a remarkable surge in gold exports. On the other hand, Mark Pieth, a former criminal law professor and gold trading expert, suggests a possible connection between these massive gold sales and Russia’s invasion of Ukraine, raising ethical concerns about the use of gold proceeds for war preparations.
Ethical Debate Surrounding Gold Refining in Switzerland.
Marc Ummel, head of commodities at Swissaid, shares these ethical concerns, emphasizing how the refinement process transforms “ethically questionable Russian gold” into gold with a Swiss seal of approval, masking its traceability and raising further ethical dilemmas. However, Swiss gold refineries strongly refute allegations of a direct connection between processing Russian-origin gold and Russia’s military actions in Ukraine. Christoph Wild, head of the Swiss Association of Manufacturers and Traders in Precious Metals, firmly maintains that this gold remains unsanctioned and carries no ethical implications, given its pre-conflict origins, thus dismissing concerns about the ethicality of refining such gold.
Swiss Response: Ban on Russian Gold Imports.
Switzerland responded promptly by imposing a sweeping ban in August 2022, restricting “buying, importing, or transporting” gold from Russia. Swiss customs administration staunchly asserts that recent imports of Russian-origin gold into Switzerland adhere to legal norms. They argue that this gold, originating from Russia but exported to the UK in February 2022 before the onset of conflict and sanctions, does not directly contribute to funding the war.