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Gold sanctions unlikely to slow down Russian exports, or hurt Polymetal

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The UK, Canada, Japan and the US have led G7 countries with bans on the import of Russian gold. This represents Russia’s largest non-energy export. From 26 June the “tough new measures” took effect, designed to impact the £12.6bn Russian gold exports.

Gold’s value to the Russian elite has also increased in recent months with oligarchs rushing to buy gold bullion in an attempt to avoid the financial impact of western sanctions. London is a major global gold trading hub and UK sanctions, which will be the first of their kind to be implemented against Russia anywhere in the world, are being touted as having the ability to impact Putin’s ability to raise funds.

“With this import ban on new Russian-origin gold, over £13.5bn of our imports from Russia will be covered by restrictions. Given London’s role at the heart of the global gold trade, this shows the UK will take tough steps to stop the Russian war machine. I am pleased that following discussions with others in the G7 Finance Track, the US, Canada and Japan will be joining us in imposing this measure, shutting down avenues for Russian gold sales and maximising the impact that we can have on Putin and his cronies.”

UK Chancellor Rishi Sunak

But will this really hurt Russia’s gold trade?

There are big question marks hovering over the likely impact of these sanctions on Russia, as most of its gold trade is with Asian countries, and a large quantity of its exports are channelled into the retail jewellery market. In many way the ban looks very cosmetic. Gold that goes into jewellery can be subsequently re-smelted and easily enter the international bullion market.

“I don’t think this will have any impact,” Jonathan Guy, a senior analyst with Berenberg Bank, told The Armchair Trader. “Russia has not been selling to Western buyers, but principally to Chinese buyers. This is not a material issue for the gold market, but could be for silver, where there are fewer Asian counterparties. Asian physical buyers will still take Russian gold and once it is smelted it will be very difficult to tell the origin.”

Switzerland remains a major conduit for gold jewellery smelting, and here jewellery is regularly melted down into gold bars which could be shipped to G7 bullion markets. “Once gold is turned into jewellery it becomes impossible to provenance it,” said Guy. “It is not like the diamond  trade.”

He also said that he felt the impact of the ban would be minimal for gold miner Polymetal International LSE:POLY. One third of its operations are in Kazakhstan and it also has the benefit of its offshore Russia infrastructure, including banking in Cyprus and holding companies in the Channel Islands. Shares in Polymetal International dropped from around £11 on news of the Russian invasion of Ukraine, and are now trading at around 187p.

The measures announced by the UK government build on the action taken by the London Bullion Market on 7th March to suspend six Russian refineries. The gold import ban applies to newly mined or refined gold. It does not impact Russian-origin gold previously exported from Russia. There are no plans to extend restrictions to Russian gold purchased legitimately before the import ban was put in place.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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