Russia has started selling physical gold from its central bank reserves for the first time in 25 years to help cover the growing cost of the war in Ukraine.According
to a report by the Berlin-based news outlet bne IntelliNews, the Central Bank of Russia sold 300,000 ounces of gold in January and another 200,000 ounces in February this year. That adds up to 14 tonnes of gold sold in just two months — the biggest such sale in a single two-month period since 2002. This is a big change from how Russia used to handle its gold. In the past, any gold movements between the Ministry of Finance and the central bank were mostly on paper, without actually moving the physical bars. Now, the central bank is selling real gold bars directly into the market. Because of these sales, Russia’s gold reserves have fallen to 74.3 million ounces — the lowest level in four years. Currently, the country still possesses over 2000 tons of gold and is the fifth largest holder of gold in the world; however, the fact that they have been selling off large amounts of gold indicates that there is tremendous pressure on the government's finances and that the sales are occurring at the same time that Russia is facing a serious budgetary crisis. For example, the government has ended 2025 with a budgetary deficit of 2.6 percent of GDP compared to their original estimate of a 0.5 percent budgetary deficit. Many experts believe that the actual budgetary deficit may be as high as 3.4 percent due, in part, to the fact that some of the spending has been postponed until 2026, which makes the government’s budget look better than it really is. Oil and gas revenues were once a significant source of income for the Russian government; however, there has been a sudden decrease in these revenues. Energy taxes contribute just about 20% of overall government revenue due to sanctions imposed by the West and lower oil prices during the latter half of 2020 than they did prior to the beginning of the conflict with Ukraine. At the same time, expenditures on military items remain at extremely high levels throughout the duration of the war in Ukraine, which has now lasted four years. The decision to sell gold also makes sense because prices have risen sharply, recently crossing $5,000 per ounce. This has pushed Russia’s total international reserves above $809 billion, even though around $300 billion of those assets are frozen in Western countries. Gold alone is now worth about $384 billion in Russia’s reserves. Since February of 2022, Russia has been working to find multiple ways to obtain funds to alleviate its budget concerns. Some of these methods have included taking money out of the National Wealth Fund (which still has approximately 4 trillion roubles left), issuing additional domestic bonds, and increasing its value-added tax (VAT). However, recently, it has begun to sell off actual gold rather than using those other options. Historically, Russia has built up its gold reserves for many years, mostly in reaction to its annexation of Crimea in 2014 and to the beginning of the Ukraine war in February of 2022. By building up gold reserves, the Russian government believed that it would be able to reduce its reliance on the U.S. dollar as well as provide itself with a safeguard against potential sanctions. Therefore, prior to selling gold, the central bank of Russia had largely refrained from selling any physical gold because they viewed the gold as a long-term, strategic reserve. Russia's decision to sell actual gold bars is indicative of the increased financial strain caused by the ongoing war. Selling 14 tonnes of gold is not much relative to Russia's entire reserve of gold but represents the Kremlin's need for cash for their military efforts. Oil prices remain low along with high military expenditures create the possibility of Russia selling even more gold or seeking alternative capital sources over the next several months. As a result, will Russia be able to continue funding their wartime efforts without experiencing substantial additional economic woes?
