The Unfreezable Asset: Gold, Sanctions, and Russia

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Editor’s note: Don’t miss our comprehensive guide to Russia’s war against Ukraine


As Russian tanks roll toward Kyiv, punishing Western financial sanctions have left the Russian economy financially isolated and in crisis. The most notable move so far has been the joint decision by the United States and the European Union to “blacklist” the Central Bank of Russia. These sanctions, which have rendered the bulk of Russia’s $600 billion in foreign exchange reserves useless, precipitated a collapse in the value of the ruble earlier this week.

The sanctions targeting the Central Bank of Russia have “frozen” the country’s foreign exchange assets, most of which are held in accounts with monetary authorities and financial institutions outside of Russia. But not all of Russia’s reserve stockpile lies in foreign accounts. A sizeable portion, about $120 billion or so, sits in Russian vaults in the form of monetary gold.



Can President Vladimir Putin’s gold hoard help the Russian economy to weather biting financial sanctions? Though there are limits to the yellow metal’s usefulness, it can function as an economic lifeline for an isolated economy. Putin could exchange gold for cash in unregulated shadow markets with criminal groups or other pariah regimes. He could use gold to pay for illicit weapons or other goods or services. None of this would be easy, but it is possible, and it has been done before. Perhaps most importantly, Putin has prepared for this very moment.

The Central Bank of Russia significantly increased the pace of its gold purchases beginning in 2014. The motive, while not publicly announced, was clear: Putin was responding to fresh U.S. sanctions, imposed following the invasion of Crimea that year.

Gold is attractive as a hedge against financial sanctions. Monetary gold held within a state’s own vaults cannot be seized by foreign adversaries, short of a military invasion. Specie can be physically moved around the world, outside of digital financial networks, making it difficult to track. In extreme circumstances, governments can illicitly trade gold for foreign exchange in unregulated markets for precious metals.

To be clear, Russia is not at the point where it has no other choice but to liquidate its gold holdings. For instance, despite sanctions, Russia is still selling oil, earning foreign exchange for those exports. Russia may also draw on some unfrozen assets in its National Wealth Fund before resorting to bullion sales. Were evidence to emerge that the Central Bank of Russia was liquidating gold, this would indicate just how weak position the economy is in. However, for an almost fully isolated country, gold can offer a lifeline when other, more conventional, assets cannot.

For a blueprint, look no further than Venezuela. In 2011, the country’s president, Hugo Chavez, made the prescient decision to repatriate 160 tons of gold reserves from Europe. That move has been critical to the ability of Chavez’s successor, Nicolas Maduro, to hold on to power despite successive waves of crippling U.S. sanctions beginning in 2014.

As sanctions targeting Caracas piled up — including Washington’s decision to blacklist Banco Central de Venezuela in 2019 — the Venezuelan financial system found itself nearly completely isolated from the world economy. What did Maduro do? He reached for his gold, but in a nontraditional way.

Compared to assets like U.S. Treasury bonds, gold holdings are relatively illiquid — that is, they are difficult to turn into cash. So, one way in which central banks can employ their gold holdings is by temporarily “swapping” bullion for more liquid foreign exchange, before swapping back at a later date. Alternatively, monetary authorities can take more permanent action by selling gold in the London gold market, or others like it.

Because of the sanctions imposed on his country’s central bank, Maduro was unable to engage in these traditional gold operations. Where did he turn? Russia.

In response to unrelenting U.S. sanctions, Russian foreign minister Sergei Lavrov pledged in early 2019 that his country would “do everything” to support the embattled Maduro regime. Russian assistance took various forms, from arms sales to Caracas to helping the South American country develop its own oil-backed cryptocurrency to evade sanctions (an effort that failed miserably). Russia also helped Venezuela to harness its gold wealth by transporting tons of monetary gold around the world to sell in unregulated markets.

Aboard Russian charter planes, physical gold bars were flown from Venezuela to various destinations including Uganda, the United Arab Emirates, Turkey, and other unknown locations. Here, gold was exchanged for cash euros. The euro notes were then returned to Venezuela and doled out to otherwise isolated Venezuelan banks. The cash injection ultimately facilitated import purchases. Maduro may have also used proceeds to enrich cronies in the military, maintaining their loyalty.

Besides sales in shadow markets, physical gold can also be used to pay for goods or services directly. For example, in 2020, Iran accepted gold as payment for helping Venezuela to repair its broken-down gas refineries. Russia may have also accepted gold as payment for Venezuelan debts under a 2017 rescheduling deal with Moscow.

What made these types of exchanges possible is the very property that makes gold so antiquated today: It is physical. Shadow-market gold sales do not rely on SWIFT financial messaging, or on correspondent bank accounts, which electronically wire funds from one account to another.

What does the Venezuelan example tell us about Russia today? If the conflict in Ukraine drags on and Western sanctions continue to pile up, gold may become a key lifeline for Russia. Putin could follow the Maduro playbook, surreptitiously selling bullion to raise cash. Funds could then be used to resupply Russian troops on the front lines, or to fund import purchases, weakening the costs that sanctions impose on the Russia people.

Who would buy Russian gold right now? Criminal groups are one possibility. Organized crime groups, like drug cartels, are attracted to gold as a store of wealth because it is held outside of the banking system, limiting law enforcement’s ability to seize their assets. Russian specie could be transported and sold in places like Uganda or Dubai where thriving illicit gold markets are used by criminals and kleptocrats to launder money.

The Central Bank of Russia may also find buyers in other states worried about future financial sanctions. Turkey, which has been sanctioned by the United States in the past and has also beefed up its gold reserves in recent years, was a key buyer of Venezuelan gold. Iran is another possibility. (In 2018, furthermore, U.S. courts convicted a Turkish banker of orchestrating a multibillion dollar sanctions-evading scheme moving cash and gold from Turkey to Iran, with Turkish government figures accused of taking bribes in connection with the scheme.) Yet, for several reasons, the most important potential official gold buyer in this scenario is China.

First, China has demonstrated a real interest in increasing its gold holdings. Beijing added nearly 900 tons in bullion to its reserves between 2009 and 2021, according to data from the World Gold Council. Second, given the events of the last week, Beijing may be keen on adding to those holdings, fearing it may face Russia-style sanctions in the future for its own foreign policy actions. Third, buying on the shadow market would give China leverage to demand a below-market price for the metal, which is quite expensive presently. Finally, with a 2600-mile land border between the two countries, shipping gold from Russia to China in exchange for cash, goods, or services would be relatively easy — and difficult to track.

There are limits to this strategy. Even if the Central Bank of Russia finds buyers for its bars, physically moving gold is time consuming and entails costs as well as risks. Planes and trains can only carry so much freight. Moscow has over 2000 tons of gold in its vaults. Sales, if they occur, will be incremental.

There are also limits in demand for shadow gold purchases. Despite demonstrated interest in holding more gold, China and other potential official buyers still need dollars. Their appetites for gold are not unlimited.

Russia’s gold holdings have not sanction-proofed its economy. Gold sales will not enable the Central Bank of Russia to prop up the value of the ruble, for instance, since the central bank is blocked from foreign exchange trading. Gold sales will not reconnect sanctioned Russian banks to global financial networks. But if the Russian economy is further isolated by additional measures, Putin could, like Maduro, sell gold for cash. Proceeds could be used to cover vital import purchases or to compensate sanctioned Russian oligarchs for their losses, reducing domestic resistance to his war effort.

No self-respecting central bank wants to resort to bullion sales in unregulated markets. But, given that the Central Bank of Russia has found itself between a rock and a hard place, dipping into its gold hoard may become its best option down the road. The yellow metal still has some shine to it, after all.



Daniel McDowell is an associate professor of political science at the Maxwell School of Citizenship and Public Affairs at Syracuse University.

Image: TASS (Photo by Donat Sorokin)