Putin’s gold

Russia’s war savings

By the time the Kremlin ordered the full-scale Ukraine invasion to begin, Russia had accumulated around $630 billion of international reserves. This amount would easily suffice to cover Russia’s foreign debt or keep the national budget going for a year. Russia was ranked fifth in terms of the total reserve amount behind China, Japan, Switzerland, and India.

Experts described this reserve-building operation on the eve of the invasion as constructing a “financial fortress” in anticipation of an all-out clash with the West. However, this policy would be quite rational for a peaceful country as well, UCLA professor of economics Oleg Itskhoki tells Novaya-Europe.

“It fits well within a reasonable economic policy of an oil-producing country even if it’s not gearing up for a war. For instance, Saudi Arabia is boosting its reserves, Norway has put together an amount that exceeds three annual GDPs combined.”

the economist explains. “However, many things only became clear in retrospect. We can see now that Putin was saving up so much not just to pursue a coherent macroeconomic policy.”

Even though the Russian authorities failed to salvage a significant share of the country’s reserves, they did try to create a safety net following Crimea’s annexation in 2014. The gold share in value terms went up from 8% in 2014 to 21% in early 2022 and now to 24%. In physical terms, these gold assets amount to 2.3 tonnes or 73.9 ounces. China’s yuan, which was never used as a reserve currency pre-2015, serves as another pillar for the Kremlin. By the time the Ukraine war began, its share in the Russian reserves had increased to 17%.

What’s the deal with finding these reserves?

Soon after Russian tanks ploughed into Ukraine, the US, EU, Japan, and other countries froze Russia’s reserves. Heads of the Bank of Russia and the Finance Ministry lamented that around $300 billion worth of reserves had been blocked. This number corresponds to the data that the Bank of Russia published on the eve of the war. Russia stored around half of its reserves in the countries that went the sanction route.

The US Treasury also reported last summer that the Western coalition had frozen around $300 billion of Russian reserves. At the same time, no country specified where Russian assets were stored and in what quantities. Fast forward one year since the first round of sanctions was announced, and we are none the wiser about Russia’s reserves.

Separate statements made by countries also fail to clarify the overall picture. For instance, France said that it had blocked €22 billion, or just around a third of the assets that the Russian Central Bank had in the country. The Bank of France possibly only reported about the funds held in its vaults, The Financial Times theorised. The rest of the assets could have been invested in bonds and securities where about two-thirds of Russia’s reserves are stored.

In total, less than a third of the aforementioned $300 billion has been successfully identified, Deputy Director of the Atlantic Council’s GeoEconomics Centre Charles Lichfield wrote late in 2022, citing private conversations with officials in the US and other countries. According to him, the asset freeze practically imposes a ban for foreign banks on their transfers to Russia but they still are failing to track all of them down.

because both foreign governments and financial institutions can be unaware of their physical location,” Kira Vinokurova, special advisor for sanction issues at Pen & Paper, told Novaya-Europe.

According to her, a complicated chain of ownership can be behind the elusive nature of Russia’s reserves. Moreover, asset holders can either refuse to inform regulators about the block or simply ignore this demand. Experts at Moscow’s Higher School of Economics also believe that US and European regulators continue to search for Russia’s foreign reserves.

Sweden, the current chair of the Council of the EU, led the push to establish a working group to study legal options in using Russia’s assets for Ukraine’s recovery. Clarifying “what assets there are and where the assets are… is an important task”, its chair Anders Ahnlid told The Financial Times.

Moreover, the tenth package of EU sanctions has a provision that sets out new obligations regarding the procedure of reporting about the Russian Central Bank assets. “This is especially important regarding the possible use of public Russian assets to fund the reconstruction of Ukraine after Russia is defeated,” the document reads.

A long road to confiscation

Even though Western politicians periodically recycle the topic of using Russia’s frozen assets to help Ukraine get back on its feet, there’s barely been any movement in legal terms. “The will is there, but legally it is not trivial; there’s a lot of work still in it,” President of the European Commission Ursula von der Leyen said in the summer of 2022.

In later statements, the West was dropping vague hints: it is unlikely that Ukraine will get any Russian reserve money at least until the war is over. “Russia’s sovereign assets in our jurisdictions will remain immobilised until there is a resolution of the conflict that addresses Russia’s violation of Ukraine’s sovereignty and territorial integrity. Any resolution to the conflict must ensure Russia pays for the damage it has caused,” G7 said in a statement in April of 2023.

Moreover, the European Commission simultaneously reached a conclusion in April that Brussels would be required to return Russia’s blocked assets after the war is over, Die Welt reported, citing an internal commission document. The EU is currently contemplating investing Russian assets in government bonds with 2.6% interest rate and use the profits to aid Ukraine. According to the newspaper, EU officials believe it is a legally viable option in light of “serious violations” of international law by Russia. The risk of losing money is “very low”, the worst case scenario puts any potential losses at the maximum of €4 billion, the commission believes.

However, there are countries in the world whose state assets were confiscated. These cases show that Russia’s reserves can well be seized if the US designates Russia as a terrorism sponsoring state or if the US withdraws its recognition of the Russian government. Vinokurova notes that Western countries can pass legislation to treat state reserves as private properties.

“The amendments paved the way for US citizens affected by terrorist actions to sue Iran and receive compensation at the expense of Iran’s assets blocked in the US,” Vinokurova says. Meanwhile, reserves of Venezuela and Afghanistan were confiscated because Washington does not recognise the governments of these two countries as legitimate ones.

Private funds and properties are a much easier thing to deal with. The US has already moved from just blocking bank accounts to confiscating assets of Russian oligarchs targeted by sanctions. For instance, a New York court ruled to seize $5.4 million owned by Russian businessman and media mogul Konstantin Malofeyev and transfer the amount to Ukraine as aid.

This is the first such instance since the US Justice Department founded KleptoCapture, a task force for maintaining sanctions and export restrictions against Russia in place as well as to hit back at “corrupt Russian oligarchs”, in the spring of 2022. The country also passed a bill late in 2022 that makes it possible to hand over confiscated assets of “Russian oligarchs” to Ukraine as humanitarian and military aid.

Properties of private individuals and reserves of the Russian Central Bank abroad are regulated through different legal norms, Vinokurova explains. “Private persons’ assets are treated under the jurisdiction of the national law of the country where they are located, therefore, these assets can be blocked or arrested,” the lawyer notes. “There’s still, however, no unified position on the central bank reserves and assets. It is universally accepted that central bank assets are protected under international law, the state sovereignty in particular. It means that foreign country’s properties cannot be arrested or confiscated if the state itself does not agree to it.”

Economist Oleg Itskhoki forecasts that the legal framework required to seize Russia’s assets overseas can take up to 10 years to be drafted. “This war ushered in a complete breakdown of the world order accepted following World War II. Many institutions that were built after 1945 will be overhauled in the coming years,” he believes.

Shadow reserves 

The idea behind the Western sanctions was to employ financial means to force Russia to end its aggression against Ukraine. Half of Russia’s reserves were successfully made unavailable, but how long can the rest last?

The national welfare fund formally ran out of US dollars, British pounds and Japan’s yen towards the end of 2022. At the same time, it still apparently has €10 billion. The Russian government has been actively boosting the yuan and gold shares in the fund since the war began. These are now the last real assets that can be used to cover budget deficits: around $83 billion.

The Russian budget deficit reached 2.4 trillion rubles (€26.5 billion) in Q1 of 2023. Meanwhile, the Kremlin planned a deficit of only 3 trillion rubles (€33.1 billion) for the whole of 2023. Public expenses accelerated to 122 billion rubles (€1.35 billion) per day in the first half of April, following 75 billion (€830 million) in March and almost 100 billion (€1.1 billion) in February and January. However, it is too early to conclude that there could be a deficit in April because this expense spike can be temporary and it’s not clear what is happening to revenues.

On top of the official ones, Russia also has “shadow” reserves, their total value is unclear as well. Bloomberg calculated that out of $227 billion of the payment balance surplus, around one-third ($80 billion) remains overseas. The Kremlin keeps them as cash or real estate and company investments. Itskhoki notes that storing export revenues in the West is not banned by Russia.

The Institute of International Finance (IIF) presented similar numbers: according to its calculations, Russian companies keep around $87 billion in foreign accounts. The IIF received this data from the Bank for International Settlements in Basel which 63 countries report to, including the US, EU, and Russia’s key trade partners: China, India, Turkey, and the UAE.

According to the tally of Brad Setser, a senior researcher at the Council on Foreign Relations, based on the EU banking statistics, around $90 billion of the 2022 revenues by Russian companies stayed in Europe. A group of economists wrote an article on the Italian Central Bank’s website, putting this amount at $100 billion in mid-2022.

The reports that a significant part of the revenues of Russian exporters remain overseas is also confirmed through the Central Bank data. In the past 6 months, the largest exporters only sold foreign currencies to pay taxes and dividends, ex-chief analyst of Ingosstrakh Investments Viktor Tunev underlined. In 2022, the companies sold 133% of the total volume of oil and gas budget revenues, while this number exceeded 200% in the pre-war times.

“The fact that our companies keep their revenues abroad makes it possible for them to pay for the necessary imports,” head of the Russian Central Bank Elvira Nabiullina conceded in April. Overseas reserves can also be needed to pay for parallel imports or arms supplies, Itskhoki stresses.

Even though these funds formally belong to companies, experts and Western media unanimously brand them as state reserves. “I think that it’s correct to imagine Russia as a mafia state where it’s completely irrelevant whether it’s [head of state-owned oil giant Rosneft Igor] Sechin’s or Gazprombank’s money. This is just a pocket used to achieve Putin’s goals,” the economist adds.

Some experts believe that these reserves must also be frozen. However, this is a mammoth task. If Russia is stripped of its commodity revenues, it can stop supplying oil and gas abroad.

“When the US devised its sanctions, it wanted to avoid decreased volumes of oil on the global market which would have pushed prices up. Washington sought to make Russia receive less money from oil exports but maintain the level of exports at approximately the same level,” Itskhoki said.

Just like other economists, he does not believe that Russia’s reserves could dry up any time soon. And if the Kremlin does run out of them, it won’t be because of the sanctions. “A chronic budget deficit can certainly become a reality, [the authorities] will look for ways to cover it. But that’s not a situation when there’s no more money. It will happen if the global oil prices drop below $50,” he forecasts.