Most Russian gold mine production is sold to domestic commercial banks, such as Sberbank or VTB, which can then sell the metal on to either the central bank or to foreign banks.
This year, sources say, foreign banks are holding off buying Russian gold after Western powers implemented sanctions against the country over the Ukraine crisis.The central bank has therefore had no choice but take domestic mine production that cannot be sold to foreign banks, two sources said, and has bought most of the metal that commercial banks had available.
"This is one measure that the central bank has taken to go through this difficult period for commercial banks and most importantly to boost liquidity," a source close to the situation said on the sidelines of the London Bullion Market Association annual conference in Peru.The central bank buying gold domestically injects currency into the economy. This is similar to deficit spending that transfers real resource to public use in exchange for currency in excess of tax withdrawal.
This is different from OMO or POMO that involves swapping central bank reserves for bonds, leaving the amount of aggregate nongovernment net financial assets unchanged. The central bank buying gold domestically increases the amount of nongovernment net net financial assets in aggregate.
Russia is running a fiscal surplus, so this injection of net financial assets by the central bank offsets the effects of the surplus on reducing the amount of nongovernment aggregate net financial assets. This amounts to offsetting a tight fiscal stance.
This does not affect the fx rate directly since the gold buying is domestic and the amount of rubles is not increased in international markets.
