Thursday, March 3, 2022

Is gold safe from sanctions?

As Russia is progressively cut off from U.S. and European payments systems thanks to an ever tightening wave of sanctions, the idea of using gold as a sanctions buster is being discussed. Russia has some $130 billion worth of the yellow metal. Might these gold bars be packed into planes and used to buy vital goods & services from other countries? To complete this monetary circuit, why doesn't Russia start accepting gold bars as payment for Russian oil and gas exports?

Gold seems like an ideal way to evade sanctions. Thanks to its high value-to-weight ratio, it is good at condensing value. This makes transport easier. Gold is also a bearer instrument. Unlike a dollar, it can't be frozen at the click of a button.

But that doesn't mean that gold can't be stopped by sanctions. Here's how a putative Russian gold payments rail gets shut down.

As of now, the only sanctions that have been announced by the U.S. are primary banking sanctions. That is, the U.S. government has decreed that U.S. financial institutions cannot provide banking services to named Russian banks (like Sberbank), certain individuals (like Putin), and Russia's central bank.

But there is harsher type of sanction that remains to be implemented: secondary sanctions. With secondary sanctions, the U.S. government announces that U.S. banks must cut off not just named Russian entities; they must also stop doing business with any foreign bank (Indian, Chinese, etc) that provides banking services to named Russian entities.

Think of secondary sanctions as a strategy of the friend of my enemy is my enemy. Foreign banks cannot afford to be enemies of the U.S. banking system. That would mean no more access to the massive U.S. economy. And so they will comply and cut off designated Russian entities. Where primary sanctions sever Russian entities from access to the U.S., secondary sanctions attempt to remove them from the global banking system.

To close Russia's gold window, a few additional steps must be taken.

The wording of secondary sanctions must extend to non-banks and into markets like gold. The U.S. might simply say something to the effect that "any foreign individual, corporation, or institution that facilitates gold transactions with designated Russian entities will be shut off from the U.S. banking system." If a foreign buyer of Russian crude oil, say an Indian refiner, had previously accepted Russian gold as payment, they may not be so willing anymore. Touching Russian gold could jeopardize their entire refining business, which will inevitably have a U.S. nexus (say a U.S. parts supplier or technical consultant.)

To enforce sanctions, the U.S. would have to rely on whistle-blowers, snitches, and intelligence gathering. The sanctions would not entirely close the gold window. There would be rule breakers. But the sanctions would do a sufficient job.

The best example of the yellow metal being shut down comes from Iran in the early half of the 2010s.

In 2010, a harsh round of U.S. secondary sanctions came into effect. As these were tightened over the ensuing years, Iranian trade plummeted, as did the Iranian rial. Iran's difficulties were compounded in March 2012 when a set of Iranian banks were banned from SWIFT, a global financial messaging network.

The sanctions did not make it illegal for foreign entities to deal with Iran using gold. And so a gold window emerged. This was most apparent in Turkey with the so-called "gold-for-gas" market. (I wrote about this market here and here). In brief, Turkey relies on Iranian natural gas. A quid pro quo was achieved between the two nations by sending gold bars back to Iran. No need for U.S. dollar correspondent banking accounts. No need for SWIFT.

In July 2012, the U.S. began to close the gold loophole. First it issued an executive order extending sanctions to sales of gold to Iranian Government entities (EO 13622). It was still possible for Turkish institutions to sell gold to Iranian individuals, however, so in January 2013 additional legislation was passed sanctioning the sale of gold to any Iranian entity. (See Benjamin Fraser Scott's Halkbank and OFAC: a sanctions evasion case study for an account of the closure of Iran's gold-for-gas trade.)

And thus Iran's gold loophole was cutoff. 

Russia's gold hasn't been sanctioned yet. But it is eminently sanctionable. 

PS: Yes, this applies to bitcoin. (Bitcoin is traceable, which makes it arguably worse than gold.)
PPS: Sanctions could put an end to a nascent Russian gold payments rail. But just because sanctions can do damage doesn't mean that the target will change its course of action.


  1. China does not give a hoot about US sanctions, and very soon other countries will join. Can the US sanction the world? Let's see what happens to the USD system if it tries. The US may find itself as a pariah.

    1. Of course China cares. If a Chinese financial institution is found guilty of breaking sanctions, it could lose access to the U.S. market, perhaps the European market, too. There's also potential jail time to consider.

    2. China was using gold both internally and in export/import thousands of years before the US existed. You are right. The US has zero ability to stop Russia and China trading bullion between themselves. In fact that was the main Silk Road trade: silk went westward, and wools, gold and silver went east.

    3. Paul, the Turkey-Iran gold-for-gas trade was shut down by secondary sanctions in 2012-2013. The same would happen to a Chinese-Russian gold-based avenue if secondary sanctions were designed to suppress it. I admit it couldn't be entirely stopped. But it would constrict it to the point of being sufficiently small.

  2. Swapping limited commodities for mass produced bits of paper is nuts.

  3. Does Russia have $130b of actual gold bars in its own custody, or is a certain proportion paper gold that's held somewhere else?

    1. According to Ronan Manly:

      "Russia, via the Bank of Russia, holds 2299 tonnes of physical gold, and is now the fifth largest sovereign gold holder in the world, after steadily accumulating most of this gold since 2008. Notably, in late 2007, the Russian central bank still only held about 400 tonnes of gold, so Russia’s gold stockpile has increased by 600% since 2008. See chart below.

      "Two thirds of Russia’s gold reserves are held in vaults on Pravda Street in Moscow, with the other third held in vaults in St. Petersburg and Yekaterinburg."