Why Is Russia Selling Its Gold?

Russia’s gold reserves have been declining rapidly in recent months, with significant volumes sold to offset a massive budget deficit. The Kremlin’s move has sparked concern about a looming financial crisis, but experts argue that it’s not necessarily a sign of economic collapse – yet.

The sale of gold is a symptom of Russia’s heavily increased defense spending, which funds the war in Ukraine. With defense costs soaring to unprecedented heights, Moscow is struggling to balance its books. The country’s finance ministry has warned that overspending on the war will exceed $28 billion this year alone, with further overspends expected in 2027 and 2028.

The Russian Central Bank’s gold reserves have declined by around 43.5 metric tons since January, dropping to their lowest level since before the full-scale invasion of Ukraine began in February 2022. Gold prices had hit record levels earlier this year but have since fallen back to around $4,000 per ounce – still a significant amount for Moscow’s coffers. The sell-off is estimated to have raised over $5 billion so far.

Experts warn that Russia’s real limit on financing its war efforts lies in its oil and gas revenues, which keep its economy afloat. “Everything hinges on that,” notes Elina Ribakova, an economist with the Peterson Institute for International Economics. When the oil price is high, Russia gets substantial revenues, making it easier to borrow and keeping its domestic financial system healthy.

However, this buffer is not limitless. As Ribakova points out, if oil prices drop significantly, Moscow’s financial situation would rapidly deteriorate. Russia can replenish its gold reserves relatively quickly by buying from domestic producers, but this ability is a double-edged sword: it allows the country to maintain a buffer against economic instability but also creates an illusion of stability.

Russia’s ability to continue funding the war depends on its capacity to cut back on non-defense spending. While this may not be a sustainable solution in the long term, experts argue that it can buy Russia some time – at least 12-24 months – before a full-blown financial crisis sets in.

The Kremlin’s motives for selling gold are twofold: to raise cash and maintain a stable image on the world stage. By portraying its economy as robust, Moscow seeks to undermine speculation about financial difficulties and bolster its geopolitical position. But this façade is fragile, and experts warn that the longer Russia pours money into the war effort without making significant progress on the ground, the more vulnerable it becomes to economic instability.

The writing is on the wall: Russia’s gold reserves may be dwindling, but its economic problems run far deeper – and will take far more than a quick fix of gold sales to resolve.