March 2022
The economic fallout from Russia’s invasion of Ukraine is creating challenges for the country’s gold miners, even as the gold price has jumped, as sanctions wipe out billions of dollars of investment in the country.

Russia’s largest gold miner, Polyus, is among the Russian stocks that have been suspended from the London Stock Exchange. The company is controlled by the family of oligarch Suleiman Kerimov, who has been under US sanctions since 2018.

Anglo-Russian miner Polymetal has seen its market capitalisation plunge more than 80%, losing its spot on the blue-chip FTSE 100, as investors dump Russian-exposed holdings in response to sanctions. Norway’s sovereign wealth fund, one of Polymetal’s top 10 shareholders, has said it will dump all of its Russian investments in a show of support for Ukraine.

The move marks a shift from the past two decades when London become the primary offshore hub for Russian companies and oligarchs. Thirty-nine Russian companies have listed on the London Stock Exchange and raised US$44bn since 2005, according to data from FactSet. However, the London Stock Exchange’s operations in Russia and Ukraine account for less than 1% of total income, which hit GBP6.8bn (US$9bn) in 2021.

The London Bullion Market Association, which oversees London’s US$5tn gold market, has revoked the membership of three Russian banks—Otkritie, VTB and Sovcombank.

In response, the Russian Central Bank has suspended stock and derivatives trading in Moscow, while authorities have also temporarily barred foreign investors from selling their Russian assets.

With domestic Russian banks effectively cut off from the international banking system, domestic producers will be looking to Russian’s central bank as the buyer of last resort.


Russian Gold Miners

Gold miners in Russia are stuck between Moscow and the Western financial centres that have provided billions in capital over the past few decades. Shares in the London-listed Polymetal, which operates eight mines and a processing plant in Russia and Kazakhstan, have plummeted since the crisis began.



Concerns have also swirled about Polymetal’s ability to pay its dividends, given the growing list of sanctions against Russian entities. The company said its final 2021 payout would be 52 cents a share, taking the total dividend to 97 cents, compared with 129 cents in 2020.

The Cyprus-headquartered company said there had been no indications from Euroclear, which handles distributions, that the 2021 final dividend payment could not go ahead. However, Chief executive Vitaly Nesis struck a cautious tone, saying that Polymetal would reserve the right to suspend or cancel the payout should conditions change.

Mr Nesis said that being slapped with sanctions was “low on the list” of risks facing the miner, with its ability to receive imported supplies its biggest concern. Domestic gold and silver bullion is expected to keep sales going, but the fact that Polymetal will receive payment in roubles introduces further uncertainty.

In the past week, the price of gold in roubles has climbed by over a quarter given the currency’s depreciation against the US dollar. Mr Nesis said this differential could pose a risk to the dividend. Polymetal has suspended capital and operating cost guidance for this year and will review projects less than 20% completed.

Canada's Kinross Gold, the only large western miner in Russia, said on 3rd March that it would suspend its gold mining operations in Russia's Far East. The move was a quick backtrack from the company’s recent prediction that the conflict in Ukraine wouldn't affect its operations in Russia’s Chukotka province because of their remote location and use of local labour and supplies. The company had also been in Russia for 25 years and survived other crises in the country, it said. Like all companies with exposure to Russia, Kinross's shares have been sold off during the crisis.

Looking to Russia’s biggest gold miner, Polyus said on 1st March that it was “monitoring” geopolitical events “extremely closely”. The company said it still expects gold output of 2.8Moz this year at a total cash cost (TCC) within the range of between US$425-450/oz. In 2021, Polyus produced 2.7Moz of gold, down 2% on-year, at a TCC of US$405/oz, up 12% on-year.  

Polyus holds the largest gold reserve base of all mining companies globally at 104Moz (measured by proven and probable reserves). For context, the next closest competitors, Newmont Corporation and Barrick Gold, hold 94.2 and 68Moz of gold respectively. Polyus’ owns the Olimpiada mine, the third largest gold mine globally by reserves. The company’s Sukhoi Log mine could potentially be the largest mine in the world when it enters production around 2027.

Sukhoi Log is estimated to hold 40Moz of gold and pre-feasibility studies show potential for annual production of 2.3Moz at a total cash cost of US$390/oz. Last year, Polyus said it expected to make a final investment decision in late 2022.

Russia is the world's second largest producer of gold after China and accounts for 9.4% of global mine production, which totalled 10,833koz in 2021.



Russia Looks to Gold

Russia’s central bank said on 28th February that it will start buying gold after a two-year hiatus as domestic producers face problems selling to international markets.

The Bank of Russia owned just under 2,300t of gold at the end of November, according to the World Gold Council. At current prices, its gold reserves—the sixth largest in the world—is worth US$153bn and accounts for roughly a fifth of the bank’s official reserves.

Following the annexation of Crimea in 2014, the central bank stepped up its purchase of gold, acquiring more than 1,200t between 2014 and 2019, as domestic producers struggled to sell overseas. For Moscow, the purchases were also a way of reducing the country’s exposure to US dollars in its official reserves. It then stopped purchases in April 2020 as the pandemic caused a collapse in oil prices, hitting the country’s national income.

Meanwhile, the Russian government plans to make gold purchases tax free to halt the switch to foreign currencies, which the state needs for its reserves after western sanctions were slapped on its central bank.

The 20% value added tax will be removed, the Russian finance ministry said on 2nd March, in a bid to encourage people to invest in precious metals. The collapse in the rouble as sanctions rock the Russian economy, has led to the country’s citizens rushing to buy dollars to protect savings and hold foreign currencies in cash in case they need to leave the country.

“Amid the unstable geopolitical situation, investment in gold will make for an ideal alternative to buying up dollars,” Russia’s finance minister Anton Siluanov said in a statement. He dismissed the US currency as “more volatile and subject to various sorts of risks,” compared with gold.

The government has restricted foreign currency transfers to Russian tax residents’ accounts abroad and has ordered that 80% of exporters’ foreign currency revenues be converted into roubles.

The strongest Western sanctions are ones that prevent Russia’s Central Bank from tapping into much of its US$630bn in foreign currency reserves, which has led to a steep drop in the value of the rouble. The reserves, which are made up of assets and deposits denominated in the world’s major currencies, includes the country’s 2,300t of gold.

Almost of all of the country’s gold is all stored in vaults within the Russian Federation. Holding the gold in the country, and not in London or New York—the twin centres of the global gold market—will make it more difficult for the central bank to dispose of it in large quantities. However, storing it domestically makes it very difficult for the US, UK and EU to successfully impose sanctions on the country’s gold. If Russia is selling below market rates, someone will be willing to take the risk.