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The decision over the weekend to ban the purchase of newly mined and refined gold from Russia is the latest effort by the United States, Britain and their allies to hasten the wave of sanctions focused on Russia in response to its four-month-old invasion. from Ukraine.
The announcement, made as President Biden and other Group of 7 leaders gathered for meetings this week in Germany, builds on steps already taken to cut Russia off from the international financial system, deprive it of extra revenue that helps fund his war in Ukraine and punish Russian President Vladimir V. Putin and the wealthy corporate executives around him.
Ukraine’s allies have already banned most trade with Russia, frozen hundreds of billions of dollars in Bank of Russia assets held in their own financial institutions, and blocked Russian banks from using the messaging that underpins the international payments system known as SWIFT.
Russia, one of the world’s largest gold producers, has accelerated the mining of new gold to compensate for some of the crippled assets, said Christopher Swift, national security lawyer at Foley and Lardner.
The Bullion Market Association in London, a major hub for global gold trading, had already suspended transactions with six Russian silver and gold refineries in March.
Mr Swift, who previously worked in the Treasury Department’s Office of Foreign Assets Control, said: “In order to offset the reserves held by Russian companies and oligarchs, they put gold online. The G7 closes access to this new gold.
Russian billionaire business tycoons have been buying gold bullion to try to soften the impact of the sanctions. British Prime Minister Boris Johnson underscored the point on Sunday, saying the move would “directly hit the Russian oligarchs”.
Whether this latest move, which is due to be officially announced on Tuesday, will also – in Mr Johnson’s words – “strike at the heart of Putin’s war machine” is more debatable.
Ukraine’s allies have struggled to keep the pressure on Mr Putin and deprive him of resources for his war machine without putting their own economy too much at risk. The balance is particularly difficult for the European Union, which is heavily dependent on Russian oil and gas.
Soaring oil prices combined with a huge appetite for fuel around the world meant that Russia raked in even more money from the sale of crude than it did before the war, despite the sale at a discount.
After weeks of tense negotiations, the European Union agreed last month to largely ban the import of Russian oil by the end of this year and to ban European countries from insuring tankers carrying oil. Russian oil. But so far the question of whether to ban Russian gas – for which a substitute is much harder to find than oil – has not been addressed. Germany’s government and industry leaders have warned that a gas embargo would spell disaster for its economy.
Speaking about the deployment of the sanctions, Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics in Washing, said the buildup of pressure on the Russian economy is “unfolding as expected.” He added that “if there are any surprises, it is the consistency of policy coordination across Atlantic and East Asian countries.”
The various members of the alliance have been looking for ways to increase the penalties one notch at a time. The gold ban “gives G7 governments some track and the ability to accelerate,” said Andrew Shoyer, a lawyer at Sidley who advises companies on sanctions compliance.
The distinction between newly mined and refined gold, and gold that was exported or purchased before the ban, is in line with the sanctions framework that prohibits new investment in Russian companies, while allowing existing investment, according to Mr. Shoyer.
The new ban also aims to deprive Russia of additional revenue from the export of gold, which is used for jewelry, in some industrial processes and for investment. As is often the case during crises, the buying of gold for investment has surged since the coronavirus pandemic began to upend the global economy. Investors expect it to hold its value. Central banks, including the Federal Reserve, had purchased Russian gold through intermediaries.
Last year, Russia earned more than $15 billion from its gold exports, according to the British government. Since gold is largely held in reserve by central banks around the world, Russia had a ready market.
“Russia is a big producer of gold, and it’s a reserve asset,” said Lucrezia Reichlein, a professor at London Business School. “If they can’t sell, then that revenue stream is gone.”
After the first rounds of sanctions shut down much of its international gold trade, Russia’s central bank announced it would resume buying locally produced gold, which was also seen as a way to support its currency. The gold held by the Russian central bank is estimated at between 100 and 140 billion dollars.
“Fundamentally, this is a gradual tightening of sanctions rather than a meaningful escalation,” Mr. Swift of Foley and Lardner said. “If your goal is to undermine Russia’s economic ability to wage war in Ukraine, this is a necessary but not sufficient measure.”
But he added; “If the G7 wants to have a strategic effect, then they really need to think about what they are going to do with Russian gas.”