Better to Sell Than Store Gold Reserves

The introduction of a single European currency, the euro, which among EU members has not been unanimously taken as positive, will have a direct effect on the interests of the Russian economy. This was the reason for the last week's visit to Moscow of Fritz Plass, head of Deutsche Bank's gold and precious metals department.


At the end of 1995, I attended almost by chance an international banking congress in Frankfurt, Germany, in which the problems the single European currency were discussed. At that time, I wondered: What am I doing here? Even rich European countries with solid national currencies had still not determined whether they would enter such a union. The strict requirements for monetary union left no doubt that this had no bearing on Russia, even if it were an EU member.


Europeans are getting closer to introducing the euro, but many Russians still consider the country to be far removed from this problem. But Russia can no longer be indifferent to the kind of monetary union that its partners will adopt.


The introduction of the euro is an attempt to propose an alternative reserve currency to the U.S. dollar in the world's economies, including Russia's.


In Russia, aside from hard currency, gold has traditionally served and continues to serve as a means of savings for simple citizens. If Russians are given an alternative to the dollar, they will most likely tend toward gold rather than the euro. The Russian government's announcement giving citizens the possibility of obtaining gold bars will only promote this tendency.


The German banker, who is called Mr. Gold at Deutsche Bank, objects to this, since the 30 tons of gold that are planned for sale in a country like Russia is nothing. Moreover, gold is not convertible into money and does not bring interest. The value of gold reserves depends on world prices for it. And the price now is not only not growing but falling.


As for Russia, under the current level of mining -- only about 100 tons of gold per year -- it could have a deficit of this noble metal in the near future. Compared with the world market for gold, which today is estimated at approximately 3,500 tons of metal per year, such volumes of production mean very little.


In order to be counted once again among the leaders of gold mining, Russia needs several billion dollars in investment. Otherwise, it will not succeed in exploiting its truly rich gold deposits.


But Russia does not have its own capital for long-term investment in gold mining, and Western companies are conducting themselves very carefully. And there are reasons for this caution. Owing to the drawn-out legal proceedings around the Sukhoi Log deposits in the Irkutsk oblast -- the reserves are more than 1,000 tons -- and the constant changes in the federal and local authorities' thinking, this promising project still remains without money and without owners. It has already been five years since the government of Yegor Gaidar tried to attract foreign investment here.


The German banker drew two conclusions from this situation. The first is that the introduction of the euro directly relates to the Russian economy. The second is that it is better to mine for gold and sell it rather than keep it in vaults. Convincing Russian citizens of this, however, will not be easy.





is economics editor of Izvestia.