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. Last Updated: 07/27/2016

State Finds Way to Print More Money

The government is planning to sell the Central Bank about $475 million in bonds backed by future gold purchases by the Finance Ministry, a senior government official said Friday.

Analysts saw the deal as an ingenious way to circumvent the provision in the Central Bank law that specifically bans the nation's main bank from issuing emissionary loans to the government.

The government would issue ruble-denominated securities backed by 50 tons of gold that Gokhran would buy from Russian gold producers next year, German Kuznetsov, deputy finance minister and head of Gokhran, the national precious metals and stones reserve, told a news conference. The Central Bank had agreed to buy the bonds, stipulating that the government would spend the proceeds on supporting gold producers, Kuznetsov added.

At current market prices, 50 tons of gold would fetch about $475 million.

The one-year interest-free issue would be sold in two tranches in November and December. The government will then proceed to buy the gold, which would go into the Central Bank's reserves.

"Gold today is the last refuge for our country," Kuznetsov said.

But gold producers said Friday the government would be hard put to purchase that much gold from them next year. They would prefer to sell to commercial banks, which have been offering better prices than Gokhran, said Valery Braiko, chairman of the Russian Union of Gold Producers, which comprises about 50 mining companies, factories and banks involved in gold mining projects.

Despite the fact that many large Russian banks are now insolvent and in no position to buy gold, Braiko said medium-sized banks such as Lanta and Zenit, which were not hard hit by the financial crisis, as well as the state-controlled Sberbank, have been investing heavily in gold lately.

Russia's gold output is expected to reach 120 tons this year, of which commercial banks will buy about 80 tons and Gokhran will purchase just 14 tons, Kuznetsov said.

If Gokhran's purchases remain at the same level next year, or, in fact, even if they triple, that will not be enough to provide the Central Bank with enough gold to redeem the planned bond issue. In effect, by selling the bonds to the Central Bank, the government would be receiving an interest-free loan of $475 million worth of freshly printed rubles which might never be repaid in full.

Central bank officials could not be reached for comment Friday.In the early 1990s, the Central Bank routinely issued loans to the government so it could subsidize industries. That was the main factor that contributed to hyperinflation in 1992. But the current Central Bank law, passed in 1995, expressly bans the Central Bank from issuing credits to cover the budget deficit, making it difficult for the government to finance the economy with emissionary cash. But with the new bonds, Finance Ministry and Central bank officials have found a way to get around the rule.

An economist with a major Western bank in Moscow, who asked not to be identified, said on Friday that the bond issue would help trigger inflation.

"Though the Finance Ministry's new securities will be called gold certificates, not treasury bills or anything else, they will still mean an increase in the money supply," he said. "This is the same as issuing direct Central Bank credits to industries."

Braiko was not enthusiastic about Gokhran's plan to use the proceeds from the bond sale f about 7.9 billion rubles at the current exchange rate f to issue cheap loans to gold producers.

"I have great doubts that this offer will take on a form that will be of interest to us," he said.