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. Last Updated: 07/27/2016

INDUSTRIES IN TURMOIL: Lack of Buyers Threatens Gold Sector

The financial crisis could add some sparkle to domestic gold producers' profits, but the industry is bracing for tough times as its cash-strapped buyers back away from making purchases.

Russia's 500 producers stand to profit in the short term from selling gold as the ruble devalues because all sales are dollar-denominated and closely tied to world prices or those set by the Central Bank.

But the road could get bumpy as inflation hits production costs and the main gold buyers, ailing commercial banks, put their orders on hold.

Analysts said gold is in direr straits than other metals industries because its financing comes solely from banks and the state. The sector's fate lies in the economic policies of the new government, they said.

Producers have grown increasingly reliant on banks in recent years as the state cut back its orders. Banks have signed agreements for 86 tons of gold this year, a gold official said.

Now producers fear that banks will back out as they funnel funds into efforts to keep from going under. The mines, already operating on thin profit margins, are finding themselves left with no alternative buyers.

"With banks in a slump, the question is, 'Where should producers take their gold?'" said Mikhail Katsman, executive director of the union of gold producers, which unites about 60 mines, plants and banks.

Producers are keeping a wary eye on the volatile ruble since its strength will determine overhead costs such as electricity and fuel, he said.

Depending on how the crisis unfolds over the next few months, Katsman said one of three scenarios would probably develop for the gold producers.

In the first, everything would remain stable as gold production costs keep abreast with producers' growing ruble revenues, he said.

Another possibility, which is already taking place to some extent, would see producers raking in profits as expenses lag behind prices.

Producers would be hit the hardest by the third scenario in which mining becomes unprofitable as the cost of producing overtakes the price of gold.

"Once it [production] becomes outright loss-making, there will be less production, with some producers stopping operation altogether," Katsman said.

The industry would then fold if the government did not revamp its gold policies and allow producers to sell bullion to outsiders, he said.

The gold industry's lack of a stable form of financing makes its situation "graver than in any other area among the nonferrous metals," said Igor Semenenko, metals and mining analyst at CentreInvest.

Production this year may easily fall by 20 percent or more since neither the government nor the banks are able to pick up the bill, he said. Mines turned out 114 tons of gold in 1997.

The sector's future rests on the economic policy of the new government, said Svetlana Smirnova, a metals analyst at United Financial Group.

"Companies themselves can do little in this situation," she said. "It will all depend on the industrial policy of the government."

"If it prints more money, and does the pre-financing f then there will be production. If not f no production," she said.