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. Last Updated: 07/27/2016

Gold Export Tariff Puts Central Bank in Saddle

The government's decision to impose a 5 percent tariff on gold exports has taken the shine off selling abroad for commercial banks, leaving the Central Bank as the lone Russian seller of gold on the world market, industry insiders said Monday.

That means that the Central Bank is now able to boost its dwindling hard currency and gold reserves by buying gold not only from gold producers but also from commercial banks that can no longer afford to export the metal.

The Central Bank has been quick to pick up the slack, buying gold in "unlimited quantities," one banker said.

The bank needs to push up its reserves to help the government make payments on its crushing load of foreign debt, and it has some measures of its own to meet that end. Those moves have included the introduction of a restrictive foreign currency exchange and export regulations.

Until introduction of the tariff at the end of April, commercial banks exported large amounts of gold on slim profit margins averaging 2 percent. But the 5 percent tariff, which was part of a package of commodity export tariffs designed to fill Russia's budget coffers, has forced the commercial banks to look to the domestic market.

Buying gold from commercial banks in rubles at 3 percent beneath the international market price, the Central Bank can, in theory, either sell the gold abroad for dollars or use it to shore up its precious metals reserves, analysts said. Either way, it is a convenient way to turn rubles into hard currency.

State-owned Sberbank led the way at end of April, announcing its intent to buy 50 tons of gold from domestic producers to be sold to the Central Bank for rubles. That amount of gold in itself would represent roughly half of Russia's yearly gold production.

Private commercial banks are following Sberbank's lead, although they would clearly prefer to sell gold on the world market. "It's better to sell on the world market, because you work with Western partners who pay hard currency the day of the deal," said Alexander Tikhomirov of Rosbank's precious metals department. "The Central Bank offers payment after six days in rubles."

However, given the choice of a list of bad and nonexistent investment options, many of Russia's surviving banks are picking gold.

The reason, bankers and analysts said, is that gold remains one of the few liquid financial instruments available to banks in the depressed financial sector.

"Right now the major problem for banks in Russia is to find any business at all," said Stephen Shevoley, senior analyst at Thomson Bankwatch in Cyprus. "Lending is not an option; there are no government securities; there are difficulties with foreign currency trading. So more and more banks are looking to precious metals as an option."

While bankers say the closing of the export market has dampened interest somewhat, the Central Bank is buying gold in sufficient quantities to attract private commercial banks.

"The Central Bank, for the time being, is buying gold in unlimited quantities, so it remains a very liquid asset," said Tikhomirov.

About a half dozen banks have emerged as major players on the gold market, and Shevoley expects that number will keep increasing at least until the end of the year.

Even so, the Central Bank's gold purchases have not kept the domestic gold lobby from pushing the Russian government to repeal the tariff on gold exports.

Lobbyists say the chances for that happening are evenly split, now that former Prime Minister Yevgeny Primakov and former Finance Minister Mikhail Zadornov, the main targets of their lobbying efforts, have been pushed out of their jobs.

With a new finance minister being appointed only Monday, it is unclear what the government position over commodity tariffs will be. The tariffs are set to expire after six months, but many observers initially predicted that they would be extended indefinitely.

Lanta Bank, one of the top commercial gold exporters before the tariff was introduced, says it will renegotiate contracts with hard-pressed gold producers rather than rely on the domestic market if the export tariff is not repealed soon.

"We do not want to export, because that would require renegotiating our contracts with producers to cover the cost of the tariff," said Nikolai Menshikov, Lanta Bank vice president for precious metals.

Insisting that commercial banks cannot pay the cost of the tariff themselves, he asserted that domestic gold producers would agree to almost any terms offered them if pushed.

"They will agree. It's better to receive something than nothing at all," he said.