When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he's not just talking. He's betting on it.
Not only has Putin made Russia the world's largest oil producer, he's also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.
“The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin's United Russia party in the lower house of parliament, said in a telephone interview in Moscow.
Gold, coveted by Russian rulers including Tsar Nicholas II and the Bolshevik leader whose forces assassinated him, Vladimir Lenin, has soared almost 400 percent in the period of Putin's purchases. Central banks around the world have printed money to escape the global financial crisis, sapping investor appetite for dollars and euros and setting off a scramble for safety.
In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold, data compiled by Bloomberg show. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5 -- less than half what it is now -- the president told the central bank to buy.
During a tour that November of the Magadan region in the Far East, where Polyus Gold International Ltd. and Polymetal International Plc have operations, Putin told Bank Rossii not to “shy away” from the metal. “After all, they're called gold and currency reserves for a reason,” Putin said, according to a Kremlin transcript.
At the time, gold was at an 18-year high of $495 an ounce and the Moscow-based central bank held 387 tons, or 2.2 percent of its $165 billion total reserves. The share reached 3.5 percent within a month, according to data compiled by Bloomberg.
Gold for immediate delivery fell a third day today, dropping 0.6 percent to $1,657.80 an ounce as of 4:35 p.m. in Moscow. It rose 7 percent last year, the 12th straight year of gains. Analysts expect the metal to advance again in 2013, to $1,825 by the end of the year, according to the median of 26 forecasts in a Bloomberg survey.
Dmitry Peskov, Putin's spokesman, declined to comment today on Putin's interest in gold.
“Putin's gold strategy fits in with his resource nationalism, statist agenda,” said Tim Ash, head of emerging- market research at Standard Bank Plc in London. “It's kind of a defensive play, but it worked, right?” Ash said in an interview in Moscow. “You need luck in politics and business, and clearly the guy has it.”
Other world leaders haven't been as lucky. Gordon Brown, as U.K. finance minister, sold almost 400 tons of gold in the 30 months to March 2002, when prices were at two-decade lows. London tabloids have referred to the period as Brown's Bottom.
Quantitative easing by major economies to support financial asset prices is driving demand for gold in the emerging world, said Marcus Grubb, head of investment research at the World Gold Council. Before the crisis, central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they're net buyers by about 450 tons, Grubb said by phone from London, where his industry group is based.
“That's a very significant switch, and obviously a very positive one for the gold market,” Grubb said.
While Putin is leading the gold rush in emerging markets, developed nations are liquidating. Switzerland unloaded the most in the past decade, 877 tons, an amount now worth about $48 billion, according to International Monetary Fund data through November. France was second with 589 tons, while Spain, the Netherlands and Portugal each sold more than 200 tons.
Even after Putin's binge, though, Russia's total cache of about 958 tons is only the eighth largest, the World Gold Council said in a Feb. 8 report. The U.S. is No. 1 with about 8,134 tons, followed by Germany with 3,391 tons and the Washington-based IMF with 2,814 tons. Italy, France, China and Switzerland are fourth through seventh. While gold accounts for 9.5 percent of Russia's total reserves, it accounts for more than 70 percent in the U.S., Germany, Italy and France.
Russia keeps about two-thirds of its stockpile in a greenish gray stone-and-glass building on Ulitsa Pravdy, or Truth Street, in central Moscow. The road is named after Pravda, the official newspaper of the Communist Party, which also was headquartered there.
Then-Prime Minister Putin became the first Russian leader to visit the complex on Jan. 24, 2011, according to the government's website. He toured the 17,000 square-meter facility, which includes 1,500 square meters of storage, with First Deputy Chairman Georgy Luntovsky, posing for photographs lifting an ingot. Most of the bars weigh 10 to 14 kilograms (22 to 31 pounds) and are boxed in plastic or wooden crates alongside an emergency supply of banknotes.
Technically, state metals depositary Gokhran has the exclusive right to buy all gold mined in the country. In practice, it lets commercial banks buy from producers directly, usually in the form of project financing, said Sergey Kashuba, chairman of the Russian Union of Gold Producers in Moscow.
When the central bank buys gold, it's from those commercial banks, led last year by OAO Sberbank, OAO Nomos Bank, VTB Group and OAO Gazprombank, Kashuba said. Russia produced 205 tons of gold last year, making it No. 4 after China, Australia and the U.S., according to U.S. Geological Survey estimates.
Security is tight along the entire production chain, Kashuba said. Just two organizations are allowed to move partially refined gold from miners in the Far East and northern Siberia to processing facilities in other parts of the country, he said. One is FeldSvyaz, a courier service that reports directly to Putin. The other, SpetsSvyaz, was split off from Stalin's NKVD secret police in 1939 to transport precious metals and state secrets, according to its website.
Russia has gone through bouts of hoarding before. Tsar Alexander II ordered his government to start amassing bullion in 1867, just months after selling Alaska, now the No. 2 gold- producing U.S. state, for $7.3 million. His grandson, Nicholas II, introduced the gold standard in 1897, then needed a loan from France to ward off speculators and save the system in 1906.
Nicholas, Russia's last tsar was forced to free the ruble in 1914 as war broke out in Europe. Lenin's revolutionary government reinstated the gold link along with a new currency in 1922. While Soviet rubles were nominally backed by gold, sales of the metal to citizens were halted in 1930, making the peg meaningless.
When Lenin's Bolsheviks seized power in Petrograd, as St. Petersburg was then known, in 1917, one of their first targets was the State Bank and its gold, which they captured at 6 a.m. on Nov. 7, according to Bank Rossii's website. They soon nationalized all the banks, confiscating any gold found in vaults and deposit boxes.
Communist secrecy regarding the country's gold holdings fueled speculation that party elites had amassed a huge hoard of bullion that they spirited out of the country before the Soviet Union disintegrated in 1991.
Viktor Gerashchenko, the last Soviet central banker and a two-time chairman of Bank Rossii, has repeatedly denied such speculation, including last February.
“When people ask about the party's gold, my answer is always: Are you an idiot or something?” Gerashchenko, 75, told Afisha magazine.
For now, with more than five years left in Putin's term, Russia plans to keep on buying.
“The pace will be determined by the market,” First Deputy Chairman Alexei Ulyukayev said in an interview in Davos, Switzerland, on Jan. 25. “Whether to speed that up or slow it down is a market decision and I'm not going to discuss it.”