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Friday, October 21, 2016

Russia buys diamonds and gold

The Ministry of Finance of the state Fund for buying diamonds in 5 billion roubles and more can spend for gold and other precious metals. In a crisis it is usually a great safe-haven assets. In addition, to buy diamonds in large volumes in hard times it becomes a tradition. But why the Agency questions the need to spend money to replenish the gold reserves of the country?

The Finance Ministry plans in 2016 to buy diamonds for 5 billion rubles for the replenishment of state reserves in the state Fund. The corresponding decision is already accepted by the government, said Deputy Finance Minister Alexei Moiseev.

“Buying diamonds it can be explained by the desire of the government to support the ALROSA before the scheduled privatization”

In total, this year the limit of formation of the state Fund provided by the government for 12 billion, but 7 billion still remain in reserve. They may be the acquisition of gold and other precious metals. “Still under discussion. I’m honestly not sure what to do (buy precious metals to the state Fund),” – said the Deputy Minister.

The country’s gold reserves

Gokhran is engaged in the storage and purchasing of precious metals and stones to replenish the state Fund. Purchases are made on the budget. The Ministry of Finance is engaged in the purchase for the Fund since 2003.

In state Fund accumulated gold reserves of the country. Theoretically, the Gokhran competes with commercial banks, which are also buying precious metals and loans to mining companies. Therefore, there is a rule that the Russian company must first offer the stones to Gokhran and then go with them to the market. But in practice, no competition there. Gokhran, as a rule, buying hundreds of times less precious metals than banks. For example, in 2010, the year he bought 3.4 tons of gold against nearly 150 tons, which were bought up by commercial banks.

In recent years, the Gokhran mostly bought gold and diamonds were sold. He sells diamonds at auctions, which differ from traditional. Wishing for one month to get acquainted with diamonds, eyeing, and then in the envelope apply to the purchase of the lot (diamond). Moreover, they must install and register the price: who will give more, and he will win the auction. Interestingly, the diamond will not get anyone if all buyers offer a price lower than that determined for the gem expert of the Gokhran.

Diamonds Gokhran sells in order to gain money to purchase more liquid of the precious metals – gold, platinum, etc. In any crisis, precious metals have become a “safe haven”. And this crisis is no exception: investors are invested in it to save money.

Why diamonds?

Why the government decided to invest money in diamonds, and about of gold in the reflection? Most likely, the Gokhran forced to buy diamonds to once again to help domestic diamond miners, whose sales are falling.

It did so in the last crisis of 2008-2009, when the sale of the largest diamond miner, Russia’s ALROSA is actually completely stopped. To save the company, Gokhran bought her stones in 8 billion roubles. This was 6% of the total revenue of ALROSA.

Most likely, this time provided for the purchase of diamonds 5 billion will go to “ALROSA” in exchange for bags with stones. At the end of 2015, the company’s management started talking about the possibility of shipments of rough diamonds in the state Fund. This was confirmed by Vice-Premier, the presidential envoy to FEFD Yuri Trutnev, who oversees the diamond mining company.

“Buying diamonds it can be explained by the desire of the government to support the ALROSA before the planned privatization. I don’t see anything wrong with that. Any seller, including the state, seek to sell their assets at a higher price”, – says the analyst of IFC Markets Dmitry Lukashov. On the eve of Vladimir Putin signed a decree on approval of privatization of 10% shares of “ALROSA” (now the state owns about 44% of the shares).

Diamonds for the state Fund are purchased only from Russian producers, and the main seller is ALROSA, extracting 95% of diamonds in Russia. By the end of 2015, ALROSA group produced 38.3 million carats of rough diamonds, and in 2016 is scheduled to receive about 37 million carats. Also produces diamonds”, geologodobychnoe Arkhangelsk enterprise” that belongs to “LUKOIL”.

“Safe Harbor”

The expense of gold and precious stones, which is buying the Gokhran, formed the country’s foreign exchange reserves. They are known, are stored not only in securities and currencies, but also in diamonds and gold. Except the Ministry of Finance procurement of precious metals is also engaged in CBR. So, in 2015, the year of the Central Bank has purchased over 200 tons of gold.

The crisis and falling oil prices have reduced the reserves of the country. And now the government wants them to fill – because the reserves maintain adequate level of money supply and stabilize the exchange rate. Since the beginning of the year, the international price of oil Brent has grown on 30%, and the Russian foreign exchange reserves increased by only 6.5%, says Lukashov.

To replenish reserves by buying government securities of developed countries. But their yield is low. For example, for 10-year U.S. bonds, it amounts to only 1.7% per annum. Given that the fed is going to raise rates, and the price of these securities will fall even more. “Under the circumstances, the increase in foreign exchange reserves due to the acquisition of precious metals and diamonds looks quite reasonable”, – said Lukashov.

Diamonds and gold is the best safe-haven assets in case of inflation in the United States and, in fact, the only way to dilute the dollar assets in reserves, said Mikhail Krylov from the IR “Golden Hills – Kapital AM”. “The production costs of gold in recent years is steadily growing and is unlikely to have ever greatly reduced. From a geological point of view our planet is well understood and not expected the discovery of new large deposits of gold, cheap in production,” adds Lukashov.

Why did the Finance Ministry questioned the need to invest in gold and other precious metals? The doubt of Moses, most likely, due to the fact, as it is advisable to draw up gold reserves given the fact that we have to cut spending. We will remind that else in the beginning of 2014, the gold reserves of Russia reached 510 billion dollars, but by mid-year they decreased to 382 billion dollars (because of interventions to support the ruble).

“To return to the level of 500 billion dollars is the challenge facing Finance over the next 3 years, however this requires a favorable economic situation and the possibility of formation of reserves at the expense of the budget revenues. But this possibility even at the current relatively high level of oil prices, which, however, is still below the budgeted $ 50 per barrel, the state is not so often”, – says Kirill Yakovenko from “ALOR Broker”.

“It is obvious that even with the current positive dynamics in the oil market to relax and adopt long-term planning is frankly early. But on the other hand, despite the fact that now Russia does not need to enter the market with currency interventions due to free the ruble, by themselves, the reserves required. Because they maintain the stability of the economy. Russia’s revenues tied to a highly unstable oil prices, so to speak, that Russia does not need to form reserves for a rainy day, it would be a profound mistake,” – said Yakovenko.

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