11/18/98 - ECONOMY-RUSSIA: GOLD MAY BE AN ALTERNATIVE CURE FOR RUSSIAN WOES
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MOSCOW, (Nov. 18) IPS - Economists grin at the very thought of minting gold coins here. Russia seems to be returning to the Middle Ages, just at the moment when the rest of the world is moving to plastic money and cashless transactions on the internet.
But gold still has a place in Russia. Its bankers argue that it could help to save Russian gold producers and give small investors a new instrument against inflation.
The current financial crisis has sent the Russian economy into tailspin and a sharp drop in the ruble, from six to the dollar in mid-August to around 17 to the dollar today, has wiped out the value of people"s wages and savings.
With many of Russia"s leading private banks falling apart, small depositors have started to remove their cash and individuals" accounts have dropped by some 20 percent over the last two months.
No surprise then that increasing numbers of Russians keep their remaining savings in dollars, thus putting extra pressure on the ailing ruble.
To tackle the issue the government and Central Bank are seriously contemplating a plan to mint gold coins to prop up the ruble and create an alternative to the dollar.
The plan, which originated with the Central Bank, involves issuing the golden money, which resembles the legendary tsarist era chervonets (10 rubles in value) which helped to stabilize Russian currency. In the early 1920s the Bolshevik government also issued gold chervonets and managed to tackle post-revolutionary hyper-inflation.
But these days officials argue that the plan to mint coins is primarily designed to help cash-strapped Russia to increase it"s gold output. Above all, issuing gold coins is supposed to support the country"s gold producers, said Tatyana Safonova, chief of the analytical department at Gokhran, the state precious metals and stones reserve.
"Private banks were planning to buy roughly half of Russia"s gold output this year. Now many of them are on the brink of collapse, and the gold producing sector is threatened by lack of buyers," Safonova explained.
The financial crisis could affect domestic gold producers" profits, but the industry is bracing itself for tough times as its buyers back away from making purchases.
Some 500 Russian producers stand to profit in the short term from selling gold as dollar-denominated sales increase the devaluation of the ruble.
Russia"s gold production reached 125.58 tonnes in 1997, nearly four tonnes more than in 1996. The bulk of production comes from alluvial deposits in Siberia. These are low-cost compared to mines, but can only be produced in the summer.
In 1997 the state bought 97 tonnes of gold compared with 121 tonnes in 1996, and the government planned to reduce its purchases to 60 tonnes in 1998. The rest of the gold was expected to be bought by private banks and industrial enterprises. But many of them have been badly burned by the crisis and have failed to come up with much needed cash.
Paradoxically, Russian Central Bank gold reserves have not changed much since things started to deteriorate in mid-August.
The reserves now amount to over 500 tonnes, and are little changed since June 25 when they stood at 525 tonnes, according to Sergei Kyshtymov, head of the bank"s precious metals operations.
Russia"s overall gold and foreign exchange reserves now amount to some $13 billion. Foreign exchange reserves have remained steady in recent weeks after a fall in August, when the Central Bank intervened in a futile effort to support the ruble.
But Russian gold production fell to 59.4 tonnes during the first eight months of 1998 from 66.4 million tonnes during the same period in 1997, according to the Economics Ministry.
The ministry"s department of precious metals and gems said it expected production to fall this year because of disruption to output due to non-payment of moneys due to mining firms.
The Central Bank"s plan to buy gold from domestic producers would help the ruble and give support to industry, according to bank chairman Viktor Gerashchenko. But under Russian law, the Central Bank cannot provide credits or other direct support for the gold industry.
As gold production drops, the Central Bank is pushing to mint gold coins in order to create a market for Russia"s hard up gold producers.
"Minting gold coins isn"t a return to the Middle Ages. It"s just an attempt to revitalize a "civilized" gold market in Russia", says Alexander Buzuyev, who heads the analytical department of the Moscow branch of Central Bank. "Coins constitute the most appropriate instrument for this market", he told IPS.
Critics argue the plan is not feasible, because gold is easy to buy in Russia, but almost impossible to sell without sizeable losses.
They warn gold coins are unlikely to attract small investors as the liquidity of gold is low and Russia, unlike many Asian nations, has long lost a tradition of retail payments in gold.
Nonetheless, some Russian economists, as well as influential Sverdlovsk region Gov. Eduard Rossel, believe that a ban on the circulation of foreign currency (primarily the dollar) along with the introduction of the gold chervonets coin are measures that can save the country.
The Russian government has dismissed rumors about restricting currency circulation, but it seems to favor the plan to mint gold coins.
The coins, with a nominal value of 1,000, 5,000 and 10,000 rubles (about $58, $294 and $588 respectively) and made of 99.99 percent gold, are expected to be issued by Jan. 1, 1999, Safonova says.
"We base our calculations upon actual demand; in 1997 retail clients bought some 500 kilos of gold, while the figure has reached seven tonnes since the beginning of this year, with two tonnes purchased in August alone," she told IPS.
However, officials privately admit that the measure could take a bit longer, probably till next March, to materialize.
It is too early to come up with specific figures, but Mikhail Belyayev, deputy head of the Central Bank"s analytical department, believes that up to 10 tonnes of gold could be minted into coins every year in Russia.
"I would not forecast mass minting of gold coins. The measure is likely to be phased", he told IPS.
However, officials argue the coins are not expected in retail circulation, but will rather be for the use of retail investors, operating through banks.
"The existing currency exchange booths could deal with new coins, providing infrastructure for retail gold trade in Russia", Buzuyev said.
"Minting gold coins could be a positive step, given the current economic situation in Russia", maintains Andrei Nechayev, chairman of Russian Finance Corporation and former finance minister.
"The measure could give small investors a new instrument to fight inflation, an alternative to the dollar, though obviously it is not a universal cure", he said. |
