INSIGHT-Gold investors face tarnished Russia bullion links


By Peter Hobson

LONDON, Aug 1 (Reuters) – Some investors want Russian gold removed from their accounts, but it’s not that easy to remove.

A de facto ban on Russian bullion minted after Moscow’s invasion of Ukraine – initiated by the London market in early March – does not apply to the hundreds of tonnes of gold that were in trading vaults before the start of the conflict.

Fund managers looking to sell the metal to avoid the growing reputational risk of holding Russia-related assets in their portfolios could spark a costly rush to replace it with non-Russian gold, bankers say and investors.

“It would only hurt investors. It doesn’t hurt the (Russian) regime,” said Invesco’s Christopher Mellor, whose fund holds around 265 tonnes of gold, including 35 tonnes produced in Russia with a market value of about $2. billion.

The dilemma facing investors reflects Russia’s weight in the global bullion trade and its hub, the London market, where gold worth around $50 billion changes hands daily in private transactions.

A rapid sale of gold from Russia – one of the three main suppliers – would potentially disrupt this trade by undermining the principle that all bullion in the London trading system is interchangeable regardless of origin, according to three senior bankers at large gold trading banks.

To bolster the market, two of the bankers told Reuters they had contacted customers and rival banks to say they would not dispose of Russian bullion minted before the war.

Bankers said they advised their customers and other traders to do the same. They declined to be named due to the confidential nature of the conversations.

“I made an effort to call the customers. I told them that if you demand your Russian metal to be exchanged, you will create a problem for yourself. You don’t want to create a rush,” one said. .

He said his phone lit up with calls after the London Bullion Market Association (LBMA), a trade body that sets market standards, removed all Russian refineries from its accredited list on March 7, which means their newly minted bars could no longer trade in London or the COMEX exchange in New York, the largest gold futures trading platform.

“There was total confusion. The funds were saying they didn’t want Russian bars in their holdings,” the banker said.


Russia invaded Ukraine on February 24 in what it called a “special military operation” aimed at demilitarizing Ukraine and rooting out dangerous nationalists. Kyiv and the West call it a baseless pretext for aggressive land grabbing.

The Bank of England, which operates Britain’s largest gold vault, said it considered Russian gold bars made before the conflict in Ukraine eligible for trade because they are still on the LBMA accredited list, known as the Good Delivery List.

“As far as the Bank of England is concerned, any Russian refined gold produced after March 8 is not good delivery from London. All bullion produced before that remains acceptable, and we have told all our customers that this was the case. It’s just a fact, so we have no comment on that,” the Bank of England said in an emailed statement.

To emphasize that pre-invasion Russian gold was supposed to be treated the same as gold from other countries, some banks told customers for whom they stored gold that they would have to pay extra to unload Russian bullion, as it would violate their existing capacity. contracts, said the two bankers, a third banker and two investment funds owning gold.

The bankers’ conversations with clients and rivals, which have not previously been reported, highlight the role played by a handful of players in the London gold market, where transactions take place within the framework bilateral agreements.

Twelve banks dominate trading in the London gold market and four of them – JPMorgan, HSBC, ICBC Standard Bank and UBS – operate vaults. Anyone who trades bullion relies on its services, directly or indirectly, to settle their trades.

JPMorgan, HSBC, ICBC Standard and UBS declined to comment when asked how they handled investor requests to sell their Russian gold holdings.

The LBMA, which is made up of gold refiners, traders and banks, is not a regulator and relies on market participants to enforce its rules.

The large quantity of Russian gold on the London market and the rapid emergence of Russia’s pariah status following the invasion of Ukraine, however, have put banks in a difficult situation, according to lawyers and market experts.

“I think you see the banking community trying to navigate a very complex situation,” said Peter Hahn, professor emeritus at the London Institute of Banking & Finance.

“The Financial Conduct Authority (FCA) should challenge the practice to understand whether the shares were, in general, for the benefit of market participants…and whether the practice was transparent to market participants.”

The FCA, the UK regulator responsible for overseeing banks and traders in the London gold market, declined to comment.

An LBMA spokesman said the association was “anecdotally” aware that some owners and traders of Russian gold wanted to trade it or not deal with Russian gold in the future.

Asked what the LBMA thought, the spokesperson said it “maintains a neutral stance as long as the efficient functioning of the market is not affected.”

The spokesman declined to comment on bankers’ efforts to prevent a sale of Russian gold. He said the LBMA “does not distinguish between different types of Good Delivery gold.”


The bankers’ actions seem to have worked.

According to traders, good delivery gold bars minted in Russia before the invasion did not trade at a discount to the rest of the market. Big investors – including some exchange-traded funds (ETFs) with more than $1 billion worth of Russian gold – don’t appear to have sold.

“Our ETFs are not able to remove all Russian metals from their books in the short term,” a Zürcher Kantonalbank spokesperson said.

“The potential losses would not be consistent with our fiduciary duty to our customers and its sale is currently not possible due to the current situation.”

Zürcher Kantonalbank’s current ETF stock of around 160 tonnes of gold comes mainly from Swiss refineries and the share of Russian gold is negligible, according to the spokesperson.

A widespread and rapid elimination of Russian gold from investors’ portfolios could lower its price by $1 to $40 an ounce relative to non-Russian gold, people in the industry have said.

At least $12 billion worth of Russian gold is stored in vaults in London, New York and Zurich, according to a Reuters analysis of data from 11 major investment funds. The total amount is likely much higher, but there are no publicly available figures to quantify it.

If Russian gold traded at a discount of $5 an ounce, the cost to the funds of replacing $12 billion worth of metal would be around $34 million.

A Reuters analysis of investment data shows that the share of Russian gold in eight major ETFs actually fell from 6.5% in mid-March to 7% on average in mid-July.

Some gold market participants pushed the sale of their Russian holdings, but they tended to have less to offload.

Britain’s Royal Mint, for example, said it had Russian bullion worth around $40 million in its ETF and dumped it in mid-March.

Others attempt to reduce their Russian holdings over time, asking the banks that store their gold to gradually reduce their allocation or refusing to accept Russian gold bullion in new shipments.

Asset manager Abrn said it asked its bank to reduce its Russian holdings. In mid-March, Russian gold accounted for 10% of the roughly 45 tonnes held in its Aberdeen Standard ETF. By mid-July, this proportion had fallen to 9.8%.

Those looking for a quicker exit, meanwhile, have been left in a bind.

“Everyone has the same problem. Everyone wants to solve it, nobody knows how,” said a source at a large investment fund. (Additional reporting by Elisa Martinuzzi; Editing by Veronica Brown and Carmel Crimmins)


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