LONDON, Aug 1 (Reuters) – Some investors want Russian gold off their books, but it is not so easy to get rid of it.
The de facto ban on Russian bullion minted after Moscow’s invasion of Ukraine — instigated by the London market in early March — does not apply to hundreds of tons of gold that have been kept in commercial vaults since before the conflict began.
Fund managers looking to sell the metal to avoid deepening the reputational risk of holding Russia-linked assets in their portfolios could trigger a costly scramble to replace it with non-Russian gold, bankers and investors say.
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“This would only serve to harm investors. It does not harm the (Russian) regime,” said Christopher Mellor at Invesco, whose fund holds about 265 tonnes of gold, 35 tonnes of which is produced in Russia at market value of about 2 dollars. billion
The dilemma facing investors reflects Russia’s impact on the global bullion trade and its hub, the London market, where some $50 billion worth of gold changes hands daily in private offers
A rapid sale of gold from Russia, one of the top three suppliers, could disrupt that trade by undermining the principle that all bars in the London trading system are tradable regardless of origin, according to three senior bankers at major gold trading banks .
To shore up the market, two of the bankers told Reuters they contacted clients and rival banks to tell them they would not dump the pre-war Russian bullion.
Bankers said they advised their clients and other traders to do the same. They declined to be named because of the confidential nature of the talks.
“I made an effort to call the customers. I told them that if you ask for your Russian metal to be changed, you’re going to create a problem for yourself. You don’t want to create a fight,” said one.
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. meaning that their newly minted bars could no longer trade in London or on the COMEX exchange in New York, the largest gold futures trading venue.
“There was total confusion. The funds were saying they didn’t want any Russian bars in their holdings,” the banker said.
THE BANK OF ENGLAND
Russia invaded Ukraine on February 24 in what it has called a “special military operation” aimed at demilitarizing Ukraine and eliminating dangerous nationalists. Kyiv and the West call this a baseless pretext for an aggressive land grab.
The Bank of England, which operates Britain’s largest gold vault, said it considered Russian gold bars made before the conflict in Ukraine to be tradable because they are still on the LBMA’s 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 London Good Delivery. Any bullion produced before that is still acceptable, and we told all our customers that this was the case . This is just a fact. , so we have no comment on it,” the Bank of England said in an emailed statement.
To drive home the point that pre-invasion Russian gold was to be treated the same as gold elsewhere, some banks told clients for whom they were storing gold that they would have to pay more to unload Russian bullion because it would violate their existing ones. contracts, said the two bankers, a third banker and two investment funds that own gold.
The bankers’ conversations with clients and rivals, which were not previously reported, highlight the role played by a handful of brokers in London’s gold market, where they deal in bilateral deals.
Twelve banks dominate trading in the London gold market and four of them — JPMorgan ( JPM.N ), HSBC ( HSBA.L ), , ICBC Standard Bank ( 601398.SS ), ( SBKJ.J ) and UBS — operate vaults. . Anyone trading bullion relies on their services, directly or indirectly, to settle transactions.
JPMorgan, HSBC, ICBC Standard and UBS declined to comment when asked about how they handled requests from investors 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 uphold its rules.
The large amount of Russian gold on the London market and Russia’s emerging pariah status after the invasion of Ukraine, however, put banks in a difficult spot, according to lawyers and market experts.
“I think you’re seeing the banking community trying to navigate a very complex situation,” said Peter Hahn, emeritus professor at the London Institute of Banking & Finance.
“The Financial Conduct Authority (FCA) should question the practice to understand whether the actions were generally to the benefit of market participants … and whether the practice was transparent to market participants.”
The FCA, the British regulator charged with overseeing banks and traders in London’s gold market, declined to comment.
A spokesman for the LBMA said the association was “anecdotally” aware that some owners and traders of Russian gold have wanted to switch or not deal with Russian gold in the future.
Asked what the LBMA thought, the spokesman said it “maintains a neutral position 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”.
POTENTIAL LOSSES
The bankers’ actions seem to have worked.
Good gold bullion minted in Russia before the invasion has not been priced at a discount to the rest of the market, traders say. Bigger investors, including some exchange-traded funds (ETFs) holding more than $1 billion worth of Russian gold, don’t appear to have been sold.
“Our ETFs are not capable of removing all Russian metals from their books at short notice,” said a Zürcher Kantonalbank spokesman.
“Potential losses would not be compatible with our fiduciary duty to our customers and their 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 spokesman.
A widespread and rapid removal of Russian gold from investors’ portfolios could drop its price by $1 to $40 an ounce compared with non-Russian gold, people in the industry said.
At least $12 billion 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 to be significantly higher, but there are no publicly available figures to quantify it.
If Russian gold were trading at a discount of $5 an ounce, the cost to funds to replace $12 billion worth of the metal would be about $34 million.
A Reuters analysis of investment data shows the share of Russian gold in eight major ETFs rose to an average of 7% in mid-July from 6.5% in mid-March.
Some gold market participants have made progress in selling their Russian holdings, but have tended to have less to unload.
Britain’s Royal Mint, for example, said it had about $40 million worth of Russian bullion in its ETF and got rid of it in mid-March.
Others are trying to reduce their Russian holdings over time, asking banks that store their gold to gradually reduce their allocation or refusing to accept Russian gold bullion in new deliveries.
Asset manager Abrdn ( ABDN.L ) said it had asked its bank to reduce its Russian holdings. In mid-March, Russian gold accounted for 10% of the roughly 45 tonnes held by its Aberdeen Standard ETF. By mid-July, that proportion had fallen to 9.8%.
Meanwhile, those looking for a faster way out have been left with a problem.
“Everybody has the same problem. Everybody wants to solve it, nobody knows how,” said a source at a major investment fund.
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Additional reporting by Elisa Martinuzzi; Editing by Veronica Brown and Carmel Crimmins
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