# Gold investors face bind over bars from tarnished Russia
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-01
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Investors Face Dilemma: Removing Russian Gold from Portfolios
Meta Description: Learn why it's not easy for investors to remove Russian gold from their portfolios and the potential consequences of triggering a scramble for non-Russian
URL: https://financedigest.com/gold-investors-face-bind-over-bars-from-tarnished-russiahtml

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By Peter Hobson

LONDON (Reuters) – Some investors want Russian gold off their books but it’s not that easy to remove.

A 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 tonnes of gold that has been sitting in commercial vaults since before the conflict started.

[Fund managers looking to sell](https://www.financedigest.com/intercos-fund-shareholders-l-catterton-otpp-sell-6-stake-at-7-discount.html "Intercos fund shareholders L Catterton, OTPP sell 6% stake at 7% discount") the metal to avoid the deepening reputational risk of holding assets linked to Russia in their portfolios could trigger a costly scramble to replace it with non-Russian gold, according to bankers and investors.

“This would only serve to damage investors. It doesn’t damage the (Russian) regime,” said Christopher Mellor at Invesco, whose fund has around 265 tonnes of gold, 35 tonnes of it produced in [Russia with a market](https://www.financedigest.com/oil-markets-steady-as-investors-weigh-banking-crisis-russia.html "Oil markets steady as investors weigh banking crisis, Russia") value of around $2 billion.

The dilemma [facing investors](https://www.financedigest.com/wave-of-lawsuits-over-ftx-expected-but-investors-will-face-legal-hurdles.html "‘Wave’ of lawsuits over FTX expected, but investors will face legal hurdles") reflects Russia’s heft in the global bullion trade and its hub, the London market, where gold worth around $50 billion changes hands daily in private deals.

A rapid selloff of gold from Russia — a top three supplier — would potentially disrupt that trade by undermining the principle that all bars in the London trading system are interchangeable regardless of their origin, according to three senior bankers at major gold trading banks.

To buttress the market, two of the bankers told Reuters they [contacted clients and rival banks](https://www.financedigest.com/uk-watchdog-contacts-banks-following-huge-withdrawal-of-mortgage-deals-ft.html "UK watchdog contacts banks following huge withdrawal of mortgage deals -FT") to tell them they would not dump Russian bullion minted before the war.

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

“I made an effort to call clients. I told them, if you [demand that your Russian](https://www.financedigest.com/ukraine-demands-ceasefire-humanitarian-corridors-at-talks-with-russians.html "Ukraine demands ceasefire, humanitarian corridors at talks with Russians") metal is swapped out, you’ll create a problem for yourself. You don’t want to create a scramble,” 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, meaning their newly minted bars could no longer trade in London or on the COMEX exchange in New York](https://www.financedigest.com/new-york-holds-top-spot-london-second-in-z-yen-financial-centre-survey.html "New York holds top spot, London second in Z/Yen financial centre survey"), the biggest gold futures trading venue.

“There was utter confusion. [Funds were saying they didn’t want any Russian](https://www.financedigest.com/permitted-share-of-chinas-yuan-in-russian-wealth-fund-doubled-to-60-finance-minister.html "Permitted share of China’s yuan in Russian wealth fund doubled to 60% -Finance Minister") bars in their holdings,” the banker said.

THE [BANK OF ENGLAND](https://www.financedigest.com/what-to-make-of-the-headlines-brexit-and-bank-of-england-policy-eba-bank-stress-tests.html "What to make of the headlines? Brexit and Bank of England policy, EBA bank stress tests")

[Russia invaded Ukraine](https://www.financedigest.com/analysis-action-wanes-at-u-n-to-isolate-russia-almost-six-months-into-ukraine-war.html "Analysis: Action wanes at U.N. to isolate Russia almost six months into Ukraine war") on Feb. 24 in what it has called a “special [military operation” aimed at demilitarising Ukraine](https://www.financedigest.com/biden-unveils-800-million-in-new-ukraine-military-aid-to-ask-congress-for-more.html "Biden unveils 0 million in new Ukraine military aid, to ask Congress for more") and rooting out dangerous nationalists. Kyiv and the West call this a baseless pretext for an aggressive land grab.

The Bank of England, which [operates Britain’s](https://www.financedigest.com/britain-sets-5g-goal-says-no-magic-number-of-operators.html "Britain sets 5G goal, says no ‘magic number’ of operators") largest gold vault, said it considered Russian gold bars made before the conflict in Ukraine eligible to trade 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 8th March is not London](https://www.financedigest.com/gold-london-real-estate-and-the-theresa-may-effect.html "GOLD, LONDON REAL ESTATE AND THE THERESA MAY EFFECT") Good Delivery. Any bars produced before that remain acceptable, and we told all our customers this was the case. That’s just a point of fact, so we don’t have any comment on this,” the [Bank of England](https://www.financedigest.com/bank-of-england-publishes-rules-for-energy-firms-liquidity-tool.html "Bank of England publishes rules for energy firms’ liquidity tool") said in an emailed statement.

To hammer home the point that pre-invasion Russian gold was meant to be treated the same as gold from other places, some banks told clients for whom they [stored gold that they would have to pay](https://www.financedigest.com/sainsburys-pays-524-million-for-full-ownership-of-store-investment-vehicles.html "Sainsbury’s pays 4 million for full ownership of store investment vehicles") extra to offload Russian bullion because it would breach their existing contracts, the two bankers, a third banker and two gold-owning investment funds said.

The bankers’ conversations with clients and rivals, which have not previously been reported, highlight the role [played by a handful of players](https://www.financedigest.com/55-of-people-who-regularly-play-sport-dont-think-being-verbally-abusive-to-another-player-makes-them-a-bad-sport.html "55% OF PEOPLE WHO REGULARLY PLAY SPORT DON’T THINK BEING VERBALLY ABUSIVE TO ANOTHER PLAYER MAKES THEM A BAD SPORT") in the London gold market, where trades happen in bilateral deals.

Twelve banks dominate trading in the London gold market and four of them — JPMorgan, HSBC, ICBC [Standard Bank](https://www.financedigest.com/first-abu-dhabi-bank-reiterates-not-eyeing-offer-for-standard-chartered.html "First Abu Dhabi Bank reiterates not eyeing offer for Standard Chartered") and UBS — operate vaults. Anyone trading bullion relies on their services, directly or indirectly, to settle trades.

JPMorgan, HSBC, ICBC Standard and UBS declined to comment when asked about how they handled [investor requests to sell their holdings of Russian](https://www.financedigest.com/billionaire-investor-yuri-milner-relinquishes-russian-citizenship.html "Billionaire investor Yuri Milner relinquishes Russian citizenship") gold.

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 quantity of Russian gold in the London [market and Russia’s rapidly emerging](https://www.financedigest.com/analysis-after-sanctions-barrage-russias-emerging-market-allies-explore-workarounds.html "Analysis-After sanctions barrage, Russia’s emerging market allies explore workarounds") pariah status in the wake of the Ukraine invasion, however, put the 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](https://www.financedigest.com/token-inc-launches-london-office-to-answer-demand-from-european-banks.html "Token, Inc. Launches London Office to Answer Demand from European Banks") & Finance.

The Financial Conduct Authority (FCA) should question the practice to understand whether the actions were, generally, for the [benefit of market](https://www.financedigest.com/health-benefits-served-by-vegan-diet-will-infuses-vegan-noodles-market-demand.html "Health Benefits Served By Vegan Diet Will Infuses Vegan Noodles Market Demand") participants … and whether the practice was [transparent to market](https://www.financedigest.com/digital-health-market-size-to-gain-traction-of-us-536-6-billion-growth-opportunities-by-2025-transparency-market-research.html "Digital Health Market Size to Gain Traction of US$ 536.6 Billion, Growth Opportunities by 2025: Transparency Market Research") participants.

The FCA is the [British regulator responsible for overseeing banks](https://www.financedigest.com/hsbc-acquires-british-arm-of-stricken-silicon-valley-bank.html "HSBC acquires British arm of stricken Silicon Valley Bank") where they trade financial products or instruments in the London gold market. It 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 swap it out or not to deal with Russian gold in the future.

Asked what the LBMA thought of this, the spokesman said that it “maintains a neutral stance provided the [efficient operation](https://www.financedigest.com/finance-operations-efficiency-7-ways-to-slick-up-your-department.html "Finance operations efficiency – 7 ways to slick up your department") of the market is unaffected.

The spokesman declined to comment on bankers’ efforts to prevent a sell-off of Russian gold. He said that the LBMA “does not distinguish between different types of good delivery gold”.

POTENTIAL LOSSES

The bankers’ actions appear to have worked.

Good [delivery gold bars minted in Russia before the invasion have not traded at a discount to the rest of the market](https://www.financedigest.com/innovation-to-trigger-the-injectable-drug-delivery-market.html "Innovation to trigger the Injectable Drug Delivery Market"), according to traders. Larger [investors — including some exchange traded funds](https://www.financedigest.com/uk-investors-add-1-2-billion-to-equity-funds-in-march-calastone.html "UK investors add .2 billion to equity funds in March – Calastone") (ETFs) with Russian gold worth more than $1 billion — do not appear to have sold up.

“Our ETFs are not able to get all Russian metals off their books at short notice,” said a spokesperson for Zürcher Kantonalbank.

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

Zürcher Kantonalbank’s current ETF [stock of about 160 tonnes of gold](https://www.financedigest.com/stocks-and-gold-cheer-u-s-inflation-picture-while-dollar-slides.html "Stocks and gold cheer U.S. inflation picture, while dollar slides") comes mainly from Swiss refineries and the share of Russian gold is negligible, according to the spokesperson.

A widespread and rapid clearout of Russian gold from [investor portfolios could push its price](https://www.financedigest.com/oil-prices-steady-as-news-of-saudi-russia-meeting-calms-investors.html "Oil prices steady as news of Saudi, Russia meeting calms investors") down by anywhere from $1-$40 an ounce compared to non-Russian gold, people in the industry 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 [large investment](https://www.financedigest.com/large-investment-success-for-basingstoke-cybersecurity-start-up.html "Large investment success for Basingstoke cybersecurity start-up") funds. The total amount is likely significantly larger but there are no publicly available figures to quantify it.

If Russian gold traded at a discount of $5 an ounce, the [cost to funds of replacing $12 billion](https://www.financedigest.com/australias-nuclear-submarine-plan-to-cost-up-to-245-billion-by-2055-defence-official.html "Australia’s nuclear submarine plan to cost up to 5 billion by 2055 -defence official") worth of metal would be around $34 million.

A Reuters analysis of investment [data shows that the share](https://www.financedigest.com/who-urges-china-to-share-specific-data-regularly-on-covid-situation.html "WHO urges China to share specific data regularly on COVID situation") of Russian gold in eight large ETFs actually rose to 7% on average in mid-July from 6.5% in mid-March.

Some gold market participants have [pushed ahead](https://www.financedigest.com/kosovo-pushes-ahead-with-car-licensing-rule-resisted-by-serbs.html "Kosovo pushes ahead with car licensing rule resisted by Serbs") with selling their Russian holdings but they have tended to have less to offload.

Britain’s Royal Mint, for example, said it had Russian bars worth around $40 million in its ETF and got rid of them by mid-March.

Others are trying to reduce their Russian holdings over time, [asking the banks which store](https://www.financedigest.com/kfc-franchisees-in-russia-ask-govt-to-halt-sale-of-stores-to-local-operator-ria.html "KFC franchisees in Russia ask govt to halt sale of stores to local operator – RIA") their gold to gradually cut their allocation or refusing to accept Russian gold bars in new deliveries.

[Asset manager Abrdn said it had asked its bank to reduce its Russian holdings](https://www.financedigest.com/bahamas-regulator-holds-ftx-assets-pending-delivery-to-customers-creditors.html "Bahamas regulator holds FTX assets pending delivery to customers, creditors"). In mid-March, Russian gold accounted for 10% of the roughly 45 tonnes held in its Aberdeen Standard ETF. By mid-July, that proportion had fallen to 9.8%.

Those seeking a faster exit, meanwhile, have been left in a bind.

“Everyone has the same problem. Everyone wants to solve it, no one [knows how,” said a source at a major investment](https://www.financedigest.com/weighing-up-buy-now-pay-later-what-you-need-to-know-before-you-invest.html "Weighing up Buy Now, Pay Later: What you need to know before you invest") fund.

(The story refiles to clarify that the FCA oversees banks trading [financial products or instruments in the London gold market)](https://www.financedigest.com/the-political-wildcard-what-is-trumps-us-presidential-nomination-doing-to-financial-markets.html "The political wildcard: What is Trump’s US presidential nomination doing to financial markets?")

(Additional reporting by Elisa Martinuzzi; Editing by Veronica Brown and Carmel Crimmins)


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