London's Bullion Market Association suspends all Russian members. The step is likely to prove to be a double-edged sword.

The tough sanctions regime against Russia is severing the country's links to the global economy and propelling its domestic economy into crisis at the same time that its central banking foreign currency reserves held abroad have been shut off.

Last Lifeline

But that does not mean all of them are frozen. A significant proportion, about $120 billion dollars, are held as gold in the Russian treasury. Because of the ruble's collapse, the ample stores of the precious metal are likely to be one of the last lifelines for Vladimir Putin's regime. But Moscow's leeway with regards to gold has shrunk.

At the start of the week, the London Bullion Market Association (LBMA) suspended the membership of six Russian precious metals refineries: JSC Krastsvetmet, JSC Novosibirsk Refinery, JSC Uralelectromed, Moscow Special Alloys Processing Plant, Prioksky Plant of Non-Ferrous Metals and Shyolkovsky Factory of Secondary Precious Metals. In the U.S., the CME Group commodities exchange followed suit, suspending the same six gold and silver refineries.

Kicked Out

London, which trades trillions of dollars of precious metals every year, is the largest gold exchange in the world. Suspending the six refineries from the so-called Good Delivery List means that their bars can't be traded in London. Both the LBMA and the CME haven't set any deadlines for the suspension, saying that it would be in effect until further notice. The Russian companies, however, can trade gold and silver produced before March 7.

Many banks only accept precious metals that fulfill the LBMA's strict criteria as its list is the de facto quality standard in the market. Russia's palladium and platinum refineries, however, have been left out of the suspension given they are traded in the London Platinum & Palladium Market.

Shanghai a Possible Loophole

It remains to be seen how hard the suspension will hit the Russian and the global precious metals market. The country is the world's second-largest producer of precious metals in the world even if it is not a meaningful exporter of gold or silver. It is more than possible that they will evade western sanctions by trading their wares on the Shanghai Gold Exchange.

The Russian central bank recently announced that it was resuming its purchases of domestic gold bars for the first time in two years. According to the London-based World Gold Council (WGC), an industry market development organization, Russia's central bank held about 2301 tons of gold at the end of 2021, meaning they hold the fifth-highest level of reserves worldwide.

Hard to Track

Gold is not very liquid in comparison with government bonds. But they can be moved surreptitiously outside digital networks in the finance sector and they are hard to track.

That is why gold is extremely attractive to pariah states as it is a hedge against financial sanctions. In extreme situations, such governments can exchange gold for currency in unregulated precious metals markets.

But, at this time, it appears Russia's central bank is still very far from needing to make such a step and start liquidating gold reserves.