Russia-Japan Gold Talks Leave London Analysts Perplexed

Gold analysts said on Monday they were perplexed by reports that Russian central bank officials were visiting Tokyo to discuss with Japanese trading houses using gold to back Russian government bond issues.

"Russia has tried gold-backed bonds domestically with mixed success," said Andy Smith precious metals market analyst at Union Bank of Switzerland (UBS). He said he had no idea why the Russians should talk gold-backed bonds in Tokyo.

"They have been tapping the Eurobond market quite successfully and were thought to be coming back for more," he said.

Last week first deputy prime minister Anatoly Chubais said that radical changes were needed in Russia's gold market.

 

"We will build a normal free, regulated gold market in this country," he said, adding that a working group would report to him on steps to that end within 10 days.

Gold was among state assets mentioned by Chubais as assets which would be regarded as a means of raising hard currency.

Creating gold-backed bonds would suggest that Russia is looking to mobilise but not sell off its gold, analysts said.

Last Friday officials at the Russian central bank and finance ministry said they had no knowledge of delegations heading for Japan to open long delayed contract talks on this year's platinum and palladium (PGMs) exports to the Japanese. Russia is the largest exporter of palladium and second biggest of platinum. Japan is the leading importer of both but has had no deliveries from Russia this year.

Markets were awash then with rumours that Russia and UBS were involved in a swap involving 30 tonnes of collateralised gold for the equivalent in platinum and palladium which had gone wrong.

UBS has refused to comment and Russian officials have denied any talks were taking place. "This (visit) might have something to do with the PGM problem. They may be approaching Japan first as counter party in a gold deal to appease them," suggested Rhona O'Connell, metals markets analyst at stockbroker T Hoare and Co.

Merrill Lynch markets analyst Ted Arnold noted that in comparison to its perceived stocks of PGMs which are tightly guarded state secret,

Russia's stocks of gold were small. "Gold is a very liquid market (for a central bank to lend into) but Russia hasn't got enough. Supposedly it has plenty of PGMs but that is a very illiquid market and much more difficult," he said.

Russia has been attempting to reform capitalisation and structure of its domestic gold mining industry for several years. It mined about 122 tonnes last year down from 135 tonnes the year before, according to estimates from central bank officials.

Expansion has been hampered by payment delays from the finance ministry for purchases of the domestic mine output.

Another part of Russia's gold industry reform has centred on making money from national gold assets, believed to be around 400 tonnes. For several years gold has been promoted by Moscow as the backing for the roubles of former Soviet republics in a CIS-wide common currency.