Russia Targets China for Gold Sales as VTB, Sberbank Expand

(Bloomberg) -- Russia’s gold sales in China are set to expand as VTB Capital boosts sales and Sberbank PJSC prepares to enter the market, chasing demand in the world’s biggest consumer of bullion.

Sberbank CIB plans to register on the Shanghai Gold Exchange and eventually to sell up to 100 tons (3.2 million ounces) a year, according to an e-mail from the investment arm of Russia’s largest bank. VTB Capital, a unit of the second-biggest lender, is targeting sales of as much as 20 metric tons of gold in China in 2017, Sergey Nenashev, the bank’s head of precious metals, said by e-mail. Sales may reach a rate of 100 tons a year near the end of 2018, he said.

Russian banks, which act as intermediaries between the country’s gold producers and the market, aim to tap into Asian growth. Rising incomes and few investment options in China are driving demand for gold jewelry, bars and coins in China. In July, Shanghai Gold Exchange volumes almost doubled from a year earlier to 1.7 trillion yuan ($255 billion), figures compiled by the bourse show.

Banks have been looking at China for a while as it’s the “largest ultimate, paying customer” for gold, Sergey Kashuba, head of the Union of Gold Producers of Russia, said by e-mail on Tuesday. This year, they may ship several tons of gold to China in pilot sales, he said.

If Sberbank and VTB each will reach their targets of annual sales of 100 tons to China, that would account for about 5 percent of the world’s global gold supply, based on figures from the World Gold Council.

Avoiding Costs

VTB and Otkritie Financial Corp., the nation’s biggest closely held lender, started operating on the bourse in Shanghai in April and August, respectively. Otkritie plans to sell 5 tons this year, the press service said, declining to comment further.

With India and China buying up almost 60 percent of global gold output, “our current strategy is to be the preferred partner for the official domestic importers into these regions,” Nenashev of VTB said. The lender buys 70 to 90 tons of gold in Russia each year, and 50 to 90 tons on international markets, he said.

Traditionally, Russian miners sold metal to local banks, primarily Sberbank, VTB and Otkritie, to avoid export costs. The country is the second-biggest gold producer, with output of about 290 tons in 2015, according to the Union of Gold Producers of Russia.

Premium Price

Miners like local banks as they offer a premium to market prices, Mikhail Stiskin, chief financial officer at Polyus PJSC, Russia’s largest gold producer, said in an interview in June.

“The central bank of Russia simply pays the London gold price to give an incentive to the domestic financial institutions not to export physical gold,” Nenashev said. “For the local banks, there are savings on international logistics, insurance and other transaction costs. This translates into savings for our customers as well.”

Sberbank sees Europe and the Middle East, as well as Asia, as the major focus but will consider expanding in other areas as long as markets stay strong, its press service said.

“We believe that the macroeconomic environment will stay supportive for gold and expect the metal to trade above $1,250-$1,300 per ounce in the mid-term with risks skewed to the upside," Sberbank said.

VTB Capital has a more optimistic view for 2017, forecasting an average $1,450 an ounce. Gold has risen 26 percent this year to $1,342 an ounce.

“Any drop below $1,300 per ounce should be viewed as a buying opportunity,” Nenashev said.

--With assistance from Ranjeetha Pakiam To contact the reporter on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net. To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Jesse Riseborough