Soviets step up gold-for-currency swaps - Gold - special section

Soviets step up gold-for-currency swaps

The gold-rich Soviet Union has become a debtor nation of the first order. Even by conservative estimates, it owes some $36 billion to $40 billion to other countries on everything from imported steel and chemicals to grain and wool, and is turning increasingly to precious metals to prop up its sagging economy and worsening international credit rating.

Oil is still the chief earner of export capital for the USSR, but crude prices have been down lately and production problems, including oil field strikes, have decreased the country's output by nearly 5 percent to 11.8 million barrels a day during recent months. As a result, the Soviets have stepped up their gold-for-currency swaps with Western banks.

The Soviets pledged more than 100 metric tons (3.22 million troy ounces) of gold during a two-week period beginning in mid-May, in addition to the 200 to 300 tons they already have tied up in such deals, according to market sources. By comparison, net communist bloc sales to the West were 296 tons for all of 1989, according to Gold Fields Mineral Services Ltd. in London.

The gold swaps are part of a move to raise $2.5 billion by selling stockpiled goods, according to officials of the Soviets' state-run Gosbank. The gold is deposited in Western banks, generally for periods of six to 12 months. For purposes of the loan transactions, gold generally is priced at 25 percent below market value.

The gold used to back the loans is from Soviet reserves, estimated at around 2,000 metric tons. At the 1989 average of $381 per ounce, that much gold was worth approximately $23 billion -- significantly less than the USSR's foreign debt.

At mid-1990 prices, Soviet reserves, whatever their levels, are worth about 6 percent less than they were last year.

Gold-swap agreements with Western financial institutions generally include buy-back guarantees and generally are not considered to constitute gold sales. But analysts on both sides of the Atlantic agree that sharply increased Soviet Union gold swaps forced world gold markets down further in early June.

The market, already dogged by a strong U.S. dollar and heavy Mid-East selling, appeared to react to speculation that the Soviets might resort to outright gold sales in the near future if their currency needs become more critical.

But analysts also agreed the Soviet actions did little to affect overall supplies of gold and that the behavior of the market was largely psychological. One London-based analyst said the panic about the Soviet sales had been overdone and were not bearish or bullish in and of themselves.

The Soviets long have used gold to earn foreign exchange in the past, and apparently dipped into reserves to make money on several occasions in the late 1980s, according to industry sources.

But gold prices fell below the $360-per-ounce level in June from highs earlier in the year of more than $420 per ounce. In addition, Soviet production could be lower this year than in previous years, market observers predict.

Though it is the second-largest gold producer in the world, the USSR has not released firm statistics on its output of gold. Estimates vary between 250 and 300 metric tons per year.

The era of glasnost ushered in by Soviet President Mikhail Gorbachev apparently has ended the thinking among Soviet bureaucrats that gold production statistics should be kept secret.

To date, no production figures for the USSR as a whole have been released, but on March 29 gold output statistics for the Soviet republic of Uzbekistan were published in a regional newspaper. They revealed that Uzbekistan's annual gold production is between 60 and 80 metric tons and is valued at between $790 and $910 million.

The greater portion of Uzbekistan's production is from the Muruntau deposit -- one of the largest gold mines in the world. Western estimates of Muruntau's production have varied widely, ranging from 20 to 150 tons per year.

The U.S. Bureau of Mines estimates that, based on the Soviet statistics, production at the mine is probably in the range of 40 to 65 tons annually.

Soviet officials have indicated complete gold production figures may be made public by year's end.

About one-third of all Soviet gold is produced by mining groups known as artels, which are private and profit-motivated, even though they predate perestroika. The artels are reported to be more efficient, lower-cost producers than state-run mining operations.

Nevertheless, a third of the Soviet Union's gold mining associations have threatened recently to stop work or disband due to a government decree fixing new purchasing prices, according to a British Broadcasting Corp. report. The revamped price structure made gold mining unprofitable for many of the artels, according to industry sources.

While many Western leaders and economists have suggested the ruble be backed by gold to lend it stability and make it more readily convertible in international currency markets, Soviet leaders so far have backed away from such a move, which likely would increase the already high unemployment levels in some sectors of the Soviet Union's economy. Thus, most political and financial observers do not anticipate a gold-backed ruble in the forseeable future.