Russia's #2 Bank Uses Gold Bullion to Raise Central-Bank Loan

RUSSIAN BANK VTB has become the first institution to raise a loan from Moscow's central bank using physical gold bullion, it said in a press release today.

First entered into law in late 2010, the scheme enables Russian banks to raise loans from the central bank by giving it physical gold bullion as collateral.

VTB says that "earlier this month" it deposited 1.2 tonnes of gold at the Bank of Russia, gaining a credit facility of up to 1.6 billion Roubles in return.

Equal to $51 million, that loan is smaller than the market-value of the gold if VTB had sold it, currently at $61.7m.

"I am confident that other credit institutions will follow suit," says VTB deputy president and chairman Herbert Moos, "as they are definitely interested in using the latest Bank of Russia refinancing instruments."

Founded in 1990 and now the second largest "universal" banking group in Russia – the world's 9th largest economy, and the 4th largest gold-mining nation – VTB had some RUB 7.1 trillion in assets ($252bn) under management at end-2012.

VTB broke new ground for Russian investors last December by offering RUB 1 billion (then $32m) of securities tied to the price of gold over the coming 12 months. One analyst quoted by Bloomberg called VTB "a pioneer on the Russian market", saying that the offer was "similar to" the exchange-traded gold funds which have proven a popular route to gold exposure for European and US institutions.

Neighboring Turkey has allowed commercial banks since October 2011 to deposit physical gold at the central bank as part of their reserve requirements. That influx of gold, often collected from private clients who then earn interest on their gold deposits, has seen Turkey's central-bank gold reserves more than triple to 370 tonnes, the world's 13th largest national hoard.

"On the monetary side, this is pure genius," said Jeffrey Christian, managing director of US consultancy the CPM Group last week.

"We think that [Turkey's move] will be emulated by other governments and other central banks."

It is as yet unclear whether VTB's gold collateral at the Bank of Russia will show as part of the country's national gold holdings.