* Sanctions-wary Western banks hold off buying Russian gold
* Central bank stepping in to mop up domestic output
* Russian gold holdings up 155 T this year vs 77.5 T in 2013
By Clara Denina
LIMA, Nov 10 Russia's central bank has been
forced to step up its gold buying this year to absorb domestic
production that Western sanctions are making it hard for miners
to sell abroad, and to boost liquidity in its foreign reserves,
Most Russian gold mine production is sold to domestic
commercial banks, such as Sberbank or VTB,
which can then sell the metal on to either the central bank or
to foreign banks.
This year, sources say, foreign banks are holding off buying
Russian gold after Western powers implemented sanctions against
the country over the Ukraine crisis.
The central bank has therefore had no choice but take
domestic mine production that cannot be sold to foreign banks,
two sources said, and has bought most of the metal that
commercial banks had available.
"This is one measure that the central bank has taken to go
through this difficult period for commercial banks and most
importantly to boost liquidity," a source close to the situation
said on the sidelines of the London Bullion Market Association
annual conference in Peru.
While the sanctions do not expressly prohibit them from
buying gold, Western banks are cautious over any business done
with their Russian counterparts, sources said.
"So, it is likely that we could see a period of
stabilisation, when the question around sanctions is resolved,
as the central bank will stop adding more gold to its reserves,"
a second source added.
Russia has stepped up its gold buying significantly this
year, data from the World Gold Council showed, adding nearly 115
tonnes of gold to its reserves in the year to date, against 77.5
tonnes in the whole of 2013 and 75 tonnes in 2012.
Central banks bought gold heavily during the financial
crisis that followed the collapse of Lehman Brothers in a bid to
diversify their currency reserves, adding 1,800 tonnes to their
holdings in the six years to June 2014.
The Russian central bank has been the most active official
sector gold buyer over the last decade. Its holdings have nearly
tripled since the end of 2004 to 1,149.8 tonnes, making it the
world's sixth largest gold holder among central banks.
Earlier this month, CBR's First Deputy Governor Ksenia
Yudayeva said that the bank could use gold from its reserves to
pay for imports, if needed.
"Central banks do not accumulate gold for no reason; you
hold gold as part of your reserves to guard against these worst
case scenarios," Natixis analyst Nic Brown said.
"It would make sense that in a situation in which the
Russians found their dollar reserves were no longer useful, for
whatever reason, they would want to use alternatives, and the
country has accumulated a large amount of gold in recent years."
(Additional reporting by Jan Harvey in London; editing by
Veronica Brown and Philippa Fletcher)