USSR GOLD PRODUCTION AND SALES POTENTIAL

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• Document Page Count: 21
• Document Creation Date: December 23, 2016
• Document Release Date: March 29, 2012
• Sequence Number: 1
• Publication Date: May 1, 1987
• Content Type: REPORT

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USSR: Gold Production
and Sales Potential
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SOV 87-10027G~1
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USSR: Gold Production
and Sales Potential
This paper was prepared by 25X1
Comments and queries are welcome and may be
directed to the Chief, Economic Performance
Division, SOVA
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SOV 87-10027CX
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Summary
Information available
as of 1 February 1987
was used in this report.
and Sales Potential
USSR: Gold Production
currency earning capacity.
We expect Soviet gold production-currently one-fifth of the world's
annual output-to continue to grow slowly through the early 1990s,
enabling Moscow to increase gold sales for hard currency without substan-
tially reducing its gold reserve. Rising gold sales, however, probably will
not offset the effect of continued low world oil prices on Moscow's hard
Soviet gold production grew less than 2 percent annually during 1981-85,
after decades of growth exceeding 3 percent per year. The main reason for
the slowdown was the sharp decline in the gold content of mined ore in
many key areas, particularly in the Northeast Region, which accounts for
nearly 40 percent of Soviet production. 25X1
equipment and spare parts needed to expand operations.
We project that by 1990 annual production will reach roughly 330 to 360
metric tons, an increase of 2.5 to 12.8 percent over the 1985 level of
roughly 320 tons, mainly as a result of gains in the utilization of existing
capacity. We believe the Soviets can do little to boost production much
above these levels, largely because most plants and mines will be operating
close to capacity. Moscow has been making an effort to expand capacity
for several years, but most construction is still at an early stage, and hard
currency constraints may prevent purchases of the Western earthmoving
for a large surge in output in the next decade.
We believe that slow output growth will continue during the early 1990s.
The grade of mineable ore in the Northeast Region will probably
deteriorate further, and the amount of new capacity under construction
indicates the Soviets probably are not making the preparations necessary
currency in 1986.
Beginning in late 1985, Moscow dramatically increased gold sales as one of
several steps to help offset the decline in hard currency earnings from
energy sales. (Other steps included borrowing more on international
markets, increasing exports, and cutting back on imports.) During 1986,
Moscow was able to hold total hard currency revenues near the 1985 level
by selling roughly 350 tons of gold for about $4 billion. Sales in 1985 were
about 190 tons. In comparison, oil sales earned $7-8 billion in hard
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SOV 87-10027CX
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Although we expect a high level of sales to continue during the remainder
of the decade to help offset continued lower revenues from energy exports,
the Soviets may be concerned about the state of their gold reserve. Its value
has been hit by a "double whammy" in recent years. First, the falling
content of gold in mined ore in key regions led to a decline in the rate of
output growth and increased the cost of production. Second, despite a
buildup of stocks in the early 1980s, the drop in the world gold price
devalued the Soviet reserve by $9 billion during 1981-85. Price increases
last year helped recoup some of this "loss."
Moscow's flexibility to sell gold during 1987-90 will be limited only by
market capacity. Market experts indicate that annual sales will probably
be limited to roughly 300 tons-although they could be as high as 450 tons
in perhaps one or two years-if selling is done judiciously to avoid
disrupting the market and causing a major, sustained price decline. At
yearend 1986, the USSR had an estimated stockpiled reserve of 2,290 tons,
and we project that 270 to 310 tons of surplus production (in excess of do-
mestic use) could be sold annually during 1987-90 without drawing down
this reserve. Assuming an average price of $400 per ounce, Moscow could
earn as much as $4-6 billion annually from sales of 300 to 450 tons.
Revenue from gold sales at these amounts, however, would cover only part
of Moscow's expected hard currency shortfalls through 1990.
Moscow could realize an annual earnings windfall of several billion dollars
above our projections if South Africa's gold sales were substantially
curtailed for an extended period-for example, in the highly unlikely event
of intense nationwide strife bordering on civil war. In this scenario, prices
would probably rise sharply, and the Soviet share of world sales could jump
from roughly 15 percent in 1985 to 50 percent or more.
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Summary
Role of Gold Sales in Foreign Trade
Recent Production Trends
Declining Gold Content
Low Utilization of Capacity 4
Rapid Buildup of the Stockpiled Reserve 7
Slow Growth in Output Projected To Continue 7
Continued Sales Flexibility 9
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Figure 1
USSR: Estimated Gold Sales, 1966-86
1 Large grain 3 Jump in world 5 Low oil
imports oil price earnings
2 Large rise in machinery 4 Record oil
and pipe imports earnings
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Lull
USSR: Gold Production
and Sales Potential
Role of Gold Sales in Foreign Trade
the West obviated the need for extra cash.
Analysis of the trends in the Soviet hard currency
balance of payments indicates that Moscow uses gold
sales primarily as a financing mechanism rather than
a trade commodity like oil. The Soviets generally sell
more gold when they need a rapid infusion of cash,
and less-even when prices are high-when they are
in a good cash-flow position. During the mid-1970s,
when Moscow needed to finance large purchases of
grain and equipment, for example, gold sales were
high (see figure 1). Hard currency crises in 1981 and
1982 forced considerable sales, even though a falling
gold price cut into earnings. Gold sales were relatively
small in 1983 and 1984 as record oil revenues from
Table 1
Major Gold Producers
Canada
United States
Brazil
Australia
1,000
211
75
54
5
19
714
251
51
33
5
16
674
294
51
30
40
17
619
321
86
77
62
57
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sales. Oil production problems in 1985 cut annual and figure 2).' Production has been growing slowly in
Soviet oil revenues by nearly $4 billion, which Mos- recent years, however, after decades of moderate to
cow partially offset by selling approximately 190 tons high growth. During 1961-70, we estimate output
of gold worth just under $2 billion. Even though oil grew at an average annual rate of roughl 6 percent
exports recovered somewhat in 1986, the steep drop in and during 1971-80 at about 3.5 percent 25X1
world oil prices resulted in another decline of $3-4
billion in hard currency sales. Estimated oil revenues
of $7-8 billion last year were just half the peak
earnings of $15.6 billion recorded in 1983. Moscow
again responded with higher gold sales, selling an
estimated 250 tons in July and August 1986. We
believe that total gold sales in 1986 may have reached
350 tons, earning $4 billion. 25X1
The sharp decline in hard currency export earnings
beginning in 1985 has again sparked substantial gold
Because of the importance of gold sales as a source of
financing, Moscow has assigned a high priority to
maintaining a large domestic production base. In
1985, we estimate the USSR produced roughly 320
tons of gold, one-fifth of the global output, and second
only to South Africa in national output (see table 1
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Figure 2
USSR: Estimated Gold Supply, 1970-90
Stockpiled
reserve
I i i I I I i I i i I I i i
0 1970 74 78 82 86 87a 88a 89a 90a
Declining Gold Content
The major cause of the slower growth in output in
recent years was the sharp decline in the gold content
of mined ores, particularly in the Northeast Region,
the main source of the Soviet gold supply for the last
50 years (see Dinset on page 4) 4 The
region's annual output peaked at an estimated 133
tons in 1977, but then fell to about 120 tons in 1980
and leveled off. In 1970, the Soviet press reported that
it was necessary to process 28 percent more ore per
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unit of gold production than in 1965. By 1975, the mines are placers that are in a state of decline
another 50-percent increase in ore processing was after having been worked for several years.'
required. A Soviet broadcast reported in late 1984
that it would be necessary in the future to process
several times as much ore just to maintain the current
production level.
' A placer deposit is an alluvial or glacial formation of sand or
gravel that has been eroded from bedrock and has concentrated in
low-lying areas such as stream valleys. In contrast, a lode deposit is
Substantial declines in the content of ores mined
throughout East Siberia and the Urals were also a
factor in the slow growth of national output. Most of
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Low Utilization of Capacity
Muruntau and Zod-Ararat, two of the largest Soviet
gold plants, have been operating below capacity since
they began production in 1969 and 1976, respectively.
Muruntau's output in 1985 was approximately 50
tons of refined gold, only two-thirds of its estimated
capacity of about 75 tons. Zod-Ararat's output was
? Soviet technical literature has not reported on the
advantages of the RIP process since the 1970s,
when the Soviets claimed this technology would
increase output and cut production costs by 20
percent compared with conventional gold extraction
techniques-claims discounted by US engineers.
? Articles in the Soviet press during the 1960s and
1970s indicated that at least five gold-ore-process-
ing plants would be converted to the RIP process,
but
only the Muruntau and o -Ararat
plants use this process.
We also cannot overlook the possibility that underuti-
lization of these plants is the result of bureaucratic
bungling. Soviet ministries are notorious for their lack
of coordination when given responsibility for different
parts of the same project. As a result, large new
facilities often operate below capacity because of
chronic problems in getting raw materials or critical
components
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1 Up 'Muluci
Figure 4
USSR: Geographical Distribution of Gold Output, 1970 and 1985'
Percent
1970
Other
3
Central Asia
4
Other Siberia
12
Northeast
Region
62
a Excluding gold produced as a byproduct from the production of
other metals, 36 metric tons in 1970 and 56 metric tons in 1985.
seven smaller ore-processing
plants shows an inadequate number of dump trucks to
deliver ore from nearby mines, a possible indication of
gold production problems. We estimate the total
annual capacity of these plants in 1985 was roughly
28 tons, but production could have been as low as 14
tons.
Several placer mines-including at least one in the
Northeast Region-may have operated below capaci-
ty because of an inadequate supply of working equip-
ment to remove and transport overburden and ores.
imports of
earthmoving equipment have increased sharply since
the early 1970s to help increase the volume of ore
Other
8
Other Siberia Northeast
11 AdMIMMEW-Region
mined and processed .6 However,) 25X1
since the late 1970s, increasing numbers 25X1
of imported earthmoving machines have incurred high
failure rates because of inadequate maintenance,
harsh operating conditions, and the long leadtimes
required to obtain spare parts:
' The domestic machine-building industry does not produce enough
bulldozers, dump trucks, and other types of earthmoving equip-
ment, and other extractive industries compete for this equipment.
Failure rates for domestically produced earthmoving equipment are
reportedly even higher because of poor design and quality. The
USSR has continued to import large numbers of earthmoving
equipment, but we cannot determine the amount earmarked for the
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in 1984, officials of
the Ministry of Nonferrous Metallurgy notified an
international heavy equipment company that 41 of
150 bulldozers purchased from the company were
inoperable because of cracks in the engine bearings.'
50 US-made bulldozers were broken down in 1980.
He claimed US-made bulldozers accounted for 80
percent of the work at the association's gold mines.'
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Table 2
USSR: Estimated
Gold Production and Reserve
Metric tons
(except where noted)
in response to a priority
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Produc-
tion
Net
Sales
Domestic
Consump-
tiona
Yearend
Reserve
Market Value
of Reserve
(billion US $)
1970
211
3
39
1,624
1.9
1971
220
19
39
1,786
2.4
1972
242
158
40
1,830
3.4
1973
246
304
41
1,731
5.4
1974
257
131
42
1,815
9.3
1975
251
147
43
1,876
9.7
1976
269
328
45
1,772
7.1
1977
278
332
46
1,672
8.0
1978
290
401
47
1,514
9.4
1979
298
250
48
1,514
14.8
1980
294
80
48
1,680
33.1
1981
298
183
49
1,746
25.8
1982
304
91
50
1,909
23.0
1983
309
55
51
2,112
28.8
1984
314
86
52
2,288
26.5
1985
321
190
52
2,367
24.1
1986
326
350
53
2,290
27.1
Rapid Buildup of the Stockpiled Reserve
Despite slow production growth, we estimate that
Moscow's stockpiled gold reserve grew from 1,680
tons at the end of 1980 to 2,290 tons at the end of
1986 (see table 2 and figure 2). Even though the
reserve increased, the potential market value actually
declined by one-fourth during 1981-85 because of the
nearly 50-percent fall in world gold prices. In 1980,
the reserve had a value of about $33 billion; in 1985,
the larger stockpile was worth approximately $24
billion. Price increases last year, however, helped
recoup some of this "loss."
annual production.
This decline in value, coupled with slow production
growth, may have caused Moscow to place increasing-
ly tight restrictions on domestic use, which has tradi-
tionally accounted for approximately one-sixth of
directive to reduce the amount of gold used in the
manufacture of electronic equipment, the Ministry of
Electronics Industry agreed, in 1985, to purchase a
US-manufactured spot-plating machine that would
use 90 percent less gold than the equipment then
being used. this $600,000
machine-used in making integrated circuits-could
save as much as 3.5 tons of gold annually and that the
Soviets indicated they would probably purchase four
more such machines over the next few years.
These restrictions followed other long-established
measures to keep domestic consumption low. Industri-
al allocations of valuable materials are generally
limited to high-priority uses for which there are no
suitable substitutes. Since the 1960s, Moscow has
attempted to reduce the amount of gold used in
making jewelry.' Soviet citizens are also prohibited
from holding gold for savings or investment purposes.
Gold used in electronics, jewelry, and dentistry proba-
bly accounts for the bulk of consumption.1?
Slow Growth in Output Projected To Continue
Although Moscow is apparently making a concerted
effort to expand capacity, most of the construction we
have identified is at an early stage. Therefore, in-
creases in production during 1986-90 will be mainly
from gains in utilizing existing capacity. We project 25X1
10 Electronics may be the fastest growing domestic use in the USSR.
Gold is used in advanced electronics applications where its relative-
ly high electrical conductivity, temperature stability, corrosion
resistance, and nonmagnetic properties compared with most other
metals are important for increasing reliability. In the West, in
1985, the use of gold in jewelry accounted for approximately 60
percent of consumption. Dental and electronics applications ac-
counted for about 15 percent; coinage, investment, and other
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Soviet gold output will grow at an average annual rate
of 0.5 to 2.5 percent during the period, reaching 330
to 360 tons in 1990:
? Output from the Northeast Region will probably
decline further, despite efforts to expand capacity,
because of continued deterioration in the grade of
mineable ore. Although stepped-up geological explo-
ration over the past decade has located some new
placer deposits that are now in various stages of
development, their combined output will be too
small to offset declines elsewhere in the region. In
addition, we project no output from a new gold plant
probably planned to be built in Magadan Oblast."
cry little construction progress, and
at least five more years would typically be required
to begin initial gold production.
? Annual production at the Muruntau and Zod-
Ararat plants will probably continue to increase as
gains are made in solving the likely technical prob-
lems at both plants.
? We project about 3 tons of annual output during
1987-90 from a new plant at Plast in the Urals that
appeared externally complete
We project no output, however, from the new plant
under construction near Kazarman in the Kirghiz
SSR, another under construction at Auezov (Bakyr-
chik) in Kazakhstan, and a new facility planned for
the Tajik SSR because they will probably not be
completed until the early 1990s.12
? Outside the Northeast Region, a small increase will
come from several small, scattered placer mines
reportedly in various stages of development.
? Gold produced as a byproduct from other metals-
mainly copper and to a lesser extent lead and zinc-
will probably increase slowly and supply about one-
sixth of annual production. We project slow output
growth for the other metals and a continuing
absence of incentives to motivate plant managers to
boost byproduct production."
Shortages of hard currency could exacerbate the slow
growth we project through 1990 by preventing or
delaying the purchase of Western earthmoving equip-
ment and spare parts needed for expanded operations.
Output could be particularly affected in areas where
the gold content of mined ore is declining and the
Soviets need to increase the volume of ore processed.
hard currency shortages
temporarily delayed purchases of several million dol-
lars worth of spare parts during 1986.
We believe there is little the Soviets can do to boost
production much above the levels that we project
through 1990. We project most existing plants and
placer mines will be operating close to capacity.
Roughly 10 tons of additional annual output could be
realized by bringing production of the seven small
plants up to full capacity. New placer deposits would
probably not yield much additional gold even if
developed on a priority basis because this type of
deposit is generally small and typically located in
remote areas of the eastern USSR where lack of
infrastructure delays startup by several years. In
addition, earthmoving equipment required for
stepped-up mining operations would probably have to
be imported for hard currency.
Moscow could realize a small boost in its salable
supply by implementing additional limits on domestic
use, but such consumption is already at or near
minimum levels. The Soviets could try to increase
gold output by using heap leaching, a recovery meth-
od recently implemented in the West that can be set
" Although the Soviets recognize that there is a large potential to
increase the production of nonferrous metals as a byproduct and
have called for an increase in such production in 1986-90, the open
press reported little progress in 1986. The performance of nonfer-
rous metals plants is gauged primarily by the fulfillment of
production quotas for the primary metal; little credit is generally
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Table 3
USSR: Projected Gold Supply
Production
Domestic
Consumption
Excess
Production
Reserves Remaining If
Annual Sales
are 300 Tons
Annual Sales
are 450 Tons
1987
324 to 338
52 to 56
268 to 286
2,258 to 2,276
2,108 to 2,126
1988
325 to 349
53 to 57
268 to 296
2,226 to 2,272
1,926 to 1,972
1989
326 to 357
52 to 58
268 to 305
2,194 to 2,277
1,744 to 1,827
1990
329 to 362
52 to 60
269 to 310
2,163 to 2,287
1,563 to 1,687
After 1990, we expect output to continue to grow
slowly for several years. The grade of minable ore in
the Northeast Region will probably deteriorate fur-
the USSR would turn to the futures
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up quickly, requires a much smaller capital invest- sales are spread over the year and among all the
ment, and is less expensive to operate than traditional geographic markets. The Soviets may even be able to
gold recovery methods." But we have seen no evidence push sales to as much as 450 tons for one or perhaps
that this technology is being used in the USSR.F__-] two years without causing a price decline, but
Even with slow production growth well into the 1990s,
Moscow's flexibility to sell gold will be limited only by
market "capacity." Market capacity projections are
somewhat speculative. But information from gold
market experts indicates that, during 1987-90, Mos-
cow could sell as much as 300 tons of gold annually on
the open or "physicals" market and through direct
bilateral sales without much effect on the price-if
10 Heap leaching can be used to recover gold from both placer and
lode deposits and is often used to process low-grade ores. It involves
distributing a weak cyanide solution over the top of an open mound
or leveled heap of gold ore placed on an impermeable pad and
collecting the gold-enriched solutions from the base of the heap.
Depending on ore permeability, 67 to 95 percent of the gold can
its reserve for only about 75 tons.16
markets to sell quantities in excess of 300 tons (see
inset on page 10).15 Sales at these levels could be met
mostly from current production, requiring only a
small to moderate reduction in the stockpiled reserve
(see table 3). At the estimated 1986 sales level of 350
tons, for example, Moscow would have had to dip into
Sales averaging 300 tons would earn nearly $4 billion
annually, assuming a price of $400 per troy ounce.17
Revenue from gold sales at these amounts, however,
IS These projections are based on the assumption that world gold
market conditions do not substantially change. A stronger gold
market and a higher price could moderately increase the market
limit on Soviet sales.
16 Although today's market is substantially different, there is his-
torical precedent for a large drawdown of the Soviet gold reserve.
Moscow drew down its reserve to about 900 tons in 1965, the lowest
level in the last 30 years.
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On the open market, Moscow directs both the buying
and selling of gold using accounts that are main-
tained with Deutsche Bank's London branch and the
Swiss Banking Corporation in Zurich. Thus the
USSR can buy and sell gold without having to
arrange physical deliveries for each transaction. A
stock of gold is maintained in the banks, and the
USSR, along with other traders, holds a paper claim
to its share of the gold; the physical gold is actually
unallocated. Sales can be handled on an accounting
basis, and only sales tofinal buyers are actually
delivered.
The USSR, like many other traders, buys and sells
large volumes frequently and on several gold ex-
changes simultaneously, taking advantage of arbi-
trage opportunities. For example, on the same day
Vneshtorgbank (VTB), the Soviet foreign trade bank,
may sell 10,000 ounces in New York and purchase
10,000 ounces in Hong Kong, debiting and crediting
its gold account in London. Or VTB might direct
Deutsche Bank to sell gold from an unallocated
account on the London market and credit VTB s
foreign exchange account. Alternatively, VTB may
have Deutsche Bank credit the gold account of some
Western firm from which the USSR has made a hard
currency purchase. In 1985, Moscow sold at least
287.3 tons and purchased at least 131.3 tons on the
exchanges alone.
Moscow also "swaps" gold with trading partners to
receive a hard currency premium. For example, gold
refined in the USSR is 99.99 percent pure, whereas
South African gold is 99.95 percent pure. Moscow
ships its gold to bonded warehouses, usually in
Zurich, for delivery to the swap partner, and orders
the hard currency premium credited to VTB s ac-
count in a Western bank. We estimate the Soviets
earned $2.3 million from swap premiums in 1985 and
probably earned more in 1986. VTB swapped 49
tons for a premium of about $650,000-in January
1986, the largest quantity observed in one month in
recent years.
Direct bilateral sales take place at a mutually accept-
able price and usually without any immediate impact
on the market. Although these sales normally show
up in the partner country's annual foreign trade data
(the Soviets do not report gold sales), the market
would not be aware of the trade in a timely fashion.
The gold futures market is used to buy or sell gold at
afxed price at a specified future date. Moscow uses
this market to speculate, but-like most players in
this market-does not physically transfer the com-
modity. To increase its sales without disrupting the
market, the USSR could commit to a sale in the
futures market and then-although it would be un-
usual in that market-actually deliver the gold and
take the money.
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..,r
The Soviets could seek to boost earnings by forming a
gold cartel with South Africa. A successful cartel for
rough diamond sales between Moscow and Pretoria
has existed for several years. Collusion would proba-
bly involve attempts to manipulate the world supply
to try to boost the price. We believe, however, that
such a cartel is unlikely in the near future.
Soviet representatives and
South African gold producers have discussed the
possibility of such an arrangement, but Moscow
showed little followup interest. In early 1980, discus-
sions were held concerning the possibility offormu-
lating a joint marketing and pricing strategy whereby
the two sides would agree to avoid simultaneous,
large sales of gold. The discussions were abandoned
later that year.
Moscow probably is not interested in the formation of
a cartel because it would require too radical a change
in its gold marketing strategy. Unlike South Africa,
which relies heavily on gold sales as a major and
regular source of foreign exchange, the USSR varies
its gold sales with its need to finance its fluctuating
hard currency trade deficit. In addition, Moscow is
probably reluctant to increase its economic ties to
Pretoria in light of growing world opinion against
apartheid.
would only partly ease Moscow's expected hard cur-
rency shortfalls." Even if oil prices continue to rise,
the volume of hard currency oil exports is projected to
decline as oil production tapers off toward the end of
the decade. With prospects poor for much growth in
nonenergy exports, Moscow's annual hard currency 25X1
export earnings are likely to run some $7-10 billion
below the peak of $32 billion in 1982-84.
Moscow could realize an annual earnings windfall of
several billion dollars if the supply of South African
gold sold on world markets was substantially cut back
or curtailed for an extended period (see inset). A
prolonged halt in South African exports caused by
intense nationwide strife bordering on civil war-an
event we view as highly unlikely-could make the
USSR the world's leading supplier. In such a scenar-
io, prices would probably rise sharply and the Soviet
share of world sales could jump from roughly 15
percent in 1985 to 50 percent or more."
"The increase in the Soviet share of world sales would depend on 25X1
how far Moscow would be willing to draw down its reserve to take
advantage of a halt in South African sales, which were about 640
25X1
25X1
25X1
25X1
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