Intelligence Report
The Soviet Gold Position
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CONTENTS
6
in Soviet Gold Reserves6 - .
Outlook
Production
B. Sales, Consumption, and Reserves
Appendix
Methodology
Tables
1. Estimated Gold Reserve Balance of the
?.. Estimated Production of Gold in thc
Illuat rations Figure 1- USSR: Gold Reserves (chart)
Figure 2. USSR: Gold Production (chart)
Figure 3- USSR: Gold Producing Areaspage
FOREWORD
This report deals primarily with developments in thc Soviet gold position0 and with the outlooklthough theof Soviet gold reserves0 in this report is approximately the same as those contained in previous CIA reports
thc sources of thc estimates differ. 0 reserve figure used in this report was derived
whereas previous reserve eatimates wereerpetual inventory approach0he closeness of the reserve estimateby the perpetual inventory method lends credence to andeserves-
The estimates of gold production, consumption, and sales in this report for the years0 differ from previous estimates because ofinmethodologics used, as explained in the appendix. These changes also account for the downward revision of the reserve levelillion5
The scries for production, sales, and consumption of gold, which are^used to derive the series for gold, have differing degrees of reliability. The series for consumption is the least reliable of the three, but has the smallest effect on total reserves; whereas the series for sales is lhe most reliable andreat effect on estimates of total reserves. The production series,
falls somewhere in hetween. Although some of the individual errors that occur in estimating production. Sales, and consumption cancel out in the final estimate of gold reserves, the estimates on changesre subjectange of error on the order of plus or minusercent-
THE SOVIET GOLD POSITION*
y
Al the endoviet gold reserves wereillion, an increascof aboutercenthis small improvementecade duringwhich reservea foil steadily fromo0 billion (seeho decline was particularly sharp, when the USSR waa forced to sell5 billion in gold to cover large purchases of wheat from the Free World. Barring aimilar such emergencies, Soviet gold reaerves probably will continue to rise slowly during the next several yeara.
USSR: GOID RtSfRVtS
t -
I -
Billion US Ocllori
H
* This report was produced solely by CIA. It was prepared by the Office of Research and Reports; the eatimates and conclusions represent thc beat judgment of the Directorate of Intelligence as of* Dollar values arc given in current dollars throughout this report.
Actions of Soviet leaders during thc past several yearserious concern about their dwindling gold reserve.3 thcUSSR haseliberate policy of expanding exports to hard currency countries and of restricting the import of commodities other than wheat.6 the overall payments deficit withthese countries had been sharply reduced. With the bumper wheat crop in that year, the USSR was able to reduce thc outflow of goldillion, far less than domestic production. In another measure to strengthen its gold position, the USSR raised the targets for gold production4lthoughthese goals were slightly overfulfilled, the rate of increase was no greater than in the preceding years, and unit costs of production rose.
Gold isproducedat extremely high cost in the USSR, and thc industry is heavily subsidized. The current cost ofram of gold is estimated to be more than twice the official buying price offble perfter modestdeclinesumber of years, costs have again begunto rise, primarilyasa result of deterioration in thequalityof ores.
Soviet plansmply an average annual increase in thcof gold ofercent the rate achieved. Thus the USSR is undertaking to improve its gold positionteady expansion of the industry rather thanrash program to boost outputat any cost. Productioncosts will probably continue to rise,because of the declining quality of ore in the Northeast region, where most of the new gold is produced.
If gold production increases as, anddomestic consumption docs not rise appreciably,0 million of additional gold will become available for sale abroad or for building up reserves. Most of this amount will probably be added to reserves, unless ansuchropfailure, necessitates large purchases from abroad. To minimize the need for selling gold, the USSR will probably try to balance its trade with hard currency countries. Barring an emergencyharp change in policy, in the next four years Soviet gold will contribute significantly less to the needed, .growth in the Free World's liquidity than it did during the past four years.
* Gosbank has established an official buying priceuble per gram for domestically produced gold. Thiserounceat thc nominal exchange rateuble to
I Trends in Soviet Cold-6
Soviet gold reserves doclined gradually irom an estimated all-time highillion at the end2 to anillion at the end Thoy dropped more rapidly12otalillion at the enduite sharply for the next three years,0 billion at the endnd then recovered slightlyillion at thc end
The steady decline in reserves2ith the exception of slight increases4esulted from the Soviet policy of selling gold to help finance imports of machinery and equipment from the Free World. The more rapid drop12 represented an intensification of this policy. The much greater declineas caused by large purchases of wheat from abroad, in response to crop failures in the Soviet Union. umper wheat crops well as strenuous efforts to improve the balance of payments, permitted the country to increase its reservesignificant extent for the first time inears. hows Soviet gold reserves for the.
Table 1
Estimated Gold Reserve Balance of the USSRO-66
Million US $
Buiaace
Net
For netbodologies used ln deriving these estimates, see the appendix.
Alarmed by its rapidly diminishing gold reserves, the Soviet regimeumber of stepso stem the outflow of gold. These included an expansion of exports, particularly timber, cotton,and
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nonferrous metals,eduction in imports of machinery andmaterials such as copper and rolled steel. In addition, the USSR sold valuable art treasures in the Free World and opened "valuta" stores in the USSR. These stores sell, for hard currency, merchandise not normally available to thc domestic public; their main customers are diplomats, tourists, and Soviet citizens who have managed to acquire foreign currencica. 6 these measures, together with the bumper wheat harvest of that year, had enabled the USSR to reduce its payments deficit with hard currency countries and to hold gold sales toillion, far less than production.
Tho USSR also continued longstanding efforts to restrict the domestic consumption of gold. As shown in Tableestimated not domesticof gold has been held to aboutercent of estimated production. The USSR hau discouraged the use of gold in dontiatry, jewelry, and the arts for many years by fixing the price for such consumers at about eight times thc official priceuble per gram. In addition, the government inn an effort to obtain larger quantities of gold from tho population, increased its buying price for used gold fromublesubles per gram.
II- Production
Soviet gold production increased from an4 million0 to an8 millionrillion. The major share of the gain was achieved in the Northeast region* of the country, where production of mined gold increasedillion04 millionrillion. Elsewhere in the USSR, the increase waaillion0illion Production of goldyproduct of copper, lead, and sine roseillion0illion The contribution of each of these sources to total Soviet gold production for thes shown innd Tabla 2. hows the principal gold mining aroas of the USSR.
* The Northeast region is used in this report to denote thc old Northeast sovnarkhoz which included Magadanskaya Oblast and Yakutskaya ASSR. Although the sovnarkhoz no longer exists as an administrative entity, iU use aageographically defined area makes the data in thia report consistent with that contained in the two previous reports on Soviet gold cited in the Foreword.
Table 2
Estimated. Production Of Gold in the USSR6
US $
I960 IQ61 2 2 J. 6
Total production
in the USSR
i'
gold
:
region
other
Because of rounding, components may not add to the totals shown, escription of thc methodologies used in developing these data, see the appendix-
, production grew at an average annual rateercent. Although only slightly greater than that achieved. this rateubstantiol accomplishment because of the declining quality of thc ores in the major goldftelds of thc Soviet Union. In order toteady increase in production in the face of declining ore quality, the USSR was obliged to permit costs to rise, therebyrend of gradual costthat had prevailed sinces.
The USSR has relied on thc Northeast region for most of itsin gold production, particularly The4 goal for the Northeast called for an output ofillion, onlyillion, orercent, more than This small increase would have held thc growth of total gold production toercent The limitations which Moscow placed on investment and on costs of production at that time probably reflected the judgment that Soviet resources could bc employed more profitably in alternative uses. Because of concern over declining gold reserves, however, Moscowpecial team to the Northeast early4 to investigate prospects for increasing gold production in the area. The team decided that gold production could be increased, but only if more funds were invested in equipment and some operating costs were allowed to increase. Those findings were promptly accepted by Moscow, although regional officials raised strenuous objections. As it turned out, gold production in the Northeast4 exceeded the origiaahlplanillion, and total gold production growercent.
*
The success achieved by the Northeast region in overfulfilling thc plan4 ledew goal for productionesigned to maintainercent increase in overall gold production. The originalillion, was increasedillion. esult of considerable effort, additional investment, and permission for costs to increase still further, (he revised goal was exceeded byillion. Although plan figures6 are not known, output in the Northeast continued its upward trend; the total,4 million, represented an increase of aboutillion
III. Costs
The USSR ia an extremely high-cost producer of gold. Current average operating costs probablyubles per gram*ore
* At the nominal rate of exchangeuble toubles per gram woulder ounce, or twice the world price for gold.
than twice the official buying priceuble per gramnd may be closeubles per gram. In thc Northeast region, which is reported to have the lowest gold mining costs in the Soviet Union, average operating costs are estimated to have been5 rubles per gramn mines outside the Northeast region, costs are even higher. Published information on the Lena Gold Trust, where mining is by dredging, one of the most efficient methods, indicates that average costs were at3 rubles per gram
The high cost of mining Soviet gold is explained primarily by environmental conditions. Some of the important gold-producing areas are far from industrial centers, and the cost of transporting equipment and supplies is high. The severe winters, especially in the Northeast, sharply curtail the length of the working season. These factors also make it difficult to attract and maintain an adequate labor force. The payment of bonuses and the provision of other benefits make labor costs considerably higher than for other nonferrous industries located in the older, more highly developed areas of the USSR. The cost of production at the important,Bilibino Gold Mining Directorate, located above the Arctic Circle in the Chukotsk National Okrug, makes the point. This Directorate mines the richest placer deposits in the Soviet Union, but its operating costs4 were estimated to have been6 rubles per gram. If located under more favorable natural conditions, these deposits could be workedost welluble per gram.
, The willingness of the USSR to incur high costs of productionlear indication both of thc inadequacy of Soviet stocks and of the importance of gold to Soviet foreign trade. Gold can be sold easily in international markets in nearly unlimited quantitiesirtually fixed price and isuick and reliable source of foreign exchange. Through its past sales of gold, the USSR has been able to acquire equipment, technology, and industrial materials which aided it in developing and modernizing the Soviet economy. In addition, gold has been used in emergencies, such'as during the recent harvest failures when the USSR made large purchases of grain from the West.
The USSR is concerned, however, about the high cost of mining gold. rogram of modernization was started in thes to improve efficiency and to reduce costs. 0verage annual operating costs for the production of gold were reduced
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ercent, in the Northeast.* pecial commission under the direction of Anaatas Mikoyan investigated conditions in the gold industry and endorsed continued programs ol" modernisation lo cut costs. In addition, it recommended Uie use of strict cost controls in determiningody ot ore was economically exploitable.
The increases in gold production achieved during the Seven Yearere accompanied by cost reductions during the first five years of the Plan, but costs increased slightly in the last two years. The average cost of production in the Northeast is estimated to have been aboutercent less3 than This reduction was achieved by thc extensive mechanization of operations including thc use of dredgeSi excavators, bulldozers, and other equipment, as well as by closing high-cost mines and increasing production from mines in Chukotsk with relatively low costs.
The USSR is concorned that costs may be forced still higher by the continuing depletion of the better grades of ore in the principal goldfiolds. Exploration and prospecting were increased sharply during thc Seven Year Plan in an effort to find new sources of gold which could be mined more economically,ew deposits were discovered. The most important single discovery was made in the Muruntau Mountains of Uzbek. The deposit there is to bo mined by the economical opon-pit method and is said to contain tho largest body of gold-bearing ores in the country. Other discoveries of Importance were made in the Urals, Kazakhstan, andna River area. All told,'these new deposits arc said to have increased exploitable reserves of gold-bearing ores in the USSRercent. Although these new deposits arc generally located in areas where environmental conditions should allow relatively low-cost exploitation, progress in developing the new mining areas has been slow, and at least several more years will be required before production willignificant level. onsequence, they will have little impact on the average costs of mining gold in the USSR
IV- Outlook
A. Production
It is estimated that the Soviet production of gold0 will reach0 million. This level of output would represent an
5 More accurately, tho cost reduction was reported for Dal'stroy, the organization which, until the industrial and economic reorganizationdministered all of thc gold trusts inblast and two of the four gold trusts in Yakutakaya ASSR.
average annual increase ofercent, thc rate achieved during the past decade. Agreement to continue (his growth rate was not easily reached by Soviet officials. Many cost-conscious central planners, including those in the Ministry of Kinance. strongly opposed making the heavy investments needed to achieve this rate of growth. But at (he meeting of the Central Committee of (ho Communist Party inop Soviet leaders docidod to continue the priority given lo the development of the gold industry and to make the necessary investments. High-level support for the decision was provided by Premier Kosygin immediately after thc plenum, when he told the head of the gold industry to send his designers to Moscow to plan new machinery for mining gold, lit added that new machinery would be used regardless of the scale of operation, and that the machine building industry would promptly manufacture the quantities and types required.
The distribution of gold production will change littlehe Northeast region, with an estimated output of0 millionill continue to account for more than half the total, although its relative share will decline slightly. The share of other gold mining areas will remain unchanged at aboutercent, with output reaching anillion These areas may accountarger share in the future, however, because of the discoveries of new deposits during the Seven Year Plan and because ihe USSR plans to concentrate future geological prospecting in the southern regions of the country. The production of the major nonferrous metals will continue to grow more rapidly than the production of gold. esult, the share of byproduct gold will increase fromercent of the total toercent,evel ofillion.
In the Northeast the USSR plans steady increases in output at each of the major gold-producing areas. percentis scheduled for Yakutskaya ASSR- An increase ofercent was announced for the Chukotsk Okrug as early asnd this goal may have been raisedfollowing the Central Committee meeting in September. In recent years thc relatively low-cost mines in Chukotsk haverowing share of total output in Magadanskaya Oblast. The planned increases for other areas in Magadanskaya Oblast, including the long-established Kolyma goldiield, are probably less than for Chukotsk. The USSR intends, however, to rework old deposits in Magadan which are now more easily accessible to settlements in the area and which can advantageously use new, efficient machinery.
Moat of thc increased output of gold elsewhere inUSSR will come from newer deposits in Uzbekistan. Kazakhstan, and Armenia. Il is estimated that the output of gold in Uzbekistan0 will be betweenillionillion, whereas output5 was Most of thc gold will come from thf newly discovered deposit in the Muruntau Mountains,ew concentrating plant is now under construction. This plant eventually may produce moraillion of gold annually. Gold production in Kazakhstan is to increase byercent. If the plan is fulfilled, gold output0 would amount toillionillion. Most of thc increase in output in Kazakhstan will come from recently discovered deposits, particularly those near Bakarchik in tho cast,ew mining and ore-processing complex is under construction. Another ore-processing complex is under construction at Zod in Armenia, which may produce up toillion annually
In thc older mining areas in thc Lena, Amur, Transbaikal, Yenisey. Urals, and Primor regions,oderate expansion of gold production is likely because of thc declining quality of ore deposits. The plan of the Amur Gold Trust in the Far East, probably representative of tho older mining areas, calls for an increase in gold output of onlyercent.
B. Sales, Consumption, and Reserves
If thc estimated growth in gold productions achieved, it will0 million to the Soviet gold supply. The Soviet economy will probably use gold worth0 million over the four-year period. 0 million will be available for salos abroad or to rebuild Soviet gold reserves. The USSR has shown considerable concern over the sharp decline in its reservesnd it is likely that moat of this amount will be added to reserves. But much will depend on developments, including,for example, whether the USSR needs to import large quantities of grain,!
6 thc USSR increased its orders for machinery and equipment from abroad, but this does not necessarily conflict with the judgment made above. The USSR will make every effort to eliminate import surpluses requiring settlement by sales of gold and to pay for purchases from hard currency countries by offsetting sales of commodities Thc payments on major orders, such as those involved in thc recent deal with Fiat for an automobile plant, can be stretched out over aperiod of time. Barring an emergencyharp change in policy, most of0 million of gold which will become available0 will probably end up in official Soviet gold reserves.
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APPENDIX
METHODOLOGY
This appraisal of the current Soviet gold position depends on four key estimates: the production of gold, domestic gold consumptionales of gold abroadnd thc level of reserves Thc following paragraphs explain in general terms thc derivation of each of these estimates.
1. 5oviet Gold Production
Soviet gold comes from two sources: mined gold andobtained from thc production of copper, lead, and zinc. the amount of gold mined in the USSR,7 was used asyear because of the availabilityfor
that year. Detailed methodologies were applied
resultingeasonably firm estimate lor gold mined in the USSR in that year. Estimates of production6 were
supplemented by information in Sovietand radiobroadcasts. No significant changes were made in previous estimates of mined gold production.
A revision was made in previous estimates of the amount of gold recovered from Soviet nonferrous metals production, basedetailed examination of available information concerning the gold content of copper and polymctallic (copper, lead, and zinc) ores being mined in the USSR and of the recovery rates in subsequent processing, including concentrating, smelting, and refining. An average factor was developed for the recovery of gold per ton of copper produced at each of the copper refineries in thc USSR, including an allowance for the gold recovered from processing thc copper portion of polymetaltic ores. An allowance was also made for the recovery of gold from lead and zinc concentrates. The average yield factors for each copper refinery were (hen weighted according lo thc estimated relative shares of each refinery in lotal Soviet oulpul of refined copper The resultant average-yield factor wasrams of gold per ton of copper output, compared withrams used in earlier CIA estimates of byproduct gold production- The revised factor is believed to be better than the earlier one because it takes into account difficulties in ohtaining satisfactory results in the recovery of gold from nonferrous ores.
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?.. Soviet Gold Consumption
Thc estimated consumption of gold in the USSR is based in part on US analogy. An arbitrary assumption was made for the first year of the estimate7hat Soviet gold consumption was in thc same proportion to Soviet GNP as US gold consumption was to US GNP. The growth of Soviet GNP6 was used to project7 figure forward. The US gold consumption/GNP ratioear-by-year basis6 was not used, because consumption of gold in the US has increasedar more rapid rate than has GNP This accelerated growth rate for gold .consumption in the US was not imputed into the Soviet scries, because of the Soviet government's concern over its gold reserve position and its restrictions on private use of gold.
Gold Sales
Most Soviet gold sales are believed to have been The major sourcessales,
oral communications from the US Treasury Department, and CIA reports. This information is generally confirmed by the annual publications of the Bank of International Settlements (Switzerland) and Samuel Montagu and Co., Ltd. (London).
1
' equatedercentotal soviet gold holdingsons, inisotal reserve of aboutillion at thc world pricenrobably at the end This level of reserves0 is similar to estimates in previous CIA reports, cited in the Foreword, which estimate thc level of reserves by useerpetual inventory going back Thc reserve figure
ias therefore been accepted as thc base lor projecting Soviet reserves toith net changes in the reserve level reflecting additions from production, minus sales and domestic
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