Are BRICS nations collecting gold to back cryptocurrency?
Every weekend, gold miners in Benishangul Gumuz regional state, Ethiopia’s top gold producer, travel from mining sites to Asosa, the capital seat of the region. Asosa zone, Metekel zone, and Kamashi zone are the major gold sources of the region, which is part of the gold belt that lies beneath Sudan and the north-western part of Ethiopia.
The miners spend the whole week digging in the fields, but on the weekends, they have to drop the gold they mined at the Development Bank of Ethiopia (DBE) branch in Asosa. All the gold mined has to be submitted to the central bank, but the DBE represents the central bank in the case of Benishangul.
Currently, there are 30 artisanal miners and 77 special small-scale mining licenses active in Benishangul. Each special small-scale mining license consists of a minimum of five individuals. But at least 35 percent of the region’s population is engaged in traditional gold mining as their primary source of livelihood.
However, the amount of gold these miners delivered to the government substantially dropped. In the past eight months, between July 2022 and March 2023, the region supplied 332.4 kilograms of gold to the central bank via the DBE branch, according to data from the Ministry of Mining. However, last year during the same period, over 20 quintals (2,000 kilograms) of gold were supplied from Benishangul alone, according to Awoke Tesfaye, communications director at the Ministry.
Of course, Benishangul fares better compared to the gold supplied by other regional states. There are 96 special small-scale miners in the Oromia regional state, 41 in the Southern Western regional state, and 47 in Gambella. However, gold supplied from all the regional states to the central bank in the past eight months has been slashed by more than half. This is a free fall from the 8.7 metric tons (8,700 kilograms) of gold Ethiopia exported last year.
“The amount supplied by artisanal miners and special small-scale miners has substantially dropped from last year,” said Awoke. “Most of the gold is going to the contraband market, due to several factors.”
From Benishangul alone, up to 120 tons (120,000 kilograms) of gold could be harvested annually, according to data from the region and the Ministry. But to do this, at least seven large-scale commercial miners have to be operational in the region. Currently, Midroc Gold is the only operational industrial-scale miner, having supplied 205 kilograms of gold in the past eight months.
A significant amount of gold from Benishangul and Gambella flows largely to Sudan and South Sudan. On the other hand, the gold from Oromia and southern Ethiopia is smuggled out of the country via Kenya’s and Somalia’s borders.
Ethiopia’s border with Sudan and South Sudan remains largely porous for informal activities. Especially Benishangul, which shares over 700 kilometers of border with the two countries, has become the epicenter of smuggled gold.
The contraband network, which is based on well-established informal agreements, stretches from gold suppliers on the Ethiopian side to money and machine suppliers on the Sudanese and South Sudanese sides.
According to The Reporter’s assessment, particularly on Benishangul, the parallel market involves several factors, but mainly, the central bank’s gold purchasing price is discouraging the players. The informal market players are offering a much better margin.
Currently, the official price the central bank offers for a gram of gold is 3,800 birr in Asosa. However, the parallel market offers between 5,800 and 6,000 birr per gram. This price is offered by the informal players on the Ethiopian side. Once the gold is smuggled across the Sudanese border, it is sold for anywhere between 7,000 and 10,000 birr per gram.
“The illegal market is offering a much higher margin. Miners and gold suppliers in Benishangul have no interest in supplying gold to the Ethiopian central bank. They only give a small amount of what they find to the central bank just to get their license renewed. If a miner finds one kilogram of gold, it is totally smuggled out. It does not come to NBE,” said an official of the Benishangul regional government, who assisted in the assessment.
He says that the gold contraband is attributable to corruption in the government system, loopholes in the mining law, and external factors.
Basically, there are gold suppliers, who are licensed intermediaries that collect gold from the miners and supply the gold to the central bank branches in the area. To get the license, they are required to have the capital to purchase at least 250 grams of gold at a time. So, usually the suppliers deposit one million birr in their account, whether it is borrowed money or genuinely their money. Once they get the license, the account is usually emptied. After acquiring the license, they collect gold from miners but usually supply the gold to the informal market.
In some regions, the number of suppliers is higher than the number of miners. Currently, there are 134 gold suppliers in Oromia, 106 in Benishangul, 41 in Gambella, and 20 in the south-western regional state, according to the data from the MoM. But the official from Benishangul says the figure reaches up to 420 in his region alone.
“Most of the gold suppliers and miners have relatives in government positions. Otherwise, you cannot get the license in the first place. Each miner and supplier has a relative at the customs office, mining office, economic office, or other post,” the official stated. The official says that their network stretches from the local level up to the national level.
“Some gold suppliers have international licenses,” added the official. He says that apart from the smuggled gold, it is also sold to jewelry owners, including in Piassa, Addis Ababa.
“Ethiopian officials at cluster, kebele, woreda, regional, and even federal levels are in the network. Only relatives of the officials in this network get gold mining and collecting licenses. There is almost no regulation for gold collectors. This loophole was intentionally left open.”
Since June 2022, the National Bank of Ethiopia (NBE) has bought gold from the miners, adding a 35 percent premium on top of the monthly average price of gold in the international market. The margin was only five percent before that. Shortly after the NBE’s decision, gold supply to the NBE improved. However, this could not continue, as the informal buyers offer a higher premium than the NBE’s 35 percent.
Ethiopia’s revenue from gold has been plummeting over the decade. However, it climbed to USD 546 million in the 2021–22 fiscal year, just before it dwindled by 59 percent during the first half of the current fiscal year.
“I found the gold using my own energy, time, and ability. I have to sell it to those who offer me better rice. Why should I sell it to the government, which offers an unfair price?” asked Hamid Mohammad (name changed on request), a gold miner in Benishangul.
Hamid and several small-scale miners in the region say the government demands gold without providing the necessary support.
“We need a lot of machines to mine the gold. Drillers, crushers, soil millers, washers, and other mining machines are required. There is no machine-lease financing system for the mining sector in Ethiopia. But our informal gold clients provide us with such technologies on loan. Then we provide the gold and pay the debt,” he said.
The miners take these machines, supplied by gold smugglers, to the other side of the border. After using the machines, the gold is directly supplied to the gold smugglers in Sudan, who supplied the machines. So it is an informal contract. The international smugglers supply the machines, the Ethiopians supply the gold, and the debt is wiped.
Some officials in Benishangul also say that even the large-scale miners are engaged in the gold parallel market.
“Of course, the large-scale miners in the region did not launch operations officially. But they are taking out the gold. Plus, they have suppliers’ licenses on top of the gold development license they have. Therefore, they are also collecting gold from the market,” said the official in Benishangul.
For Awoke, there are several complicated factors behind the escalating gold contraband.
But Wondemagegnehu Gebre-Sellassie, a counselor at the law firm Wonde and Associates and a mining lawyer working for a number of large-scale gold mining projects in the pipeline in Ethiopia, argues to the contrary.
“Several industrial-scale mining investors are in the pipeline in Ethiopia. Some of them are at the trenching stage, taking samples of the soil in the gold reserve area for analysis. It is wrong to conclude they are taking out gold and selling it before launching operations,” Wondimagegn said. On average, he claims that it takes 10–15 years to start up an industrial-scale gold project.
Where does the contraband gold go to?
So far, the informal gold market is willing to pay a higher premium to purchase gold from developing countries, mainly in Africa. Just like Ethiopia, gold is sourced from several African countries. After leaving Africa, it mainly enters Dubai and India, becoming legal in the process. But these are not the final destinations of the illicit gold market.
At least two major hypotheses have been advanced to trace where all the gold purchased at inflated prices is going.
The first is that the gold sourced from developing economies is ending up in the reserve stocks of the BRICS (Brazil, Russia, India, China, and South Africa). This is mainly because these countries are stocking gold to back their currencies with the precious metal. Backing currency with gold is basically used to maintain the stability of the currency.
After US President Richard Nixon enacted the decision that closed the US’s gold window in 1971, which also brought an end to the Bretton Woods system, the global trend to reserve gold to back currencies has diminished.
The dollar is basically believed to be the major source of the US’s power. Currently, 60 percent of the global reserve is in US dollars.
But after the Russia-Ukraine war, the dollar’s reign is now under threat. The current expectation is that the BRICS leaders will introduce a new gold-backed currency to speed up the dedollarization process. The new currency enables BRICS members to transact without the need for the dollar as a medium of exchange.
This week, Vassily Nebenzia, Russia’s ambassador to the UN, confirmed that the BRICS nations are working on a new currency to speed up depolarization and reduce the impact of the sanctions on Russia.
“Their financial framework is not something that we can depend upon, knowing that they, at any time, can switch off; or cut off the world-wide installment framework, that dollar exchanges are not solid any longer,” said Nebenzia. “We have been talking that we ought to de-dollarize’ the world economy some time recently, and we need to include nearby monetary forms and more inside exchange with Russia.”
The project for the new currency is expected to be disclosed during the BRICS summit in August 2023. Several developing countries like Turkey, Argentina, Iran, Saudi Arabia, and others have already expressed interest in joining the BRICS new currency.
Experts say the new currency is likely to favor cryptocurrencies since it will be difficult to replace the dollar with existing currencies like the yuan or ruble.
“The BRICS countries have been purchasing gold massively in the past few years. They are stockpiling it. Otherwise, who would collect gold at such expensive prices—even more than the international prices?” asks Samson Hailu, an independent researcher. Samson says most of the gold collected, especially from African countries, finally ends up in the stocks of the BRICS countries.
However, Tewodros Mekonen (PhD), a former advisor to the NBE and the International Growth Center (IGC), begs to differ.
“We have to conduct several analyses to find out where the gold is going. We have to study what is determining the international gold price, which is already high. The price has to be decomposed to find out where the gold demand is coming from,” Tewodros said.
He says the recent economic shocks need to be analyzed to find the real price of gold. “So, we cannot say the BRICS are collecting gold just because the demand for contraband gold surged. There is no doubt that in Ethiopia, miners prefer to sell on the black market because it offers double the official price.”
Over the past week, the price of a 29-gram of gold has surpassed USD 2,000, a historic mark.
The second area of speculation regarding where the gold ends up is among the wealthy. Experts in this category argue that people who have disposable income, be it in Ethiopia or developed countries, are converting their money into gold. This is mainly due to the fluctuating strength of currencies around the world, including the dollar. Several strong currencies around the world are losing their status, following the layers of economic shocks the world has been facing since the COVID-19 crisis and the Ukraine war.
Can Ethiopia stop gold contraband?
The contraband gold market can be minimized, mainly if the government takes serious measures and clears out the corruption in the mining sector, customs, and economic bureaus, as per recommendations.
“The government can control the illegal circulation of gold at check points across Ethiopia and at customs stations on borders. However, the gold smugglers simply pass even the checkpoints because officials are also involved in the gold contraband,” says the official from Benishangul.
The official claims that several gold smugglers, after being caught at checkpoints, are released. “Of course, the vast majority of the illegal gold network remains undetected. There are armed groups that directly take the gold from mining sites and smuggle it out of Ethiopia.”
They also believe that the government should reverse the law that allows the issuance of licenses for gold intermediaries and suppliers. They say the central bank must increase its presence and directly collect gold without the involvement of intermediaries. Ensuring transparency in the licensing of gold mining is also crucial. Auditing of the amount of gold mined against the amount supplied to the NBE is also recommended. Some experts recommend the government increase the premium on gold purchases to discourage the attractiveness of the black market.
Currently, the Ministry is studying a new gold purchasing premium, which reportedly aims at increasing NBE’s purchasing premium to 85 percent from the current 35 percent.
“We have submitted the study to the NBE,” confirmed Awoke, refraining from mentioning the new figure. However, he says the MoM does not believe that increasing the premium will be a lasting solution.
“The black market premium will also increase, after some time, and exceed the official premium. We believe the contraband gold market can be stopped only by deploying security forces at the mining sites. Currently, the Defense Force and federal police forces are already being deployed to major gold mining sites,” Awoke said.
Though he is new to the sector, Habtamu Tegegn (Eng.), newly appointed Minister of Mining, also seems to understand the Achilles heel of the mining sector.
“A huge mining resource is being abused. Especially the gold contraband, which is significantly increasing. Theft of gold has increased. The government system itself is part of the problem,” he said during his first appearance as minister at the Parliament this week.
The miners, according to him, need several supports, including technology, a laboratory, and financing. “There is nothing invested in the mining sector. There can be no return without investing. It will take several years to change this situation,” he added.
