Ukraine’s IMF Gold and the Gold Carry Trade

Submitted by Steve Brown…
Let’s first consider a typical International Monetary Fund (IMF) loan to a sovereign in trouble, and then examine a typical gold carry trade transaction to support a sovereign arms deal. The intent is to demonstrate the importance of physical sovereign gold holdings in all forms of international trade.
Semi-failed and failed states can only exist by dealing in hard assets of real intrinsic value just as Syria, Venezuela, Iran, and Ukraine have done… and the most liquid of those hard assets is their physical gold.
Central Banks always work with the Security State apparatus when dealing with failed states and recall that the US Central Intelligence Agency funded al Qaeda and funded the war in Syria for example. Just about anything can be made to happen with funding when that funding is based on real resources. One of the most important of those resources is physical gold.
IMF Cartel Example: Ukraine
The IMF’s 2014 aid to Ukraine is based on a unique history however all IMF ‘aid’ packages are in some sense unique. Since we are highlighting the largely hitherto concealed importance of real physical gold in geo-political calculations and operations, Ukraine provides a relevant and timely example of how the banking Cartel operates with gold and may highlight that importance.
According to the 2018 Independent Transparency Index, Ukraine ranks as one of the most corrupt nations in the world. Ukraine ranks 120th out of 180 countries where the 180th – Somalia – is the most corrupt.  But all nations need funding whether corrupt or not, and Ukraine defaulted on its IMF debt in 2001 and then again in 2009 when distribution of an existing IMF loan to Ukraine was frozen.
So, in 2014 why would the IMF strike another “deal” with a nation as corrupt as Ukraine for a whopping $17.5 Bn USD extended funding facility, when it had already defaulted on its previous two IMF loans? The answer lies well beyond the natural gas tariffs paid by Ukraine to the European Union and is founded in gold and state resources as well as geopolitics.
Consider Yanukovych’s attempt to confront the IMF and EU on its new onerous terms to settle Ukraine’s debt to the IMF in 2013, when Yanukovych and Mykola Azarov (then-Ukrainian Prime Minister) protested the IMF’s outrageous imposition of a 40% tariff on natural gas exported from the Ukraine (via the Russian Federation) to Europe. Yanukovych’s IMF ire was all US State needed to impose its will: Ukraine must cooperate with the IMF or take the consequences. Azarov and Yanukovych did risk the consequences and the entire corrupt Ukraine apparatus came tumbling down by February of 2014.
Nevertheless, Washington is aware that replacing one corrupt regime with its own will not pay that failed state’s bills, and Washington does not provide its own funds to the failed states that it creates. After all, that’s not how the Great Game is played. This is not about largesse, it’s about Washington demanding the spoils of war.
Thus in 2014 when Russia diverted its natural gas deliveries to bypass the troubled mess that Washington invoked in Ukraine, Ukraine urgently needed an International Monetary Fund bail-out. The IMF’s “round heels” did not come into play this time however – the IMF demanded a solid ‘guarantee’* for its first installment of funding to Ukraine.
One IMF demand was for Ukraine to setup its own National Anti-Corruption Bureau as a ceremonial gesture, since Ukraine’s deep corruption is endemic, extant, and simply an accepted way of life there.
The other demand was for Ukraine to partly collateralize its IMF loan with gold reserves. We know that because the IMF tells us so: (The IMF) may accept gold in the discharge of a member country’s obligations (loan repayment) at an agreed price, based on market prices at the time of acceptance.
And we can prove the IMF-Ukraine 2014 gold transaction by simply looking at the historic fluctuation in Ukraine gold reserves. In October of 2014 – just nine months subsequent to the Maidan coup – Ukraine reduced its gold reserves by fourteen tonnes (metric = 2200 lb per tonne).  Fourteen metric tonnes of Ukraine gold were flown to one of the designated IMF gold depositories: Gold depositories of the Fund shall be established in the United States, the United Kingdom, France, and India as noted by the IMF itself.
But why did the IMF require just fourteen tonnes of the Ukraine’s gold as a loan guarantee? Let’s look at the figures. Fourteen tonnes of gold equates to 30,800 lbs, or 492,800 ounces. At 400 oz per bar 1,232 bars of gold were flown from the Ukraine to the IMF designated depository. At then-prevailing market price — note that the US government still values gold at only $42 per ounce! — Ukraine’s gold provided $640M US dollars’ worth of loan collateral to the IMF.
In sovereign terms, a $640 million guarantee seems trivial. But recall that most aid guarantees are fractionalized at 10%, meaning that Ukraine needed just that much in collateral to finance its first tranche loan from the IMF of $5 Bn USD as received from the IMF in 2015. Ukraine provides just one example regarding the IMF’s extortion of sovereign gold from the failed states it hopes to service.
But gold is not the only important asset a nation can trade in exchange for its debt, the IMF demands much more than a fractionalized gold pay-off as the people of Greece have discovered. Oleksiy Honcharuk the current embattled Ukraine Prime Minister, just announced that Ukraine expects to receive $500M USD from the IMF in exchange for the sale of Ukraine state-owned firms to private buyers.
The point however is that gold has always been an important asset in world trade regardless of those who claim otherwise. And it is just as important now – perhaps more so – than it has ever been; note that states like Burundi, the United Arab Emirates, and Iraq have dramatically increased their gold reserves. And at least the IMF admits to trading in sovereign gold while the US Federal Reserve only admits to trading in gold while actively denying that fact!  (See link)
Gold Carry Trade Arms Deal
Note that the physical gold in this example trade does not move outside of its vault in New York, London, Paris or whichever bullion bank is holding the bars. That’s because the vaults in London, New York, or Switzerland are designated by numbered accounts and those numbered accounts (assigned to a particular vault or to particular group of bars) may alter over time by transaction, but the 400 oz gold bars are seldom transported; only the account numbers and allocated bars in the individual (and many) bullion bank vaults may change. There are rare exceptions when the gold does move – for example when Venezuela physically repatriated its gold from New York.
The usual classic carry trade is when a sovereign or primary bank simply leases gold from a London Bullion Market Association bank, sells the gold to convert to higher yielding assets, then re-purchases the gold at the end of the lease period to satisfy the lease. The sovereign or dealer will provide security for the transaction (perhaps a percentage of its own gold reserves or other state assets) and pay what is called the Gold Forward interest rate (GOFO is usually 1%) to the bullion bank and return the carry trade gold by re-purchase at then-prevailing gold market prices at the end of the lease.
Central Banks operate the same way, utilizing the same type carry transactions but generally only to support or debase their currency or another currency. (Central Banks also hope that semi-failed states will sell their gold reserves to Central Banks at knock-down prices as Syria did in 2012!)
But the hypothetical scenario below is a different type of carry trade. The example below contests the commonly held premise that belligerents are freely ‘given’ their arms by the major powers. In very unreliable circumstances like Somalia, Sudan, Yemen, and formerly in Eretria etc – the ‘free delivery’ of weaponry by major powers for political reasons is partly true. And in Libya, the Sahel states inherited weaponry after the assassination of Qadaffi.
The idea here is to show the importance of the gold carry trade to Central Banks and their related security state in the provision of arms to failed states by way of collateral and special bank accounting. The carry trade is the financial trade of choice for Central Banks when dealing with failed or semi-failed states, because the gold carry trade provides all parties:

  • Absolute Secrecy
  • Zero public accountability
  • Zero legislative accountability
  • 100% political cover
  • Guaranteed profits, and perhaps even the
  • Spoils of war or
  • Financial collapse to profit Central Banks
  • No limit on the amount of GOFO gold leased**
  • Zero risk based on Central Bank accounting

In this typical but hypothetical carry trade arms deal, the Central Bank (called by the fictional name  “CBBI”) hopes to identify a semi-failed or failed state possessing either its own gold reserves or mining resources so that the Central Bank may gain leverage and perhaps state-owned resources too, or even intervene militarily by proxy, by way of a carry trade for arms. Mali springs to mind as one potential current example as does the pending new independent state of Bougainville.
The hypothetical carry trade scenario for our paper finds small embattled Nation ‘X’ in the Sahel with one tonne of gold reserves and X wishes to purchase $5M US dollars value of small arms from Austria for self-defense versus Nation Y. Nation X has limited foreign cash reserves on hand and its own currency is virtually worthless. Nation X cannot qualify for an IMF loan and does not seek one, nor could it. Nation X has some natural resources and does possess the aforementioned gold reserves even if it has a bad credit history. So how is Nation X to get the weaponry?
Nation X contacts the CBBI Central Bank in Europe and receives encouraging news. The CBBI says at current market price $5,000,000 USD in small arms can be traded for just 8 x 400 oz good delivery gold bars that the country already has, plus an additional 100 oz bar. Better than that, the CBBI will negotiate the entire sales deal (including the arms)!
However, Nation X is reluctant to sell its gold. The CBBI instead suggests a two-year gold carry trade lease for $50M (million) US dollars if Nation X will turn over 20% of its reserve gold bars, ie a quantity of sixteen 400 oz ‘good for delivery’ gold bars. At the end of the lease the gold will be returned, the (GOFO) interest will be paid to the CBBI, and Nation X will have found the funds for its weaponry and improve its credit as well.
In other words, Nation X will thus receive $50 million USD from the CBBI when Nation X supplies 20% in security (by supplying sixteen 400 oz gold bars worth approx. $10M) to the CBBI and by agreeing to pay the gold forward rate (usually 1%) to the bank. As a result, Nation X obtains ten times the amount of funding that it sought, far beyond the $5M in small arms needed. Then X can perhaps buy a few ex-Libyan jets and hire mercenaries to fly them all for a 1% loan!
(Note: Nation X has only loaned its gold bars as collateral since Nation X will receive them back at the end of the lease period providing X does not default to the CBBI. Also, the collateral to the bank is not always gold and may consist of state assets as well or instead.)
The CBBI reveals nothing publicly about Nation X’s intent for the funds, and the bank’s governmental Secret Service connections have politically cleared the deal. The CBBI does require Nation X to sign a gold lease document of course, stating X’s return of $50M in gold two years hence at market price, and X must also pay the 1% gold forward interest rate. The CBBI then receives Nation X’s good for delivery gold bars and the deal is done. Nation X receives the proceeds of the gold lease in the currency of its choice – say Chinese yuan – transferred to X’s national bank and all is well, while the brokered gold never left its London vault only the vault account number changed!
The CBBI is more than chuffed since the $10M USD in Nation X physical gold delivered to the CBBI allows the CBBI to leverage those gold reserves to ten times that amount – $100M USD – in leveraged ETF’s or any other debt instrument the bank cares to leverage. All that’s changed with regard to the CBBI lease is the account number on the vault where the $50M in registered gold bars are still held.  So, for an outlay investment of $50M USD equivalent in China yuan – which the bank already had hedged in a CHF account! – the CBBI doubled its own investment in leveraged ETF’s at a stroke.
Now, the bank hopes that Nation X will default since the CBBI received real hard assets from Nation X that the CBBI has leveraged ten times, and the GOFO 1% rate is trivial. Unfortunately, X’s war with Y has gone badly, and after two years Nation X does indeed default on the gold lease and cannot buy the gold back to satisfy the lease. So what is the CBBI to do?
Regardless of X’s default, the Central Bank essentially leased the gold to itself when accounted for as a receivable on its books in perpetuity until satisfied. That means the ‘loss’ appears as an asset on the Central Bank’s balance sheet because the bank’s accounting allows the ‘loss’ on leased gold to appear as a receivable credit. Better yet, the bank leveraged Nation X’s gold – which it now owns – to double its investment on the ETF market. That may appear to be accounting trickery and it is. But this carry trade deal is by no means rare and is quite common even if the collateral is not always physical gold.
NB: in real terms the CBBI is still ‘minus’ the $50M in traded currency but the $50M appears as a credit receivable on the bank’s balance sheet. That’s due to an accounting trick where leased gold is always a receivable regardless of status of the lease. But this type of trade deal is most useful when coupled with political designs on the failed state in conjunction with the nation bank/state’s political goals.
When multiple state assets are involved in gold swaps for currency such transactions can be multi-layered with severe political repercussions for the failed state when things go wrong. But such negative consequences usually impact the failed state only, while aiding the political ambitions of the Central Bank in the lessor country.
Summary
We have examined two important tools used by Central Banks above: the IMF gold collateral loan and the gold carry trade, the major point being that Central Banks can and do leverage their gold in many different ways – including the Federal Reserve – in conjunction with the Deep State/Security State apparatus in regard to its political ambitions. But why then did Ukraine go the IMF loan route while ‘Nation X’ took the ‘CBBI’ carry trade deal?
In Ukraine’s case a gold carry trade for a typical lease period is impractical, when Ukraine already has a history with the IMF and is not quite a failed state. Ukraine also possesses significant physical gold reserves that it may use as 10% collateral for such an IMF loan. Whereas an $18Bn USD lease (sale) of physical holdings represents ½ of daily gold trading, where most of those trades are non-allocated (ie not real). Then, at the end of the lease, the gold market could be negatively impacted (gold price goes higher) when the gold is re-purchased to satisfy the lease.
But even if the market could sustain an $18Bn gold lease dump (to provide Ukraine’s funding) a 1% GOFO rate is still a burden, and there is absolutely zero chance that Ukraine could ever satisfy the terms of a typical gold lease. Only the IMF loan makes sense for Ukraine just as the Nation X failed state could never qualify for an IMF loan — so only a carry trade makes sense for X.
Another question is why the bank doesn’t simply front Nation X the funds for its weapons. While covert government operations frequently do that – as the Afghanistan, Iraq, and Syrian insurgencies prove – banks are in business for a profit and Washington cannot service every failed state that it creates. Thus the need for real assets like Central Bank gold in this sort of trade.
Finally, many parts of the world are flooded with weaponry. Where did those weapons come from? Were they always supplied freely by the major powers to create their failed states? From Libya and the Sahel, Middle East and Afghanistan… perhaps we can define ‘money’ as being a claim on the weaponry/ armaments provided by governments and their Central Banks to the rest of the world.
*As is typical, even though the IMF demands some type of collateral for their “aid” the IMF adamantly refuses to call it that.
** 22 Central Banks including the the European Central Bank allowed the Central Bank Gold Agreement to expire in September of 2019

Steve Brown is the author of “Iraq: the Road to War” (Sourcewatch) editor of “Bush Administration War Crimes in Iraq” (Sourcewatch) “Trump’s Limited Hangout” and “Federal Reserve: Out-sourcing the Monetary System to the Money Trust Oligarchs Since 1913”; Steve is an antiwar activist, a published scholar on the US monetary system, and has appeared as guest contributor to The Duran, Fort Russ News, Herland Report, Lew Rockwell Report, The  Ron Paul Institute, and Strategika51
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