Russia's President Vladimir Putin delivers a speech
Russia's President Vladimir Putin delivers a speech during celebrations for the 70th anniversary of the Moscow State Institute of International Relations (MGIMO), in Moscow, October 14, 2014. Reuters

Russia, hit by economic sanctions by the West is on a gold buying spree. Holding world's fifth largest basket of foreign currencies, Russia has made a course correction with a new focus on heightened gold purchases. Reason is that Russia is getting wary of the dollar and euro reserves once it came under the fury of U.S. and European sanctions over the Ukraine crisis.

Another reason is that currencies are risky in terms of holding due to the bulging debts of the governments that back them. The latest data from International Monetary Fund, says Russia is hiking its gold holdings for the fifth consecutive month as of August, reported Asia Nikkei. The IMF noted that Russia is overtaking both China and Switzerland in the process. Thus Russia became the world's fifth-biggest buyer of the metal.

As per the latest stats, in August Russia had 1,112.5 tonness of gold in its foreign reserves kitty and that was up by 7 percent compared to January. As a result, the new ratio of gold to foreign reserves of Russia is 8.3 percent to 9.8 percent.

Pain Of Sanctions

Worsening relations with the U.S. and European countries was the main reason for the rise in Russia's gold holdings. The economic sanctions slapped by the U.S. and European Union following Russia's annexation of Ukraine's Crimean Peninsula and the conflict in East Ukraine created the economic woes.

Because of sanctions, Russia's arms industry is in stress because of its inability to make settlements through U.S. dollars. The dollar-based energy exports are also under pressure as Russia's forex reserves have more than 70 percent component in in dollars and euros.

Undercutting Dollar

A senior Russian official said President Putin's administration has reviewed the country's foreign currency reserves and is aiming to delink from dollar and euro to counter the intensity of sanctions.

Responding to the economic gag, Russia has already lowered the ratio of its dollar and U.S. treasury bond holdings by raising the purchase of gold and the Chinese yuan. The sluggish prices of Gold also attracted Russia. In the recently held St. Petersburg International Economic Forum, Putin had articulated the reasons for preferring gold as a secure reserve.

Multiple Benefits

Holding gold reserves also helps Russia in fighting the contamination risk in case precarious financial conditions of the West worsen. In the coming years, Russia will increase its gold holdings. Still, Russia's ratio of gold in its foreign reserves is smaller than those of France and Germany, whose gold holdings are 60 percent their total foreign reserves. Projections are that the Central Bank of the Russia will purchase some 200 tonnes of gold towards the end of this year.

Meanwhile, China, critical of cornering Russia with sanctions, is deepening economic ties with it, reported Business Week. China is also noted for its significant gold holdings. Many market watchers aver that both China and Russia pursuing a confrontational approach to Western countries will like to increase their gold holdings as a hedge against future uncertainties. Ultimately, the duo hope gold rush will undo dollar's supremacy as a key currency.