INTRODUCTION

The mining industry in the economy of Magadan oblast plays a decisive role: it occupies 88% the industrial output volume and makes up almost 50% of the regional budget’s own revenues (even taking into account benefits under the regimes of regional investment projects and the special economic zone); mining employs about 14% of those working in the regional economy not counting those in related and service industries.

Magadan oblast is a single-resource region. The basis of its economy is the precious metals’ mining (gold and silver). The stable position of the sector, the commissioning of new facilities, and the increase in gold production in Magadan oblast to a record level of 52 tFootnote 1 (2021) over the past six years (Fig. 1) were the result of consistently high gold prices on the global market and growth of the domestic dollar/ruble exchange rate (Yakubchuk, 2023) (Fig. 2).

Fig. 1.
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Gold mining in Magadan oblast, t. Source: (Pruss and Sharypova, 2019).

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Fig. 2.
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Change in price of gold from 2012 to 2021. Compiled from data: https://bullion.ru/prices/fixes/; https://bullion.ru/prices/currency/ (accessed September 20, 2022).

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Gold is mined in placer and large ore deposits. Despite the decrease in the share of placer mining from 45% in 2000 to 38% in 2021 due to the development of large ore deposits, the gold production volume from placers increased 1.5 times over 20 years. Placer mining is carried out by about 100 regional enterprises (mostly small), employing about 8000 people, mostly locals. In addition to the contribution to the Russian gold mining, the preservation of this sector for the region is important for guaranteeing employment to the people of Magadan oblast, whereas in ore mining, large Russian companies employ rotation workers from other Russian regions.

When foreign sanctions were introduced in 2022, gold mining, the output of which is mainly exported, became very vulnerable. The scale of gold exports from Russia has increased, in particular, in the last two years: out of 340 t of gold produced in Russia in 2020,Footnote 2 320 t were exported;Footnote 3 out of 346 t in 2021,Footnote 4 302 t was exported,Footnote 5 which is 4% of global gold exports.Footnote 6

According to analysts, under sanctions, the enterprises mining placer gold and engaged in seasonal activity were the most affected, since the price for gold during the gold-washing season was less than the production cost for most companies (Kashuba, 2022).

It should be noted that in Magadan oblast, the gold mining industry operates in harsh natural and climatic conditions; all consumables are shipped in from other regions at high transport costs. Therefore, the cost of gold production here is objectively higher than in more geographically favorable Russian regions, especially for placer gold, which has been mined for over 90 years; thus, today, deposits with very low metal content remain in operation (Galtseva et al., 2019).

ASSESSMENT OF THE SITUATION

The main factors negatively affecting the preservation and development of the gold mining industry in 2022 are as follows.

(1) Gold’s value depends on the global market price, calculated in USD/oz under conditions of state regulation of the ruble/dollar exchange rate: thus, in conditions of falling global prices, ruble revenue for Russian companies has decreased at a faster pace. From April 15, 2022 to July 1, 2022, the global market price of gold decreased by 9% (from 63.49 to 58.44 USD/g),Footnote 7 and in ruble equivalent by 42% (from 5251.12 to 3068.92 RUB/g). Higher (by 33%) rates of gold price decline for Russian gold mining companies are due to depreciation of the dollar. The lag in the Russian price behind the global price continued until January 2023 (Fig. 3).

Fig. 3.
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Change in price of gold during year, 2021–2022. Compiled from data: https://bullion.ru/prices/fixes/. Aaccessed September 20, 2022; https://bullion.ru/prices/currency/. Accessed April 14, 202.

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(2) The sanctions-related ban on acquisition of Russian gold by the London Precious Metals Exchange and some G7 countries led to the search for new markets.Footnote 8 Up to February 2022, 84% of Russian exports went to the UK, and only 1.3% went to China. Since February, the Russian Federal Customs Service has not disclosed the volume of exports; it is known only that, e.g., in July, gold exports to China increased 50 times compared to the same period in the previous year.Footnote 9 In addition, the London Bullion Market Association has deprived Russian refineries of their status as reliable gold suppliers (Good Delivery), which necessitated either gold refining abroad or re-refining ingots, which entailed additional costs.

(3) The application of sanctions against the largest Russian banks (VTB and Sberbank) in the blocking of foreign exchange transactions (Minakir and Izotov, 2022) engaged in purchasing gold from subsoil users and its sale on the global market, forced mining companies to search for new intermediaries licensed to operate with and sell precious metals on global markets. Due to limited supply, prices for services by independent operators not subject to sanctions rose by 10–15% (Kashuba, 2022), thereby reducing the purchase price of the metal from subsoil users.

As a result, the purchase price of gold from subsoil users decreased by 43–48% due to sanctions and domestic Russian factors (a 33% depreciation of the dollar and a 10–15% discount for gold bought by intermediaries for sale (Lomakina, 2022)) relative to the actual global market price and ruble/dollar exchange rate that occurred before the events in February. Against declining financial indicators of gold mining enterprises, banks reduced lending volumes and made amounts dependent on the price of gold, which (in particular, in the placer mining niche) complicated not only the 2022 gold-washing season, but also preparations for 2023.

(4) The main mining companies use imported (mainly Japanese (Komatsu, Caterpillar, and Hitachi) and to a lesser extent, South Korean (Hyundai) and Chinese) high-performance equipment and machinery. The decision taken by foreign mining equipment manufacturers to stop doing business in Russia forced the organization of alternative supplies of equipment proper and imported spare parts for existing equipment. The search for new partners and new logistics’ schemes led not only to an increase in the delivery period for spare parts and equipment, but also the cost of this process—according to experts, by 10–50%. Given that foreign companies announced the termination of business in Russia in mid-2022, most mining companies were provided with equipment and spare parts for the current year; costs from the change in logistics schemes will undergo a large-scale increase in 2023.

(5) In addition to the increased cost of imported spare parts, in 2022 there was an unreasonable increase in prices for domestic goods, according to experts for various items of the cost of gold production from 15 to 40%, with the most significant being raw materials and diesel fuel.Footnote 10 For example, the price of ammonium nitrate in 2021 in Magadan oblast was 29 200 RUB/t, while in March 2022 it was already 75 700 RUB/t (Susumanzoloto JSC data).

Major gold miners were provided with key consumables for the 2022 mining season in advance, so it is clear that the cost of organizing work will increase significantly in 2023. In Magadan oblast, 70% of gold mining enterprises specialize in placer development, and it was they who found themselves in the most difficult situation. Thus, taking into account the growth rate of the cost of mining alluvial gold (on average 10–15% per year), as well as the increase in prices for consumables and spare parts, costs in 2023 may increase by more than 40%.

A comparative assessment of the efficiency of indicators for extracting 1 g of gold from placers, taking into account new factors, was carried out using the example of Susumanzoloto (Table 1).

Table 1.   Efficiency of placer gold mining under different conditions on example of Susumanzoloto in 2022 and 2023
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Forecast of profitability of gold sales in stable conditions at the beginning 2022 for the enterprises of Susumanzoloto mining placer gold, with an average gold content of 0.075 g/m3 rock mass was 14%. To ensure profit, an average content of 0.072 g/m3 is sufficient.

As of July 1, 2022, taking into account the actual global price indicators, the dollar exchange rate adopted by the Central Bank, the 10% discount for intermediaries from the price of gold, and previously planned mining costs, the activity of Susumanzoloto yields a negative financial result (loss of 692 RUB/g; the return on sales is 25%). For profitable operation of the enterprise in current conditions, it is necessary to mine placers with a content of 0.103 g/m3, which is 1.4 times higher than planned. Until the end of the gold-washing season in 2022, there were no fundamental changes in the situation. As of November 11, 2022, the price of gold in rubles increased by only 6.6% compared to the assessment period of July 1, 2022Footnote 11 (with a decrease in the global price (the price on the global market decreased by 5.4 USD/g, and Footnote 12 the dollar exchange rate increased by RUB 9.1).Footnote 13

The production efficiency for 2023 was forecasted taking into account the global market price for gold and the dollar exchange rate as of April 3, 2023, as well as a cost increase by 40% (10–15% annual growth rates that prevailed in the previous period and 10–50% increase in the cost of imported spare parts). The organizational conditions for the sale of gold remained within the limits of 2022 (a ban on foreign exchange transactions by large Russian banks, an embargo on the purchase of gold by the London Stock Exchange, and the need to refine gold abroad to sell it to countries friendly and neutral towards Russia); the only change was the Central Bank’s exchange rate policy with respect to the dollar. Taking into account the rise in the global price of gold, and most importantly, the Central Bank’s dollar exchange rate even above the level of the stable presanctions period, the prospects for placer gold mining in Magadan oblast for the 2023 gold-washing season no longer appear as tragic, although the required average gold content for profitable mining remains 20% higher than the region’s real average, which will lead to selective placer mining and a decrease in production volumes.

CONCLUSIONS AND OFFERS

Susumanzoloto, the data of which are used in the above calculations, is the largest placer gold mining enterprise in Russia, with high-tech output at all stages of operation and the capability of large-scale and advance purchases of inventory for work. According to dataFootnote 14 as of August 1, 2022, Susumanzoloto (about 7 t of annual gold production) was acquired by the Ural Mining and Metallurgical Company (UMMC), which has an export license. Thus, the largest placer gold mining company in the region, at the cost of losing independence, has reduced the risks of bankruptcy under sanctions-related restrictions.

Since placer mining in the region is mainly done by small enterprises lacking the advantages of Susumanzoloto, it can be suggested that their situation is even more critical in 2022, which will be even greater in 2023.

Experts have suggested that the 2022 season would pass without major losses in production volumes and the financial performance of gold mining enterprises, in particular placer mining, would deteriorate to a greater extent (Leskov and Baushev, 2022). In 2022, using previous stocks of consumables and spare parts, companies continued to mine gold in order to repay loans, only reducing production volumes due to unattractive selling prices; preparations for the next season remain a big question.

Indeed, gold production in Magadan oblast decreased in 2022 versus the previous year by only 0.9% (–0.72 t), including 0.2 t less placer gold. However, according to the Chairman of the Union of Miners of Russia V.I. Tarakanovsky,Footnote 15 up to 25% of gold mining companies in Magadan oblast plan no mining in 2023; most likely these are small placer gold mining companies, as a rule, with production volumes from a few grams to a few hundreds of kilograms.

The current situation can lead to the following negative externalities for the socioeconomic situation of Magadan oblast:

✓ a decrease in placer gold production of up to 10 t in 2023 due to the unpreparedness of 25% of enterprises in the territory and selective mining of placers faced with an expected increase in mining costs (about 40%);

✓ about 4000 people will lose their jobs, and their families’ standard of living will drop sharply;

✓ the Magadan oblast budget will lose about 10% of revenues (in proportion to the decrease in gold production).

In order to prevent negative development of the situation in Magadan oblast and the gold mining sector, it is necessary to adopt a number of state support measures. In particular, the author, taking into account consultations with subsoil users, proposes the following at the federal level:

(1) Include the gold mining sector in the lists of industries affected by the sanctions, and in Magadan oblast, include the main placer gold mining enterprises among backbone enterprises to qualify for special support measures, including, loans at a subsidized rate and subsidization of some transportation costs when reorienting to other suppliers of imported spare parts and consumables.

(2) Form a list of banks for the purchase of gold from subsoil users without a discount with the support of these banks by the state.

(3) Apply support mechanisms in the form of tax incentives (mineral extraction tax, profits tax, etc.) so that gold mining enterprises break even.

At the regional level, the following is appropriate:

(1) Creation of a unified regional structure that provides a centralized search for alternative ways of supplying imported spare parts and consumables; organization of lending to subsoil users; sales of gold, including on the global market. The Fonddragmet State Institution, which existed in Magadan oblast from 1998 to 2012, during a difficult period for the industry (low price of gold, lack of collateral from small enterprises to obtain bank loans) can be a model in terms of organization and functions. At that time, not all plans were implemented; however, at present, the creation of such a structure with state guarantees represented by the regional government can be a way out in this situation.

(2) Search for opportunities for the organized sale of gold in the markets of countries not participating in sanctions against Russian: China, UAE, India (e.g., China, responsible for about 20% of global gold production, does not export the metal, developing domestic demand, and is a potentially large gold importer).Footnote 16 Small placer mining enterprises with 50–100 employees cannot seek a sales market; therefore it is proposed to use the capabilities of the Magadan oblast government.

(3) Resumption of the operation of the Kolyma Refinery under the control of the government of the Magadan oblast can become a center of metal refining and its sale for enterprises in Magadan oblast, the Chukotka Autonomous Okrug, and the Republic of Sakha (Yakutia).Footnote 17 Today, gold for refining is exported to factories in other Russian regions: the Prioksky Nonferrous Metals Plant, the Gulidov Krasnoyarsk Nonferrous Metals Plant, etc.

(4) The region should also initiate the creation of an enterprise for the production of alternative spare parts for imported equipment, assembly of imported equipment (possibly Chinese), or organization of similar workshops on the basis of the Magadan Mechanical Plant.