Why the National Bank of Georgia Is Ditching Dollars for Gold

The National Bank of Georgia (NBG) recently acquired 7 tons of high-quality monetary gold valued at $500 million, constituting approximately 11% of its total reserves. This marked the first occasion that Georgia acquired gold for its reserves since it regained independence. This acquisition is a significant event, prompted by the aim to enhance diversification amidst heightened global geopolitical risks, as stated by the NBG.

This policy brief examines the rationale behind central banks, particularly those in emerging economies, acquiring gold reserves. The decision typically stems from one or both of the two main factors. Firstly, an economic motivation, involving portfolio diversification and protection against inflation and geopolitical uncertainties. Secondly, a political dimension, wherein countries seek to reduce reliance on the US dollar and shield themselves from potential sanctions. The economic argument gained prominence since the 2008 global financial crisis, prompting many central banks to bolster their reserves with gold. Similarly, Russian aggression and the annexation of Crimea in 2014 led countries (e.g. Russia, and later after 2022 Belarus) to fortify their gold reserves as a safeguard against sanctions, given the difficulty in freezing gold reserves, especially if stored domestically.

While the NBG's gold acquisition aligns with the economic rationale, recent domestic developments raise questions about alternative motives. Actions such as the USA imposing sanctions on influential political figures (e.g. judges, former chief prosecutor), concerns about the Central Bank's governance, and legislative decisions of the ruling party (the Law of Transparency of Foreign Influence) diverging country from the EU path have sparked public dissent and reactions from key partners – USA, EU and other bilateral partners. Coupled with anti-Western rhetoric from the ruling party and a recently passed amendment to the tax code, a so-called “law on offshores ”, these factors prompt speculation about whether the gold purchase is driven by a fear of potential sanctions and its preparedness strategy, rather than solely economic considerations as gold is perceived as a secure and desirable reserve asset in situations where countries face financial sanctions or the risk of asset freezes and seizures.