With oil prices tanking, the Russian government is desperately looking for new sources of cash. Luckily, Russia is home to some of the world’s biggest deposits of gold and the central bank has been stockpiling the yellow metal for years. Unluckily, the price for this traditional safe haven has been whupped along with all other commodities over the last few years – though much less than the price of oil.

Russia began casting around for an alternative to holding reserves in US dollars even before the clash with the West over Ukraine began. The dominance of the dollar as the global reserve currency is part of the “unipolar” world setup that President Vladimir Putin objects to so strongly.

The amount that Russia keeps in gold as hard currency reserves took off in 2007 as the global crisis began to break and gold prices began to climb. The state’s gold fund fluctuated between about 360 and 430 tonnes for most of the noughties, but suddenly in 2007 the government began to aggressively accumulate gold, more than tripling the amount to reach 1,352 tonnes as of the third quarter of 2015, the latest data available. Likewise, gold as a share of total reserves grew from a low of about 2% in 2007 to reach 13% today.

The new policy in 2007 was a savvy decision. Gold prices put in a sustained rally that started at around $300 per troy ounce at the start of the decade before rising to a peak of $1,990.

By 2012 the global economy (and Russia’s too) appeared to be coming out the other side of the 2008 crash. But by the end of 2013 things were starting to go badly wrong as growth stalled and the current malaise set in.

Those problems were already visible in the gold price, which began to fall steeply from the third quarter of 2012. The price has been falling ever since and was trading at $1,084 per ounce as of January 12, having apparently found a floor around this level at the end of December.

The collapse in the price of gold has cost Russia dearly. When the government’s fast accumulation of gold started in 2007 the CBR had 400 tonnes of gold in its vaults that was worth just under $9bn. When the peak was reached in September 2012 the pile had grown to 934.5 tonnes, which was worth a whopping $54bn. Betting on gold had been a brilliant investment.

Since then the CBR has stuck to the same strategy, adding another 417 tonnes to its gold brick house to bring the total up to the 1,352 tonnes at the start of the last quarter of last year: that is an additional 1-2 tonnes of gold added each month to the reserve pile, with the pace picking up from the middle of 2014 to 4-6 tonnes a month.

But the increase in the number of gold bars in the vaults has almost exactly been offset by the fall in value of the same bars since 2012: in the last year the value of Russia’s gold reserves has been fluctuating between $45bn and $50bn: Russia’s gold reserve is worth more or less the same it was in 2012, even though the amount of physical gold in the vaults has increased by just under a third. Put another way, the bet on holding reserves in gold has led to a trading loss of about $24bn in value since the peak prices of 2012.

The combination of collapsing oil prices and growing momentum for the state to restart its stalled privatisation programme offers the government two possible ways to make money from gold.

Gold prices may have fallen by a third since their peak in 2012, but that is still a lot less than the drop in oil prices in just the last 12 months; and if Economy Minister Alexey Ulyukayev is to be believed, then oil prices could fall to $20 and stay there for decades. The worse the panic over the possibility of a new global crisis gets, then the more likely gold prices are to rise – or at least that is what has happened in the past.

The Kremlin also has an ulterior motive for its gold holdings. “Gold is a liquid commodity and it means you are not beholden to anyone else’s promise to pay,” says one gold producer who didn't want to be named due to sensitivities in the sector. Russia is now actively diversifying its hard currency holdings away from the US dollar and gold is one of the main repositories of value that the CBR can use as an alternative.

The Russian government could also raise huge amounts by selling off the Sukhoi Log (Dry Canyon) gold mine in the Siberian region of Irkutsk. With an estimated 64mn ounces of gold reserves, or 2,000-3,000 tonnes – more than the CBR’s entire gold stockpile – this is the biggest gold mine in the world and would be worth about $2bn at today's gold price if it were sold.

Plans to auction off Sukhoi Log have been around for decades, but like the province of Egypt to the ancient Romans, it never got off square one, as too much wealth and power go with the mine to give to any one oligarch. The idea of an auction came up periodically throughout the 1990s, and the government announced plans to sell the mine in 2009 and 2010. But there was never any real need to sell the mine, as explained by Vitaly Nesis, CEO of Polymetal International, one of Russia's leading gold producers, in December 2012: “It is an asset that is a natural hedge against global inflation. Why does the government need to turn a real asset into a pile of dollars or euros that could be inflated away?”

After the collapse of oil prices, that “pile of dollars” now looks a lot more appealing.

In September the idea of an auction was back on the agenda, but this time it looks more likely than ever to happen. The government announced that the mine would be put under the gavel in the “nearest future” along with another RUB1 trillion worth of government stakes in blue-chip companies as part of this year’s privatisation plan, reported business daily Vedomosti.

Sukhoi Log is a massive project. Currently, there is no infrastructure, no access to water needed to enrich the ore, and no power supplies in the vicinity. By the government’s own estimates it would take 12 years to develop the mine and cost at least $1.5bn to bring it into operation.

The contenders

Three companies would be in the running to buy the mine. Russia’s largest gold producer Polymetal is out in front. Founded by Alexander Nesis, a 1990s vintage Russian businessman and one of the few to successfully make the transition from the 'Wild East' of the Yeltsin-era, Polymetal, run by his brother, is part of the ICT Group that has holdings in several sectors including banking with Otkrytie. Since hitting their peak at the end of 2012, Polymental’s shares have fallen around 47% to trade at £550 on the London Stock Exchange. The company had $1.4bn in revenues as of January and Ebitda of $785mn in 2015, according to Sberbank’s estimates.

Polyus Gold is another contender. Owned by the family of Duma deputy and Russian tycoon Suleiman Kerimov, which took the company private in November, Polyus had $2.2bn of revenues and Ebitda of $981mn in 2015, according to Sberbank’s estimates.

The third contender is the state-owned Rostec (formerly Rostekhnologii), run by Sergey Chemezov, which was set up in 2007 to promote high-tech exports from Russia. Chemezov cut his teeth as head of the Sovintersport Foreign Trade Association between 1988 and 1996, and is a close associate of President Vladimir Putin, specialising in industrial relations with other countries. He also did a long stint as head of Russia’s arms export agency Rosoboronexport.

Clearly, choosing Rotec would be a political decision to keep Russia’s biggest gold mine under state control. Rostec has no experience in hard rock mining and would have to find a partner. The most obvious candidate would be London-based Petropavlovsk Mining, which got its start with gold production in the Far East. Petropavlovsk is on the Russian “strategically important” list of companies, but doesn't have the financial resources to take on a project as big as Sukhoi Log on its own. Petropavlovsk’s shares have collapsed and flatlined at between £0.05 and £0.07 after hitting a peak of £13.48 in 2010. The company had $775mn of revenues and Ebitda of $225mn in 2015, according to Sberbank’s estimates.

Russia watchers' curiosity was piqued on a possible tie-up between Rostec and Petropavlovsk after Russian oligarch Viktor Vekselberg bought 20% of the latter’s shares on the open market last year. Vekselberg has not approached the London-listed mine’s management yet, according to a company spokesman, but clearly Vekselberg, who is beleived to have gold mining interests in Kamchatka, has positioned himself to move seriously into gold mining if he wants to.

A decision by the Russian government on the privatisation of Sukhoi Log is not expected any time soon. And even if it is sold, then it would take a decade to bring it fully online. But the sale would be significant step if it happens, and who it goes to will say a lot about which direction Putin wants to take the country.