Russia has sold off almost all U.S. government bonds: right now its investments in debt securities are $15 billion, and in the beginning of the year was more than $100 billion Is a political choice that is associated with the risk of sanctions, experts say
Photo: Jim Young / Reuters
Russian residents for the second consecutive month cut investment in US debt — the most liquid and reliable in the world. Data about their investments in Treasury securities (also called Treasuries), the US Treasury publishes monthly with a delay of a month and a half: 17 July, the Agency announced which countries and to what extent owned Treasuries as of the end of may. It turned out that Russian residents (these include anyone, but mainly the holder of this asset is Central Bank) reduced its investment in US debt to $14.9 billion out of the thirty largest creditors.
A month earlier, in late April, Russia owned US government securities of $48.7 billion, and at the end of March the portfolio was $96,1 billion.
Why is this historic event?
Now the Russian possession of the U.S. public debt is less than that of Turkey ($32.6 billion), South Africa ($24.4 billion) or Kazakhstan ($17.6 billion). Russian investments in Treasuries returned to the level of mid-2007 ($14.7 billion).
But almost a year from March 2017 to March 2018 — Russian investments in Treasuries fell below $100 billion, and the record was recorded in October 2010, when Russia owned US government securities $176,3 billion was from third to sixth place in the world.
For the deployment of Russian foreign exchange reserves in us bonds criticized the Finance Ministry is still under Alexei Kudrin (international reserves managed by the Central Bank, but a considerable part belongs to the government, through the Ministry of Finance). In 2007, the Central Bank in the interests of the Treasury has invested more than $100 billion in bonds of troubled mortgage agencies of the USA — Fannie Mae and Freddie Mac, Kudrin defended the investment, saying that Russia got them a profit of over $1 billion.
Attachment of the Russian monetary authorities in US government securities could not prevent neither the financial crisis of 2008 (in the autumn of that year, Russia still had more than $100 billion in debt obligations of the US), the diplomatic conflict 2014 after the annexation of Crimea to Russia. Despite the rapidly deteriorating relations between Russia and the United States, the whole of 2014, the Russian residents held American government securities worth more than $100 billion.
The exact amount of investment of the Bank of Russia in us government securities is unknown to monthly US Treasury data reflect investments of all Russian residents (other than CB that can be commercial banks, although Central Bank is the largest holder of the debt). In addition, statistics of the U.S. Treasury may not reflect all Russian investments in Treasuries for example, if Russian Institute owns the US government securities through the custodian Bank in Luxembourg, the us statistics count these investments to Luxembourg.
And the Bank of Russia, in turn, reveals the currency and geographical structure of its reserves, but with a delay of six months (that is now known data to the end of 2017). According to the Bank, as at 31 December 2017 in the United States were placed 29.9% of reserves, or about $131 billion, but these assets could be not only government bonds but also, for example, a gold Deposit or a U.S. Bank account.
Why Russia gets rid of us debt?
All in a sharp increase in geopolitical tensions and tighter us sanctions against Russia, according to a senior economist at Danske Bank Vladimir Miklashevsky. “For such a massive sale, we see pure geopolitics: risk reduction amid the ongoing tightening sanctions on Russia in order to avoid possible development of events in the Libyan or Iranian scenario”, — said RBC miklashevskii.
In early April, the US Treasury imposed the most severe sanctions against Russian businesses in 2014, including the sanctions list of Russian billionaires Oleg Deripaska, Viktor Vekselberg, Suleyman Kerimov, the heads of Gazprom and VTB Alexey Miller and Andrey Kostin, several high-ranking officials and security forces, as well as aluminum giant Rusal and multidisciplinary group “Renova”. Then in Russia began to talk about possible sanctions on the Iranian scenario — with the shutdown of Russian banks from SWIFT, and measures against Russian government debt.
The impact on the public debt and the SWIFT trip: what are they afraid of the Russian authorities
Although the freezing of assets of Central banks (which in the vast majority of countries, as in Russia, legally independent from the Executive power) is an extreme measure, such precedents are well known: for example, when the US authorities had frozen assets of the Iranian Central Bank billions of dollars. “Ownership of us securities expose their holders to the risk of blocking because of the sanctions,” confirmed RBC former senior adviser to OFAC (sanctions unit of the Ministry of Finance USA) Brian O’toole.
Selling of us securities is “primarily a political decision,” says senior analyst BKS Sergey Suverov. “CB stored up to 30% of its assets in US treasuries. He was criticised for it from all sides, therefore, subject to us sanctions, the reduction of the position in dollar assets seems logical,” he said.
And is it beneficial?
But this is the feasibility study. “The moment the sale is especially good on the background of toughening of monetary-credit policy of the fed and rising yields of US government debt,” said miklashevskii of Danske Bank (the rising bond yield means that the price decreases and Vice versa).
If the decision to reduce investments in Treasuries was taken for economic reasons, it could be due to fed rate hike, said an analyst at Nordea Bank Denis Davydov, — in this case, long-term bonds may lose value and more profitable to sell.
In March, the fed raised its key rate by 0.25 percentage points, to 1.5–1.75 percent per annum, and at the June meeting continued the policy tightening is 1.75–2%. Now the yield on ten-year U.S. Treasury bonds is about 2.86 percent, and in may it was 3.1%. For comparison: in the early years of the ten-year Treasuries were trading with a yield of 2.4%.
In addition to the political component in the decision of the Central Bank and the economic logic is confirmed Suverov: rate increases in America, the price of bonds falls. “However, it’s a little kompensiruet the strengthening of the dollar, so the negative effect is, but it is small”, — he added.
Where to invest now CB?
Despite the reduction of Russian investments in us government debt, increased reserves of the Central Bank, expressed in cash currency and deposits in other Central banks, the Bank for international settlements and the International monetary Fund (April 1 this part was $93 billion, and on June 1 — $140 billion) and foreign commercial banks ($43 billion on April 1 and $65 billion on June 1), according to the regulator. The Central Bank has redirected part of the reserves of U.S. treasuries in foreign banks (Central and commercial), but these deposits, “most likely a temporary solution,” says Suverov from the BCS.
Nabiullina commented on the reduction of Russian investments in government securities U.S.
The Bank of Russia, at least since 2007, has steadily increased its investments in gold (in physical terms): on 1 June, the Central Bank was owned by 62 million tons of pure Troy ounces of gold market value of $80.5 billion (almost 18% of all international reserves of the Central Bank). From the beginning of 2018, the Bank on a monthly basis re-buy about 600 million ounces.
According to the analyst of Raiffeisenbank Denis Breaking, the released funds, the Central Bank may send to the European assets or the same gold, “given management strategy and limits on the reliability of investment instruments”. “Gold is a good asset to protect against inflation risks,” said Poryvai. However, the “completely replace US Treasury bonds gold can not, because the liquidity of assets are quite different — the gold market is much smaller than the market for U.S. Treasury bonds,” said Suverov.
Funds can be transferred in euros, Swiss francs, Japanese yen or even again in Treasuries, suggested Davydov, depends on why Russia came out of American securities. “The regulator will be guided by the principle of maximum liquidity with sufficient profitability”, — said Davydov. According to Miklashevsky, the Central Bank may also be of interest markets government bonds of the peripheral countries of the Eurozone, which show a good trend in 2018 (for example, Spain or Portugal).
“The Central banks of different countries have a different strategy for the management of its international reserves — some actively investing in the economy, not just into debt, buy shares of large companies and receive dividends and income from their growth. The Russian Central Bank management strategy is conservative. It yields very low returns unlike, for example, from the Sovereign Fund of Norway,” Poryvai said.