Russian officials are hoping Vladimir Putin’s rapport with Donald Trump will lead to rapprochement with the U.S. But they’re not taking any chances.
A U.S. Treasury report this week appears to show Russia liquidating dollar assets at a record pace, selling four-fifths of its cache of U.S. government debt, $81 billion worth, over a two-month period. It started in April, when the U.S. imposed the most onerous sanctions yet on allies of Putin.
The release caused a stir in the markets because neither the Treasury nor the Bank of Russia will comment on the transactions. And the data is murky, so it’s hard to know if Russia actually offloaded the bulk of its U.S. assets or simply transferred custodianship to a foreign entity to disguise ownership.
But for Sergey Dubinin, Russia’s central bank chief from 1995 to 1998, there’s no mystery at all -- the sales were simply a prudent “hedge” against confiscation, a possibility that looks more likely every day. Russia, he said, has learned from Iran’s experience and is converting its dollar assets into other currencies to safeguard its reserves against any attempts at seizure.
“It would be silly to sell U.S. debt and then keep it in dollars somewhere else,” said Dubinin, who’s now on the supervisory board of state-run VTB, Russia’s second-largest lender. “They most likely bought other hard currencies like euros and yen.”
The central bank won’t update details of its foreign holdings until later this year, but there are already some clues that suggest Dubinin may be right. Monthly statistics posted on the Bank of Russia’s website show that deposits in other central banks, international institutions and foreign lenders jumped by the equivalent of $47 billion in April and May.
There’s no way to tell in which currencies those deposits were made, but Governor Elvira Nabiullina last month told Russian lawmakers who expressed concerns about excessive holdings of U.S. debt that she was in the process of diversifying the central bank’s investment portfolio.
Putin has long railed against “the dollar monopoly,” even referring to the U.S. as a “parasite” for “living beyond its means.” In May, after he was sworn in for a fourth term, Putin went further and called for a “break” from the dollar to bolster the country’s “economic sovereignty.”
Yet that’s easier said than done in a country that continues to sell its main exports, oil and gas, for greenbacks, a fact that Putin referred to as a “burden” that Russians “need to free ourselves from.”
Still, Russia’s central bank needs to maintain a certain level of dollars in its reserves to help banks manage liquidity and intervene in the currency markets if needed. Many of the country’s biggest companies earn dollars but pay most of their expenses, including taxes and salaries, in rubles.
According to the central bank’s latest data, the dollar’s share in the reserves at the start of 2018, when they stood at about $430 billion, actually climbed to nearly 46 percent from just over 40 percent a year earlier. The euro accounted for almost 22 percent, sliding from about 32 percent and as high as 43.8 percent in 2009.
In terms of geographical distribution, which can include sovereign and corporate securities as well as deposits, U.S. assets accounted for 29.9 percent of overall reserves. Germany ranked second at 13.6 percent followed by France, the U.K., Canada and the Netherlands. Gold bars held at vaults inside Russia made up 17.2 percent of the stockpile’s value.
The last time Russia pulled such a large sum out of the U.S. was just after the annexation of Crimea in 2014, when the central bank withdrew about $115 billion from the New York Fed, Reuters reported last year, citing two former Fed officials. Most of that money was returned a few weeks later, after it became clear that the scope of initial U.S. sanctions would be narrower than the Kremlin expected, according to the news service.
Since then, the U.S. has deepened its sanctions and widened the reasoning behind them to include election meddling and Putin’s generally “malign” actions. Some 700 Russian citizens and companies now face travel limits and asset freezes, while some state banks and companies are effectively barred from obtaining financing through U.S. banks and markets.
“The obvious way to limit a country’s exposure to U.S. sanctions is to shift foreign-exchange reserves out of dollars,” said Brad Setser, who worked at Treasury from 2011 to 2015 and is now at the Council on Foreign Relations in New York. “I would never underestimate the reach of U.S. sanctions. That said, it would be a major step for the U.S. to contemplate blocking a country’s dollar reserves as opposed to sanctioning a bank or a firm.”
Even with a counterpart in the White House with whom he seems to see eye to eye, Putin is preparing for relations with the U.S. to worsen. The Finance Ministry recently created a kind of financial SWAT team to coordinate the government’s response to any new sanctions with companies and investors.
The new group will interact with the U.S. Treasury’s Office of Foreign Assets Control, or OFAC, to “understand how to interpret correctly the language of sanctions,” Deputy Finance Minister Vladimir Kolychev said in an interview in late May, at the tail-end of Russia’s selloff of U.S. bonds.
“We can’t guess whether or not sanctions will be introduced or what their content will be, especially if they are linked to the political cycle in the U.S.,” Kolychev said on the sidelines of Putin’s annual investment showcase in St. Petersburg.
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