Russia Dumps the Dollar for Euro as Reserve Currency

The Market Oracle reports that Russia Dumps the US Dollar.

(emphasis mine) [my comment]

Russia Dumps the U.S. Dollar for Euro as Reserve Currency
May 19, 2009 - 07:37 PM
By: Pravda

The US dollar is not Russia's basic reserve currency anymore. The euro-based share of reserve assets of Russia's Central Bank increased to the level of 47.5 percent as of January 1, 2009 and exceeded the investments in dollar assets, which made up 41.5 percent, The Vedomosti newspaper wrote.

The dollar has thus lost the status of the basic reserve currency for the Russian Central Bank, the annual report, which the bank provided to the State Duma, said.

In accordance with the report, about 47.5 percent of the currency assets of the Russian Central Bank were based on the euro, whereas the dollar-based assets made up 41.5 percent as of the beginning of the current year. The situation was totally different at the beginning of the previous year: 47 percent of investments were made in US dollars, while the euro investments were evaluated at 42 percent.

The dollar share had increased to 49 percent and remained so as of October 1. The euro share made up 40 percent. The rest of investments were based on the British pound, the Japanese yen and the Swiss frank.

The report also said that the reserve currency assets of the Russian Central Bank were cut by $56.6 billion. The losses mostly occurred at the end of the year, when the Central Bank was forced to conduct massive interventions to curb the run of traders who rushed to buy up foreign currencies. The currency assets of the Central Bank had grown to $537.6 billion by October 2008. Therefore, the index dropped by almost $133 billion within the recent three months.

The majority of Russian companies, banks and most of the Russian population started to purchase enormous amounts of foreign currencies at the end of 2008 [last year's misguided "flight to safety"]. The dollar gained 16 percent and the euro 13.5 percent over the fourth quarter. The demand on the US dollar was extremely high, and the Central Bank was forced to spend a big part of its dollar assets, experts say.

The change of the structure of the currency portfolio of the Bank of Russia has not affected the official peg of the dual currency basket, which includes $0.55 and 0.45 EUR.

The investments of the Bank of Russia in state securities of foreign issuers have been considerably increased, the report said. About a third of Russia's international reserves are based on US Treasury bonds.

Russia became one of the largest creditors of the US administration last year, the US Department of the Treasury said. Russia increased its investments in the debt securities of the US Treasury from $32.7 billion as of December 2007 to $116.4 billion as of December 2008.

My reaction: Russia dumping the dollar is another sign of the world losing confidence in the US reserve currency.

This entry was posted in Currency_Collapse, News_Developments, Russia. Bookmark the permalink.

12 Responses to Russia Dumps the Dollar for Euro as Reserve Currency

  1. Bowtie says:

    I contributed! Ha!

    “All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem," see

    http://www.bloomberg.com/apps/news?pid=20601039&sid;=aKOzWiTDseUE&refer;=columnist_gilbert

  2. Pak says:

    It's not clear whether this is a deliberate policy outcome.

    If you can read Russian, check out this link:

    http://www.vedomosti.ru/newspaper/article.shtml?2009/05/21/196597

    If you can't, you'll probably have to trust my explanation:

    Russia's foreign reserves include (apart from some little gold and SDR's):

    1) Central Bank's reserves.

    2) Ministry of Finance's Stabilization Fund (StabFond).

    3) Ministry of Finance's National Welfare Fund.

    #1 has 47% USD and 41% EUR, #2 and #3 - 45% USD and 45% EUR. This has remained unchanged.

    However, because #1 has been largely used up to support the ruble in late '08, the overall ratio has come very close to 45:45.

    What has tipped the balance towards EUR is that in late '08, to hold back flight of capital, the Central Bank began opening foreign currency accounts for Russian private banks. Since then, banks (mostly subsidiaries of foreign banking institutions) have deposited large amounts of EUR (almost 30 bln.) with the Central Bank. These deposits have then been counted as a part of currency reserves.

    The questions are:

    1) Why deposit in EUR?

    2) Did the Central Bank somehow informally encourage EUR deposits?

    None of the above, however, explains some two TIC data pieces which I find hmm.. strange.

    http://financialsense.com/fsu/editorials/dorsch/2009/0520.html

    1) How could Russia's US Treasuries holdings stay flat in Q3-Q4 '08 when it sold some $220 bln. of its reserves?

    2) How could its US Treasuries holdings grow by 20 bln. in Q1 '09 when its overall reserves only grew by 20 bln., which had to be DIVERSIFIED according to existing policy?

    Either I don't get it, or there's a bit of fraud going on here.

  3. avd says:

    Pak said...

    1) How could Russia's US Treasuries holdings stay flat in Q3-Q4 '08 when it sold some $220 bln. of its reserves?

    2) How could its US Treasuries holdings grow by 20 bln. in Q1 '09 when its overall reserves only grew by 20 bln., which had to be DIVERSIFIED according to existing policy?

    -----

    1) They sold off all the Fannie and Freddie holdings they had.

    2) Being afraid of another bank failure they also moved money from deposits in foreign banks (like JPM or some else I don't remember) to treasures. Russian Central Bank doesn't have an account at Fed, so it can only own $$$ through an account at some US bank, if the bank goes bankrupt the Central Bank reserves evaporate, so they deemed being in Treasures is a safer option.

    A bit dated article on crisis in Russia:

    Russia Economic Crisis III: On the Importance of Self-Sufficiency in LiquidsIt might be wrong at some points but at least there is no that excessive idiotic FUD that prevails in MSM when they talk about Russia.

  4. Pak says:

    avd said...

    1) They sold off all the Fannie and Freddie holdings they had.

    2) Being afraid of another bank failure they also moved money from deposits in foreign banks (like JPM or some else I don't remember) to treasures. Russian Central Bank doesn't have an account at Fed, so it can only own $$$ through an account at some US bank, if the bank goes bankrupt the Central Bank reserves evaporate, so they deemed being in Treasures is a safer option.

    -----

    Thanks for clarification. However:

    1) I get it, but according to Ulyukayev Russia had cut its exposure to Fannie and Freddie paper to 50 bln. by August 2008 already (from abt 150 bln. in April, but again I'm not sure if I can trust that figure, too). I would think just over USD 100 bln. would be needed in Q3-Q4 alone to do what you suggest. Either Ulyukayev is a liar or smb. else is..

    2) You mean they had a CASH position that big? And they moved all of it to UST in Q1?

    And btw, would be quite nice to quantify what else they could move to UST now. Not much is my guess.

    But honestly, it's not Russia which is on my mind but the US bond market, and how much of US debt will have to be monetized. That's simply because that will have a much greater impact on my personal finance.))

  5. avd says:

    The latest available data is for Sep 2008:

    http://cbr.ru/publ/Obzor/2009-02_res.pdf

    Currency reserves structure:

    cash: 13.4 %
    repo (< 6 month): 24.2 %
    papers (< 1 year maturity): 62.3 %

    I would speculate that as CBR was selling agency papers first the cash grew somewhat and then it moved to treasures later.

    We'll see when the report for the 4th quarter is out.

  6. avd says:

    aha, they have it in another report

    http://cbr.ru/publ/God/ar_2008.pdf

    The data for Jan 1, 2009 is changed like this:

    cash: 8.1 %
    repo: 1.2 %
    papers: 90.7 %

    (gov papers 77.5 %, non-gov papers: 13.2 %)

  7. avd says:

    And I missed another point. The figure of 220bn sold in Q3/Q4 seems wrong. The reserves declined from the highest 2008 figure of 598 to 427 by Jan 1 2009. So it's 171bn. But don't forget that about a half of the reserves is denominated in euros and with euro/usd rate going down from 1.55 to 1.30 the decline is partially explained by this factor. So actually sold-off reserves amounted to about 150bn.

    All in all these figures seem pretty credible to me. I fail to see any ground for fraud allegations.

  8. Anonymous says:

    Eric,

    I am new to your site and wanted some advise.. I notice a lot of people are saying to buy gold to protect agn the massive devaluation of the dollar that is comning...

    what would you recommend buying? I have never bought physical gold and dont want to be ripped off,

    any advise will be greatly appreciated. thanks.

  9. Pak says:

    avd said...

    All in all these figures seem pretty credible to me. I fail to see any ground for fraud allegations.

    -----

    At least once in a while no fraud!))

    Still:

    1) According to your original post, they kept shifting cash to UST in Q1 '08. However, the data in reference says Russia's cash position had already down from 13.4% in September to 8.1% as of 01/01/09. I wouldn't think they've reduced it much since (8.1% is already little), but I'll try look up what it actually might be today.

    2) They've kept selling reserves in Q1! Reserves only began to grow again very recently. At 15/05/09 they stood at 391.3 bln. $ value.

    http://lenta.ru/news/2009/05/21/reserves/

    3) You are 100% true, the decrease in reserve figures was made worse by EUR value slump. But on the other hand, stabilization and subsequent growth of Russia's reserves towards the end of Q1 '09 was supported by EUR revaluation!

    So, Russia buying $20 bln worth of UST in Q1 still looks kinda counterintuitive to me..

  10. Pak says:

    Anonymous said...

    what would you recommend buying?

    -----

    I apologize for interrupting and answering a question not asked to me but if you had some elevator/granary/well-ventilated on-farm store at hand, the best buy would be PHYSICAL: 1) corn; 2) rice; 3) soybeans; 4) sugarcane; 5) ginned cotton.

    The point is, the question you should ask is "what you think is a good investment now", not "what would you recommend buying".

    Nobody can give such advise (and in fact, is prohibited from in countries like the US) without knowing your exact financial position, leverage, risk tolerance etc.

    For example, nobody can advise you on physical gold purchases without knowing, in the first place, which country you reside in.

    Or, at some point in the future, short selling US T-Bonds should prove a fantastic profit opportunity, but sell too early - and you'll be WIPED OUT financially. The US Fed has more money than you ever will - theirs is free money!

  11. avd says:

    Pak said...

    At least once in a while no fraud!))

    -----

    If Americans say that everything is great take it with a grain of salt. They do not mean it. It's just what they are supposed to say. If Russians say that everything is ugly, take it with a grain of salt. This is just what they are supposed to say.

    If you are looking for fraud then think in what country there are those theories about self-fulfilling expectation. In what country they believe in "creative" accounting, financial "innovation" and crap like that.

    In Russia fraud is widespread. Like tax-evasion, corruption, etc. But at least fraud is fraud. They don't lie to themselves. They don't call black white.

    For instance, you never find a central banker publicly encouraging innovative ways to take bank's assets out of balance sheets.

    There is no that idiotic every-week game with experts predicting one number and then official stats go out "unexpectedly" better causing stocks rally only to be downward-revised next week to let the data for it look better than for the previous. And I just amazed that this sheer lunacy keeps working for many years for American simpletons.

    It looks to me that while fraud is a problem of Russian economy, it is not so for US. These days it is the foundation of US economy, its bread and butter.

  12. Pak says:

    I haven't found any more recent data on the make-up of Russia's reserves. There simply seems to be none.

    In the meanwhile, everyone is still welcome with an explanation of private banks' mostly EUR deposists with the Russian Central Bank.

    -----

    avd said...

    fraud... is the foundation of US economy, its bread and butter.

    -----

    Apparently, Americans are just much more advanced when it comes to self-delusion.))

    Well, we're going more into philosophy than finance here, but to me corruption is not just about taking bribes. Taking bribes for doing a service is informal bureaucracy as opposed to formal.

    Corruption is when you use your position to get money for nothing. US bureaucracy is highly corrupt with little bribery. Chinese bureaucracy is moderately corrupt with a moderate dose of bribery. In resource-poor (exclude Nigeria, Angola etc.!) African countries, bureaucracy is moderately corrupt with plenty of bribery.

    Russia's bureaucracy in the 1990's was African-style in fact, and posed surprisingly little practical problem for doing business.

    However, around 2003-2004 something went terribly wrong, and now Russia is replicating the WORST possible model: highly corrupt with plenty of bribery. Add to that massive unproductive money give-outs, asset bubble creation through mismanaged inflow of resource revenues, plus a kind of hubris which almost pales America's - it looks like the worst of all worlds coming together..

    Russia's venezuela-ization is very disappointing indeed. I'm sick whenever I'm in Mioscow, though it has become [very] slightly better since October '08, at least on the hubris side.

    Enough of philosophy! Smb plz give yr ideas on the banks' EUR deposits with CBR!

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