Russia in April sold half of its US Treasury bonds, shedding 50 percent of its international dollar reserves and showing that US bonds are no longer attractive. Why has the Russian Central Bank made this decision? Can China do the same?
According to data released by the US Treasury Department, the Russian Central Bank sold $47.5 billion worth of US Treasury securities, reducing its investments in these assets to $48.7 billion, equivalent to 10% of the Bank of Russia’s total international reserves.
From one day to the other, Moscow rose from 18th to 22nd on the list of top buyers of US debt, according to data released by the US Treasury. Although Russia never ranked first, that figure of 10% of total reserves could be considered measly, said analyst Natalia Dembinskaya.
A strategic decision
“The Russian Central Bank makes it very clear: Moscow is not willing to finance the budget of a country that openly practices a hostile policy,” Dembinskaya said .
The measure is not only logical from the political point of view, but also from the economic point of view. Following the adoption of sanctions against the Russian aluminum company Rusal and other large Russian companies, the Russian financial market took a big hit.
For Mark Goighman, an analyst at Teletrade, the sale of US Treasury bonds in April was related mainly to the adoption of sanctions against the country itself and against Russian companies.
In fact, this is a decision that aims to respond not only to the sanctions that are already in force, but also to those that may follow.
Not only sanctions
However, sanctions may not be the only reason why Russia has decided to get rid of its US government bonds, said Roman Blinov, director at the analysis department at the International Finance Center in Moscow.
“Sanctions are only half the problem. There are other factors, such as the increase in the interest rate by the Fed that also influences the profitability of US Treasury bonds,” added Blinov.
The fact that Russia got rid of US Treasury bonds means the country is now less dependent on the US. In recent times, Russia has chosen gold, an asset that accounts for 18% of the country’s reserves. This step helps Russia to defend itself against monetary risks.
“It’s an insurance against sanctions and, of course, an opportunity to make money,” he explained.
All analysts believe the sale of US bonds by Russia is unprecedented. The country has never sold so many titles, not even in a year.
By the end of April, when the 10-year yield on US 10-year Treasury bills exceeded 3 percent and the value of bonds fell, market participants understood that this would lead to higher interest rates. “It’s a scenario that causes fears about the future collapse of the market,” said prominent investor Jeffrey Gundlach.
Analysts warn that if Washington continues its trade war against China, Beijing may take the same decision as Russia in the sale of Treasury bonds. This scenario will be all the more devastating given that China, despite its disagreements with Washington, is the largest buyer of US debt.
By 2017, China has gotten rid of more titles than in previous years. If China continues to sell, this measure can cost the US economy dearly. Other countries could follow Beijing’s example and strike another blow against US supremacy in the international economic system.