IN DEPTH: Mass US Treasury bonds sell-off spells apocalyptic scenario for USD

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Since April 2018, Russia has sold almost 85% of US Treasury bonds and has increased its gold reserves to a record level.

In April and May this year, Moscow reduced assets in US Treasury securities from $96 billion to $15 billion. The list of the 33 largest holders of public debt published by the US Treasury Department no longer includes Russia. At the same time, the Russian Central Bank significantly increased its gold share in its international reserves.

These factors have led to a significant shift in Russian international reserves over the last decade: the gold share has increased 10-fold, while that of US Treasuries has fallen to its lowest.

The role of US Treasury bonds in global reserves

A country’s international reserves represent the net financial assets of the monetary authorities (generally central banks) that are held in different reserves, such as in foreign currencies (bonds and deposits), gold, special drawing rights – payment unit created by the Fund International Monetary Fund – and reserve position in the IMF, in addition to some other assets.

These resources are used by the country to meet its financial commitments such as issuing currency, to minimize volatility, as well as to protect the financial system of speculators. In general, it is a kind of safety mattress to cushion the consequences of external shocks to the state economy.

In the current financial system, most of the international reserves are invested in US government bonds. These bonds are issued by the US Treasury to finance US government debt. The US can freely issue its currency, taking advantage of the fact that \international trade is carried out in dollars, which contributes to the demand for dollars globally. That is, each country that buys US government bonds finances the US deficit. But why does the international community continue to fund the US economy, supporting the hegemony of the dollar?

The answer is quite simple. US debt securities are considered the safest asset in the world with higher liquidity, which means that, if necessary, these assets can be sold quickly and without loss of value. The US has a good credit rating, despite some speculation about the debt ceiling. It is believed that a US default is almost impossible, making this asset suitable for a country’s security mattress.

Russia and de-dollarization

Russia is trying to ease its reliance on the US currency after Washington and its allies imposed sanctions on the country in 2014. Russian President Vladimir Putin has stated that Moscow can no longer rely on the US dollar-led financial system because the United States imposed unilateral sanctions and violated the rules of the World Trade Organization.

The first step was to increase domestic currency transactions with Russia’s trading partners, thereby reducing demand for these countries’ dollars.

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As a result, transactions in rubles in the Eurasian Economic Union (composed of Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia) increased significantly. In October 2017, China opened in Moscow the first division of its Bank of Industry and Commerce to promote transactions in yuan. In addition, Moscow has already signed agreements with Turkey, Iran and Azerbaijan to avoid using the dollar in international transactions. During the 10th BRICS summit held in Johannesburg on July 25-27, representatives of the member countries of the group also discussed the possibility of making transactions in national currencies instead of the dollar.

In early April, Washington imposed a new package of anti-Russian sanctions, the hardest since 2014. The US has introduced sanctions against 38 Russian businessmen and businesses.

In June 2018 the US Treasury Department revealed that by April this year Russia had sold half of its US public debt securities. In this way, Russia went from 18th to 22nd on the list of top US lenders. In July 2018 it was revealed that Russia got rid of another one third of its US bonds. At the same time, Russia’s gold reserves reached almost 2,000 tonnes. During the first six months of 2018, the Russian Central Bank bought about 106 tons of the precious metal, increasing the gold share in international reserves by 18%, and also increased its reserves denominated in other currencies, deposited in central banks of other countries .

According to the president of the Bank of Russia, Elvira Nabiullina, the bank’s objective is to diversify its international reserves.

“We have recently diversified the entire structure of foreign exchange [in international reserves]. We have implemented a policy to ensure that international reserves are safely stored and diversified,” said Nabiullina commenting on the sale of the bonds.

Some experts believe that Russia has sold its US Treasury bonds because it fears these assets could be frozen in the event of new anti-bank sanctions. However, such measures are unlikely because they would affect the credibility of investors around the world in the US financial system.

What will happen if other countries get rid of US Treasuries?

As for the consequences for the US economy, the sale of US bonds by Russia poses no major threat to Washington because, even before the massive sale of bonds, Russia ranked only 18th on the list of top US lenders.

Among the largest holders of US Treasury bonds are China, which holds bonds worth $ 1.18 trillion. Japan is in second place with $1.03 trillion. Among the leaders are also Ireland, Brazil, Switzerland, United Kingdom, India and Saudi Arabia.

Imagine that most of these US debt holders would get rid of US Treasury bonds. The offer of bonds would increase dramatically, causing them to devalue. US bond yields would reach a record high. This situation could collapse the entire US economy.

Turkey is another country that has already decided to get rid of US government bonds. The president of the country, Recep Tayyip Erdogan, believes that the West wants to punish the country for its policy of strengthening sovereignty. According to the latest data, Ankara has reduced its financial resources invested in US securities by 38% since October 2017, increasing gold purchases.

Although these bonds are still the safest asset in the world today, given Washington’s trade war against China, the top US lender, some analysts predict that Beijing could also reduce its position in US Treasuries, as has already been done by Russia and Turkey. This step would truly be the beginning of the end of the dollar era.

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