By Simon Derrick, Chief Currency Strategist, BNY Mellon
After the sharp drain seen in Russia’s FX reserves during the 2014 crisis and the subsequent sharp criticism of the central bank by President Putin there has been little appetite to actively defend the RUB. Economy Minister Maxim Oreshkin implied that this remains the case in April, noting that the floating RUB would help to mitigate the impact of U.S. sanctions on the Russian economy.
The lack of any meaningful shift in the overall scale of Russia’s FX reserves in recent months suggests that the RUB continues to be left to its own devices. However, something else appears to have been going on.
At the end of March the US Treasury TIC data showed Russia’s holdings of US Treasuries stood in excess of USD 95 bn down from just over USD 100 bn at the end of December.However, over the next two months this number fell to just USD 15 bn, its lowest reading since the summer of 2007.
When asked about the Treasury sales by state media in July, the head of Russia's central bank, Elvira Nabiullina said: “We have increased the share of gold in recent years, almost tenfold in ten years, so we are diversifying the entire structure of currencies." She added that Russia assesses "all the risks: financial economic and geopolitical." Although this doesn’t provide an explicit reason for the shift (or an admittance that the move had actually occurred), it seems reasonable to suppose it was driven by a desire to minimise the risks connected with Russia’s deteriorating relationship with the US.
This is not the only reported shift seen in FX reserve composition this year driven by changing international relationships. The FT reported on Wednesday (citing “two people with direct knowledge of the orders”) that Saudi Arabia’s central bank and state pension funds had instructed their overseas asset managers to dispose of their Canadian equities, bonds and cash holdings “no matter the cost”. The paper also reported that one financier had “confirmed that Canadian securities had been sold on explicit instructions from Riyadh.” However, it’s important to note the Saudi government’s media office stated clearly that “neither the government nor the central bank or the state pension fund has issued any instructions regarding the sale of Canadian assets”.
Whether or not these reports prove to be accurate, it's hard to avoid the feeling that FX reserve managers are facing a significant new set of risks. To put this into context it should be noted that even when relations between Japan and China took on a distinctly frosty tone in 2012 there was no suggestion that Beijing would be prepared to reduce its holdings of JGBs as a result.
Turkey aside, perhaps the real take away from this week is that political risks need to be considered when thinking about the forces driving FX reserve holdings.