We questioned on Wednesday just how wise it was of Russia to be talking down the dollar ahead of switching US Treasuries into alternative non-dollar denominated investments, as it indeed was claiming it would – surely the process would depreciate its assets?
Well, Edward Hugh, at A Fistful of Euro cleverly surmises why talking down the dollar might in fact be in Russia’s interests after all.
First, he considers the fact that Russian institutions have throughout 2009 been quite busy issuing dollar-denominated debt. Among them; Gazprom, which issued $2.25bn of debt in April; state-owned lender Rosselkhozbank which sold $1bn worth last week and Vnesheconombank, Russia’s state development lender, which issued $2bn of one-year notes on June 3rd.
Which leads Hugh to conclude:
So, if I understand things right, you first borrow a lot of money in a given currency, and then you wind up a discourse which forces the currency you have borrowed the mony in on an ever downward path. I guess this is what they call “win-win” in Moscow.
Indeed.
Hugh further points out to FT Alphaville the actual composition of Russia’s reserve assets in the first place:
But there is one little detail you may not have thought about – the composition of their basket: it is pretty equilibrated (Russia’s reserves are made up of 45 percent dollars, 44 percent euros, 10 percent pounds and 1 percent yen according to bloomberg data). That suggests that a shift of about 4 billion out of dollar denominated assets – 1% of the total, would make euro and dollar holdings equal, and 10 billion into SDRs would give euro holdings a majority.
So since the USD goes down and the euro goes up, the valuation effect is positive if you have more reserves in euros. There’s also a nice boosting effect on all that freshly pumped oil too.
Clever, clever Russians.
Related links:
Another illogical Russian smackdown for US treasuries – FT Alphaville
China’s fake recovery redux, or who’s laughing now? – FT Alphaville