translated by the Saker Translation community
Part of our gold and currency reserves was frozen in other countries, mainly the US and EU member states, due to sanctions imposed against Russia’s Central Bank (RCB).
Therefore, Russians are naturally asking why are our strategic reserves NOT stored on Russia’s territory but on the territory of our economic adversaries?
We’ll try to explain how much was stored where, how much is left, can it be returned, how the freeze will affect the economy and ordinary Russians, and also who’s to blame.
What do the RCB reserves consist of:
RCB publishes an annual report on its assets and a weekly one on its volume. It stopped publishing on March 4. As of that date reserves consisted of $643 billion, but the data on the structure go back to June 30, 2021, when it was as follows:
$311 billion: financial instruments by foreign issuers.
$152 billion: cash in foreign deposits.
$132 billion: gold in Russia.
$30 billion: International Monetary Fund.
Thus, 80% of Russia’s reserves are outside of Russia. We’ll explain why later, but first here’s the list of countries as of June 30, 2021:
Geography of Russian Central Bank (RCB) Reserves storage as of 30.06.2021
A reminder – this represents the allocation as of the end of June, 2021. After the publication of that report, the RCB reported it was moving part of the reserves from western countries to eastern ones, therefore the geographic distribution might not be accurate, but is a guide, since there have been no radical changes.
Thus, Russia is home to only 1/5 of the reserves, 13% are in China, 5% in IMF, and the rest are in Europe and United States. China is apparently friendly, some of the ‘other’ countries are as well, IMF is not about to block the reserves, but Western countries have decided to recall their “raider” past, therefore only half of the reserves proved resilient to arrest or potential arrest, and the rest we have no access to. The Minister of Finance, Anton Siluanov, named the figure of $300 million which is approximately the same as my calculations.
According to one explanation I’ve seen earlier, RCB transferred some of the reserves from the West to Eastern countries, in secrecy from the IMF, giving IMF a false report and therefore Western powers expected they’d be able to freeze a far larger sum than it turned out. But I have not seen any official confirmation (or refutation) of that explanation. One can only guess whether they thought this through or it came out the way it did by accident.
Nevertheless, some of our money was blocked, and that’s a fact. It’s remains our money, only RCB account transactions are blocked (it’s possible it’s our money for now, but one wants to believe they will release the funds).
If $300 billion were arrested, about $340 billion remain free, out of which $132 billion is monetary gold in the form of bullion. It is not known how much of the remaining money is cash, and how much is invested in securities.
But, I want to make a disclaimer right away — I’m not accusing anyone and I’m not defending anyone, however, the RCB and the Ministry of Finance did everything correctly, reducing the share of the dollar and the euro in favor of the currencies of eastern countries. However, our retaliatory move against blocking our reserves may be harder for the US and the EU, but more on that later.
The Central Bank began withdrawing money from dollar assets after 2017, when the United States froze about 40% of Kazakhstan’s reserves on far-fetched pretexts. Yes, regardless whatever pretexts there may be, no one has the right to prohibit the use of reserves accumulated by a sovereign country. This created a dangerous precedent, and our financial authorities reacted correctly to it, not just hoping that somehow, we would not be affected.
So, why are our reserves stored abroad?
Let’s see which ones – specifically cash currency and securities of foreign countries. The answer depends on it.
Securities. When you buy stock in a foreign company like Apple or Bank of America, you don’t receive these shares and nobody brings them to Russia as if it was cash. They are all stored in the country where they are issued. You don’t buy the stock but get a receipt that says you have ownership. And vice versa—when foreigners buy our stock, these obligations don’t leave Russia.
It’s the same with central bank reserves. Our RCB buys US government bonds and, in accordance with the rules, they are kept in the US. They cannot physically leave US territory, or the territory of other countries where RCB buys government bonds.
Cash. Storing money as money is the best way for it to lose its value – you know this yourself. Keeping money under the pillow means losing its purchasing power commensurate with annual inflation. You place your liquidity in a savings account so that you can earn some sort of interest and your losses are less than inflation.
The RCB (and other central banks) do the same. It places dollars, euros, yuan, yen, and franks and so forth in foreign banks at interest.
It could hardly be otherwise, and if it could be, then one could blame the RCB and the Finance Ministry for improper distribution of assets, because the value of the reserves ought to be sustained and not lost year to year by merely being kept in a huge safe.
Why can’t these assets be deposited with interest in Russian banks? Because Russia does not print another currency and banks do not earn money on it, respectively, banks cannot guarantee RCB income in foreign currency. There is enough money for the population, but not enough to ensure a profit on hundreds of billions of dollars at interest. Moreover, commercial banks also deposit foreign currency in foreign banks when you make such deposits, earning interest and sharing it with you.
RCB has cash reserves in order to react quickly, to intervene in order to support the ruble exchange rate and to pay debts, but cash is only a small portion of the assets.
Why is the RCB storing money in dollars, euro, pounds, and yen? Because, as of right now, these are the most stable currencies in the world, with minimal inflation. Therefore, their purchasing power does not decline as much as the Kazakh tenge, the Belorussian ruble, the Turkish lira, or other world currencies.
How to retrieve these assets?
As I already mentioned, right now only transactions are frozen. The Reserves have not been confiscated. Moreover, the government has a symmetrical response that will hurt the US and EU, much more than it will hurt us, if those restrictions are not lifted.
What has been done thus far:
A ban on dividend payments to non-residents (foreigners). Russia has forbidden paying any form of profit such as dividends to foreign owners, including private investors, international organizations, and governmental organizations which have invested in Russia. They will not be able to realize a profit.
A ban on transferring or transporting foreign currency out of Russia in large sums. Just as currency belongs in part to foreign citizens and organizations, its de-facto arrest on Russia’s territory “hurts” those who earned money in Russia while being abroad. The vast majority of these are foreign investors. Moreover, they will not be able to earn a profit from Russian financial instruments, which means that foreign countries could declare Russia in technical default since Russia is not fulfilling its obligations.
But there is a solution.
Here is the plan:
Paying debts in rubles. In the coming days, the Ministry of Finance will have to pay coupons on Eurobonds, which have to be paid in foreign currency. Anton Siluanov (the Minister of Finance) stated that all will be paid on time, but only in rubles, since we don’t have access to our “foreign currency wallet”, and in order to transfer rubles into dollars, those wallets will have to be unfrozen.
On the one hand, Russia would fulfill its obligations and pay its debts, but on the other, that might not satisfy “the other side”, since ruble payments are not in accordance with the terms of the deal. So, it’s a form of competent blackmail, and walking on ice at the same time.
In any event, Russia has money and, most importantly, levers of influence and pressure unlike Iran or Venezuela which also had their funds blocked. And there’s one more key issue:
What will happen to the economy if the reserves are not unblocked and will there be a default?
Naturally, one cannot rule out the possibility the reserves won’t be unblocked and our hundreds of billions will be used by Uncle Sam to cover his national debt, so let’s see what the consequences would be. I’ll say at once it won’t be like 1998.
For starters, let’s remember that a default is a country’s inability to fulfill its obligations, namely, debts. A default in Russia would occur if, when the time came to pay, there was no money. Government loans can be internal (must in their own currency) and external (must in foreign currency).
Russia has $119 billion in foreign debt of, including $39 billion in bonds, of which only $7 billion is by 2025. It must pay $2.1 billion by April 4. Pay with what? As we already explained, Russia has $643 billion in reserves, of which $340 billion are not frozen, or twice as much as the debt. Even if all the debt had to be paid all at once, that could be done without problems. As I already said, Russia’s debts will be paid in rubles since it does not have access to foreign currency savings. Russian companies (Gazprom, Yandex, Rosneft, and others) fulfill their obligations in hard currency.
Russia’s internal debt amounts to 16.5 trillion rubles, most of it in federal loan obligations and the payments stretch until 2044. How will that be paid? The National Welfare Fund has 13.7 trillion rubles. Seems like it is 3 trillion short, but over the course of 22 years the reserves will either increase or the needed quantity of rubles will be printed.
Incidentally, (a small digression) do you know that USA borrows only in dollars? Not because of boundless love toward its currency, but rather because one’s own currency can be created in whatever quantities needed in order to pay debts. Warren Buffett once said:
“If you are printing financial obligations in your own currency, the question arises – what will happen to the currency? The USA cleverly issues debt in its own currency. If I could issue “Buffett Coins”, had a printing press and I could borrow money – I would never stop paying my debts.”
The only thing that the West can do to Russia is place it in technical default. No need to panic, it has little to do with actual default. In order to understand technical default, imagine the following situation:
You ate at a café, asked for receipt, the waiter brought it to you but says that you can’t use your credit card here. You stick your hands into your pockets and realize you have no cash. Until you withdraw money from the nearest ATM, the café will hold you in technical default (naturally, this term is not applied to individuals, but you get the idea).
In other words, you have money and even desire to pay, but you physically cannot pay. Does it remind you of anything? Technical default does not pose serious threats to a country if money and willingness to pay exist.
How is this different from 1998? In 1998 there was no money, no ability to pay, and no particular desire either.
If Western countries seize Russian reserves, they will acquire the reputation of “plunderers”, and central banks of other countries will ask themselves the question whether it makes sense to keep one’s reserves in those countries if they can be snatched at any moment. Our country can be similarly branded if it decides to seize, as compensation, the property of foreign organizations, but at that point there will be nothing to lose.
I hope Russia will learn the necessary lessons from this situation and adopt measures aimed at better protecting its own capital. What thoughts do you have on that score?
And, as usual, if this was interesting for you, you may subscribe to my Telegram channel – there is even more useful information there, and it appears there more quickly.