Russia’s FX reserves slip from its grasp

Russia’s central bank’s significant reserves are designed to maintain currency stability in the face of market panic.

Reserves – worth $ 630 billion, As of the end of January – Consists of assets and deposits denominated in major world currencies (ie, dollar, euro, sterling and yuan). Also almost 2,300 tons of gold.

The pool was there so that the central bank could intervene in the foreign exchange markets, and strengthen the ruble in the event of volatility.

God Sanctions imposed by the US, EU and UK Against the central bank many, if not all, of these reserves are expected to become useless. To understand what the CBR is, and what is not expected to be available to it when the banks open tomorrow morning, it is worth taking a closer look at the so-called “data format for international reserves and foreign exchange liquidity”.

The snapshot below was taken from former Alphanbel’s Twitter account Matthew Klein. We tried to find the official data on the Central Bank’s website, but it was no longer available.

Securities make up just over half ($ 311 billion) of what was available to the CBR. According to its annual report, most of these assets were rated high, with only 6.8% of them holding a rating lower than A.

Given their high rating, most of them will probably be very liquid and easy to sell in times of panic. But how does the Russian central bank turn these securities into cash in case it needs access to dollars or euros quickly? Well, it should rely on global finances.

This is what Osman Mendang, a visiting fellow at the School of Economics and Political Science in London, who has worked for decades in managing the central bank’s reserves, explained to us:

Foreign currency balances are not held by central banks. Securities and money never move, everything is external. . .

In the case of securities, the central banks will ask their brokers to sell the property in question. . . In the case of, say, German government bonds [that the CBR owns], The broker in Frankfurt will call other brokers to announce the sale, and after agreeing on a price, will instruct the custodian of the security to transfer it to the buyer. Upon receipt of payment to a bank account, usually in Frankfurt, the custodian will instruct the central collateral pool to assign the buyer as the new owner. Subsequently, the central bank credited the consideration in their account with the broker.

The proceeds will then be used to instruct the broker, or forex traders, most of whom are in London, to buy the ruble at a certain rate. The seller will usually be a Russian commercial bank. The seller and buyer may well share the same written bank. Instructs his reporter bank to credit the seller’s account in euros.

Stopping the central bank from using its securities to stabilize the ruble would therefore involve instructing the financial intermediaries appearing in this chain – brokers, guardians, central officials, foreign exchange traders and correspondent banks – to freeze assets and stop acting on behalf of the central bank.

Judging by its recent behavior, there is much to suggest that the U.S. would be willing to do just that. In recent years, Washington has often promoted its foreign policy through what is known as the “weapon of the Treasury.” Disconnect from the monetary authorities of Iran, Venezuela and (recently and highly controversial) Afghanistan accessing their own reserves.

There is a paradox here, between what the U.S. is willing to do to its political enemies and the rules of the private sector. Has been scrutinized over the years in various lawsuits against default governments, with bondholders spying on wealthy choices in their foreign exchange reserves. Yet none of these lawsuits went as far as the U.S. government’s frequent intent on its central banks.

Focusing on central banks, authorities have enacted anti-terrorism and human rights legislation, alongside the International Emergency Forces Act in the U.S. The latter in particular has demonstrated a strong index.

The most direct way to impose sanctions on the CBR would be to put it on the SDN list of individuals and institutions that prevent American entities from dealing with them. When it comes to accessing the dollar, it will stop every step in the Mendeng outline process.

The other part of the reserves that the CBR holds are in the form of currency and deposits. These are worth $ 152 billion. Of the $ 152 billion, about two-thirds are held in official institutions. This includes other central banks, the Bank for International Settlements and the IMF.

Central banks in the euro system, which hold about a quarter of CBR assets, have already frozen central bank accounts. The European Central Bank has announced that it has implemented all the sanctions decided by the governments of the European Union and Europe. Joachim Nagel, president of the Bundesbank, said earlier today that he “welcomes the fact that comprehensive financial sanctions have now been imposed and he has acted on their behalf.”

The BIS said: “[Our] The policy is that the institution does not recognize or discuss banking relationships. The BIS will comply with the sanctions, as the case may be. “

It is not clear how other authorities will behave. Mostly China. According to the CBR Annual ReportAs of early 2021, 14 percent of foreign exchange reserves were held in China – the largest share for any one country. Nearly 13 percent of reserves are in yuan or assets denominated in yuan.

Mendang says China may offer a means for Russia to continue trading at least with certain parts of the world:

Russia may receive payments for its exports to Renminbi and increase the imports paid for in Renminbi from China and possibly from other countries receiving Renminbi. Since Renminbi – based payments are likely to be made by institutions outside the immediate sphere of influence of the West, it will work. I’m not sure if China is willing to undermine Western efforts to isolate Russia, but it could be. This means a reorganization of Russia’s international financial and economic relations, but it could be something it pursues anyway.

The second third of CBR deposits are held in private banks. Again, it is impossible to say what part of the $ 57 billion it holds in the US, UK or EU. But since almost 60 per cent of CBR’s reserves are in dollars, euros or sterling, it is fair to guess that it is more than half.

Financial brokers in the rest of the world may not want to deal with the CBR either, even if they are not directly covered by sanctions. When the U.S. puts you on its blacklist, it can have a chilling effect. As you know, Hong Kong leader Carrie Lam turned to “piles of cash” after local institutions backed away from her bank and other city officials who were under U.S. sanctions.

Then there is the gold, the historical favorite of central banks around the world. Including the Monetary Guardian of Russia. The CBR holdings are large – the fifth largest in the world – and according to the industry trading body, the World Gold Council, they were Among the big buyers lately. According to its annual report, all the $ 130 billion ingots are stored in safes inside the Russian Federation.

Holding all your gold close to home is unusual. Most of the world’s central banks hold a large proportion of safes under the Bank of England’s headquarters on Threadneedle Street, or close to Wall Street, at the Federal Reserve Bank of New York. The reason is that the City of London and New York are the twin centers of the global gold market, making it easier to buy and sell bars.

Holding gold in Russia, rather than in London or New York, will make it difficult for the central bank to get rid of it in large quantities. At the same time, being close to home makes it very difficult for the US, UK and the EU to successfully impose sanctions on Russian missiles. Financial slump It may be, but people familiar with the market believe it would be foolish to assume that Russia will be completely frozen. The temptation of gold has always been present throughout history – especially in times of geopolitical uncertainty. If Russia sells below market prices, then we think someone, somewhere, would be willing to take the risk.

We are not going to pay too much attention to why another CBR may, or may not, be available in the morning. SDR or a few billion bills are not going to stop the currency from collapsing.

Think differently? Thoughts in the usual place. Along with any guess as to where the ruble will end today tomorrow.

Russia’s FX reserves slip from its grasp Source link Russia’s FX reserves slip from its grasp

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