from Follow the Money

Russia’s central bank deserves some serious credit

July 31, 2006

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Monetary Policy

Many central banks still don’t report their total reserves in a timely manner.   Many also emerging markets go to great lengths to hide the currency composition of their reserve portfolio.   Most don’t provide data on the currency gains and losses.

Not Russia.  It is about as transparent as anyone about its reserves.  

It reports its reserves data every week, and with only a short lag.    And I just discovered, it also publishes data on the Bank of Russia’s valuation gains and losses (The RBI and Bank Negara Malaysia do as well).

That is a good thing.   More folks should do it.   Even if it makes it easier to infer the currency composition of your reserves.    Central banks should be disclosing more data about that too. 

I do have a bit of egg on my face though.  I have spent a fair amount of time trying to guess the currency composition of Russia’s reserves

And I wasn’t making use of the data on valuation gains and losses that the Bank of Russia put out on its web site.  The data appears under the heading the “international investment position of the international reserves of Russia.”  That data is a big help.

In both q4 2004 and q2 2005, the scale of Russia’s valuation gains (losses) are consistent with holding about 30% of its reserves in euros and currencies that move in tandem with the euro.  Surprisingly, the same is true of q1 2006

The US data led me to expect that Russia had diversified a bit by then.  But the euro’s q1 move came early in the quarter, in January.  Russia may not have really started to increase its euro and pound holdings til a bit later in the quarter.  So it isn’t a great test. 

So here is a simple thing to watch – the size of Russia’s valuation gain in q2.

By my calculations, a $3b gain works is consistent with Russia holding around 30% of its reserves in euros and currencies that move in tandem with the euro.  A $4b gain is consistent with holding about 40%.  And a $5b gain is consistent with holding about 50%.  All are ballpark estimates.   Russia started the second quarter with $198.5b in foreign exchange reserves.  The Euro went from 1.2139 to 1.2779 in the second quarter, with most of the change coming in April and May.   The math is pretty easy.

I personally suspect that Russia increased its euro and pound holdings well in advance of its June announcement that it held 40% of its reserves in euros and 10% in pounds.   And consequently, would look for $4-5b in valuation gains in the second quarter.   But I am ready to be proved wrong.

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