I have been wrong about enough things that it is nice to be right (or at least sort of right) about something. Particularly if it is something that I discovered as a result of a lot of sleuthing through various data sources.
A couple of weeks ago, I noted that the US data wasn’t registering a pickup in Russian holdings of US debt, even though Russian reserves were rising fast. Given all the holes in the US data, that wasn’t enough to prove that Russia was diversifying out of dollars – Russia could have just been shifting dollars from short-term dollar accounts in the US to long-term dollar accounts with London custodians.
But it did hint that something was up – it was a change from the “rising reserves/ rising Russian dollar claims in the US data” pattern typical of 2005
It turns out Russia was shifting out of the dollar, at least at the margins, as it increased its euro and pound holdings. See the FT.
And with Russian reserves now at $247b – up over $20b in May and up $65b in the first five months of the year, we are talking real money. I guess Russia didn’t like Cheney’s tone during his recent trip … as I have noted before, creditors usually don’t like being lectured by debtors.
Some of the rise in Russia’s reserves stems from valuation gains on its holdings of euros, but not all. Russia’s trade surplus has been around $12b a month this year. If Russia’s monthly reserve growth slows to $15b, it will add $170b to its reserves this year.
The market is focused on other things today (the dollar is up v the euro), and in some sense, this is old news. But on a longer-term basis, I do think it is significant. So long as Russian reserve growth continues, it means pretty big flows into the eurozone – something like 50b euros a year from Russia alone. With oil at $70 or so, Europe may have a deficit that the world’s central banks can finance.
But its deficit will still pale relative to that of the US – so markets will need to adjust to create incentives for Europeans to take the funds the funds from central banks flowing into Eurpoe and use them to invest in the US.
On a slightly note, Japan’s reserves increased by $3.9b in May on the back of valuation gains on its euro portfolio (and on its SDR position in the fund). And we know China holds a lot more euros than Japan does. Ted Truman and Anna Wong nicely pinned down Japan’s dollar holdings at between 83 and 89% of Japan’s total reserves at the end of 2005. That is roughly consistent with May’s valuation gains. Whenever China ever gets around to reporting its April and May reserve growth, watch out. Valuation gains and ongoing intervention will combine to produce a big number.
Unless China decides to transfer a bunch of reserves to the Agricultural Bank of China or otherwise do something to disguise the pace of its reserve growth.