World
Valentin Katasonov
March 20, 2014
© Photo: Public domain

Recently the British newspaper The Guardian, and then the Bloomberg news agency, reported sensational news: over the week of March 5 through 12, the reserves of U.S. treasury securities in the depositary of the Federal Reserve System decreased by $104.5 billion. 

According to the U.S. Treasury Department, at the end of 2013 the total volume of U.S. treasury securities (bonds and other debt securities) was $12.3 trillion. This is over 70% of the total state debt of the U.S. Approximately $6.5 trillion were held by various American investors, the largest of which was the Federal Reserve, which had around $2.2 trillion in treasury securities on its balance sheet. Foreign security holders owned $5.79 trillion in U.S. treasury securities; first place among them was held by China ($1.27 trillion) and second place by Japan ($1.18 trillion). Russia was in ninth place, with a portfolio of $138.6 billion, or 1.1% of the total volume of U.S. treasury securities. 

It would seem that with such volumes of U.S. treasury securities in the world financial system, the drop in reserves in the Fed's depository looks insignificant. However, everything looks quite different on the backdrop of what has been happening with reserves of these securities in recent years. While at the end of 2013 there were $3.020 billion in treasury securities reserves in the Fed's depository, by March 12 they had fallen to $2855 billion, that is, by $165 billion. And 2/3 of that drop took place during the week of March 5 through 12, 2014. Last year the maximum weekly decrease, recorded in late June 2013 (June 19 through 26), was three times less than the current March decrease. If the withdrawal of treasury securities from the Fed's vaults continues at the same rate as in the period from January 1 through March 12, then over the course of 2014 the securities reserves could go down by about one trillion dollars. 

Neither the Federal Reserve nor the U.S. Treasury Department is giving any details on the reduction in U.S. treasury securities reserves. But there are theories. Almost all analysts agree that the withdrawal of securities from the Federal Reserve's depository was made by Russia, but experts differ in their opinions on the subsequent fate of the withdrawn securities… It is highly unlikely that the Bank of Russia needed the securities in order to turn them into cash currency and stabilize the exchange rate of the ruble. If over $100 billion in treasury securities were thrown out onto the market, it would immediately react with a drop in prices for these securities. However, this has not happened. Furthermore, analysts have noted that during the week in question (March 5-12) a drop in the yield of U.S. treasury securities was recorded. While at the beginning of March the yield of 10-year treasury securities was 2.73%, on March 13 the yield was 2.63%. According to market laws, releasing $100 billion in securities onto the market should, on the contrary, lead to a decrease in prices and an increase in yield. 

Another theory on the abrupt decrease in U.S. treasury securities reserves looks more plausible: that Russia has transferred its treasury securities from the American depository to some other depository outside Washington's direct sphere of influence. Experts link this withdrawal with events in Ukraine and Crimea and expected U.S. sanctions against the Russian Federation. One should bear in mind that the Federal Reserve is not the only depository for U.S. treasury securities. This function can also be (and is) performed by the central banks of some countries, the Bank for International Settlements, and private banks, including those in offshore zones. There is no overall picture available in open sources of the distribution of world U.S. treasury securities reserves among depositories. There is fragmentary information about some alternative depositories to the Federal Reserve. For example, at the end of 2013 the Central Bank of Belgium had $256.8 billion in U.S. treasury securities on deposit, and the reserve increased over December of last year by 28%. 

If the withdrawal of treasury securities from the Federal Reserve was made by Russian investors, one would like to think that Russia will not stop there. Why? Because holding U.S. treasury securities is risky. Washington could introduce its own sanctions against Russia, and then force its allies (for example, Belgium) to join in these sanctions. The U.S. Treasury Department organizes the issuance and distribution of treasury securities, and it also makes decisions on blocking transactions with such securities. This is done by a division of the department called the Office of Foreign Assets Control (OFAC). In such a situation, Russia's next step should be to sell the U.S. treasury securities for liquid currency, preferably not U.S. dollars. Considering the large currency debts of state companies to non-residents, the currency could be used to pay off these debts. It could also be used to buy back assets in the Russian economy owned by foreign investors. There are other ways to use liquid currency as well. Keeping it in deposit accounts in foreign banks is inadvisable in light of expected sanctions. 

It remains unclear why Washington allowed such a large withdrawal of treasury securities from the Federal Reserve vaults. Apparently it was afraid that Moscow would take steps which could have unpredictable consequences for the dollar system. It is known that Washington has already "quietly" blocked withdrawals in the past. For example, after the disaster at the Fukushima nuclear power plant, Japan needed a large amount of cash currency to mitigate the consequences. It planned to withdraw a significant lot of treasury securities from the American depository for this purpose, but Washington blocked the withdrawal. Japan did not make any noise. 

* * *

One of the largest holders of dollar reserves, China, is thinking of getting rid of them. In November of last year the vice chairman of the People's Bank of China stated that China is halting further accumulation of U.S. treasury securities. China then moved from words to actions: in the last month of 2013 year the Celestial Empire rid itself of $47.8 billion in treasury securities, reducing its holdings by 3.6% to $1.27 trillion. For the second time in its economic history, China sold a record quantity of U.S. government securities. 

Although some analysts are hinting that Russia and China are coordinating their actions in reducing their dollar reserves, there are no obvious signs of collaboration in this area. However, both countries must perforce act very carefully, as an unexpected collapse of the dollar system would be a blow both to China and to Russia. The difference is that the cost for Russia would be much less than for China; Russia's dollar reserves are almost ten times less than China's. 

This is not the first time that Russia has faced threats of freezing or even confiscation of its currency reserves abroad. For example, 100 years ago, when the smell of gunpowder was already in the air, the State Bank of the Russian Empire was able to withdraw its currency deposits from German banks in time. But in France, which was supposedly Russia's ally under the Entente, the imperial government miscalculated. The French froze Russian currency accounts in its banks at the beginning of World War I. Another instance took place during the Soviet period of Russian history: after the events in Hungary in 1956, Washington threatened to freeze the USSR's currency accounts in American banks. In 1957 all of Vneshtorgbank's currency accounts were moved to banks in London City. This money laid the foundation for the Eurodollar market and the rebirth of London's former glory as an international financial center. 

Today experts point out that the Federal Reserve is a depository not only for treasury securities, but also for gold and international reserves for other countries. According to some estimates, gold from dozens of countries is held in the vaults of the Federal Reserve Bank of New York in Manhattan. And as Germany's attempts to repatriate its gold from American vaults have shown, this has become extremely complicated. Information that there is also Russian gold in American vaults is sometimes seen in the media. Keep in mind that before World War I Russia also had a certain amount of the precious metal abroad, but it had all been moved to the vaults of the State Bank of the Russian Empire by August 1, 1914.

The views of individual contributors do not necessarily represent those of the Strategic Culture Foundation.
Sensational News in the World of Finance

Recently the British newspaper The Guardian, and then the Bloomberg news agency, reported sensational news: over the week of March 5 through 12, the reserves of U.S. treasury securities in the depositary of the Federal Reserve System decreased by $104.5 billion. 

According to the U.S. Treasury Department, at the end of 2013 the total volume of U.S. treasury securities (bonds and other debt securities) was $12.3 trillion. This is over 70% of the total state debt of the U.S. Approximately $6.5 trillion were held by various American investors, the largest of which was the Federal Reserve, which had around $2.2 trillion in treasury securities on its balance sheet. Foreign security holders owned $5.79 trillion in U.S. treasury securities; first place among them was held by China ($1.27 trillion) and second place by Japan ($1.18 trillion). Russia was in ninth place, with a portfolio of $138.6 billion, or 1.1% of the total volume of U.S. treasury securities. 

It would seem that with such volumes of U.S. treasury securities in the world financial system, the drop in reserves in the Fed's depository looks insignificant. However, everything looks quite different on the backdrop of what has been happening with reserves of these securities in recent years. While at the end of 2013 there were $3.020 billion in treasury securities reserves in the Fed's depository, by March 12 they had fallen to $2855 billion, that is, by $165 billion. And 2/3 of that drop took place during the week of March 5 through 12, 2014. Last year the maximum weekly decrease, recorded in late June 2013 (June 19 through 26), was three times less than the current March decrease. If the withdrawal of treasury securities from the Fed's vaults continues at the same rate as in the period from January 1 through March 12, then over the course of 2014 the securities reserves could go down by about one trillion dollars. 

Neither the Federal Reserve nor the U.S. Treasury Department is giving any details on the reduction in U.S. treasury securities reserves. But there are theories. Almost all analysts agree that the withdrawal of securities from the Federal Reserve's depository was made by Russia, but experts differ in their opinions on the subsequent fate of the withdrawn securities… It is highly unlikely that the Bank of Russia needed the securities in order to turn them into cash currency and stabilize the exchange rate of the ruble. If over $100 billion in treasury securities were thrown out onto the market, it would immediately react with a drop in prices for these securities. However, this has not happened. Furthermore, analysts have noted that during the week in question (March 5-12) a drop in the yield of U.S. treasury securities was recorded. While at the beginning of March the yield of 10-year treasury securities was 2.73%, on March 13 the yield was 2.63%. According to market laws, releasing $100 billion in securities onto the market should, on the contrary, lead to a decrease in prices and an increase in yield. 

Another theory on the abrupt decrease in U.S. treasury securities reserves looks more plausible: that Russia has transferred its treasury securities from the American depository to some other depository outside Washington's direct sphere of influence. Experts link this withdrawal with events in Ukraine and Crimea and expected U.S. sanctions against the Russian Federation. One should bear in mind that the Federal Reserve is not the only depository for U.S. treasury securities. This function can also be (and is) performed by the central banks of some countries, the Bank for International Settlements, and private banks, including those in offshore zones. There is no overall picture available in open sources of the distribution of world U.S. treasury securities reserves among depositories. There is fragmentary information about some alternative depositories to the Federal Reserve. For example, at the end of 2013 the Central Bank of Belgium had $256.8 billion in U.S. treasury securities on deposit, and the reserve increased over December of last year by 28%. 

If the withdrawal of treasury securities from the Federal Reserve was made by Russian investors, one would like to think that Russia will not stop there. Why? Because holding U.S. treasury securities is risky. Washington could introduce its own sanctions against Russia, and then force its allies (for example, Belgium) to join in these sanctions. The U.S. Treasury Department organizes the issuance and distribution of treasury securities, and it also makes decisions on blocking transactions with such securities. This is done by a division of the department called the Office of Foreign Assets Control (OFAC). In such a situation, Russia's next step should be to sell the U.S. treasury securities for liquid currency, preferably not U.S. dollars. Considering the large currency debts of state companies to non-residents, the currency could be used to pay off these debts. It could also be used to buy back assets in the Russian economy owned by foreign investors. There are other ways to use liquid currency as well. Keeping it in deposit accounts in foreign banks is inadvisable in light of expected sanctions. 

It remains unclear why Washington allowed such a large withdrawal of treasury securities from the Federal Reserve vaults. Apparently it was afraid that Moscow would take steps which could have unpredictable consequences for the dollar system. It is known that Washington has already "quietly" blocked withdrawals in the past. For example, after the disaster at the Fukushima nuclear power plant, Japan needed a large amount of cash currency to mitigate the consequences. It planned to withdraw a significant lot of treasury securities from the American depository for this purpose, but Washington blocked the withdrawal. Japan did not make any noise. 

* * *

One of the largest holders of dollar reserves, China, is thinking of getting rid of them. In November of last year the vice chairman of the People's Bank of China stated that China is halting further accumulation of U.S. treasury securities. China then moved from words to actions: in the last month of 2013 year the Celestial Empire rid itself of $47.8 billion in treasury securities, reducing its holdings by 3.6% to $1.27 trillion. For the second time in its economic history, China sold a record quantity of U.S. government securities. 

Although some analysts are hinting that Russia and China are coordinating their actions in reducing their dollar reserves, there are no obvious signs of collaboration in this area. However, both countries must perforce act very carefully, as an unexpected collapse of the dollar system would be a blow both to China and to Russia. The difference is that the cost for Russia would be much less than for China; Russia's dollar reserves are almost ten times less than China's. 

This is not the first time that Russia has faced threats of freezing or even confiscation of its currency reserves abroad. For example, 100 years ago, when the smell of gunpowder was already in the air, the State Bank of the Russian Empire was able to withdraw its currency deposits from German banks in time. But in France, which was supposedly Russia's ally under the Entente, the imperial government miscalculated. The French froze Russian currency accounts in its banks at the beginning of World War I. Another instance took place during the Soviet period of Russian history: after the events in Hungary in 1956, Washington threatened to freeze the USSR's currency accounts in American banks. In 1957 all of Vneshtorgbank's currency accounts were moved to banks in London City. This money laid the foundation for the Eurodollar market and the rebirth of London's former glory as an international financial center. 

Today experts point out that the Federal Reserve is a depository not only for treasury securities, but also for gold and international reserves for other countries. According to some estimates, gold from dozens of countries is held in the vaults of the Federal Reserve Bank of New York in Manhattan. And as Germany's attempts to repatriate its gold from American vaults have shown, this has become extremely complicated. Information that there is also Russian gold in American vaults is sometimes seen in the media. Keep in mind that before World War I Russia also had a certain amount of the precious metal abroad, but it had all been moved to the vaults of the State Bank of the Russian Empire by August 1, 1914.