(Bloomberg) — Russia still has about $300 billion of foreign currency held offshore — enough to disrupt money markets if it’s frozen by sanctions or moved suddenly to avoid them.
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That’s according to Credit Suisse Group AG strategist Zoltan Pozsar, who parsed data from the Bank of Russia and financial markets to calculate that a much larger share is held in dollars than official numbers suggest. The Bank of Russia’s dollar exposure is about 50%, compared with the 20% it reports, Credit Suisse estimates.
That’s enough to substantially shift funding markets, according to Pozsar.
“$300 billion -– in the extreme -– can either be potentially trapped by sanctions, or moved somehow from West to East to avoid being trapped by sanctions,” Pozsar wrote in a report Thursday.
Russia’s multi-year push to remove the dollar’s hold over its economy has so far helped ease the impact of sanctions from the U.S. and its allies. Any unreported reserves would be far harder to track and target with sanctions, though it does raise the potential for the U.S. and others to target more accounts — if they can identify where that money is. Pozsar wrote in his note that the offshore currency holdings he outlined could be vulnerable to sanctions, or to being moved out of their potential reach, potentially fueling further de-dollarization.
Russia’s central bank and private sector have almost $1 trillion of liquid wealth, with dollars accounting for more than most people realize, even after the country sold all its Treasuries holdings in 2018, Pozsar wrote. He estimates about $200 billion is held in foreign-exchange swaps, with another $100 billion in deposits at foreign banks.
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The U.S. has vowed to inflict a “severe cost on the Russian economy” that will hamper its ability to do business in foreign currencies, as Western nation warn that Kyiv could fall. Ukraine’s foreign minister said the capital was hit with “horrific” rocket strikes as Russian tanks, troops and aircraft pushed closer to the city.
Equities slumped along with bond yields this week as Russia prepared for and then carried out the assault on its neighbor. Risk sentiment revived late Thursday in the U.S after sanctions from the Biden administration spared Russian oil exports and avoided blocking access to the Swift global payment network. Asian equities advanced Friday, while yields on Treasuries rose.
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“When flows change, spreads can gap,” Pozsar wrote. “If things escalate, it’s hard not to see a direct impact on FX swaps and U.S. dollar Libor fixings given Russia’s vast financial surpluses and where those surpluses are deployed.”
(Updates Treasuries move in eighth paragraph, elevates de-dollarization context.)
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