Inverse effect: How Washington helped Moscow accumulate $450 billion


MOSCOW, Russia – The accumulation of a large volume of international reserves by the Russian Central Bank is a direct effect of Western sanctions on the Russian economy, writes Natalia Dembinskaya.

In February 2019, the volume of Russian international reserves reached 475 billion dollars. This figure significantly outstrips the volume of external debt, which in January stood at 453 billion dollars.

If necessary, the Russian Finance Ministry will be able to repay its debt completely,” she said .

International reserves are highly liquid assets that the Central Bank of Russia has at its disposal. The bank uses them to influence the exchange rate of the national currency through interventions. The international reserves of any country include resources denominated in foreign currencies, gold, special drawing rights of the IMF and bonds.

Dembinskaya believes that one of the factors that facilitated Russia’s accumulation of reserves was the so-called budget rule, whereby all revenues from the oil industry above the base price of $40 per barrel are directed to the country’s public treasury.

Security mattress

The Central Bank of Russia made monetary interventions in 2014 to support the ruble exchange rate and save the country’s economy from the consequences of the economic crisis. As a result, international reserves decreased by 25%. From 2015, Russia began the long process of recovering its international reserves.

Since February 2018, these reserves have increased by more than $27 billion. With this growth, they are adjusted not only to the functioning of the budget rule but also to the imposition of sanctions by Western countries, says the author of the article.

“The Russian Central Bank is gradually applying the policy [of increasing international reserves]. This is not surprising: the pressure of sanctions is increasing and so Russia is actively creating a kind of security mattress,” Dembinskaya said.

The sanctions do not allow major Russian banks and oil companies to get new loans from Western banks. Russian companies started paying their debts within the terms of the contracts, thus reducing their financial leverage. This has led to the accumulation of financial means, writes The New York Times.

According to the American newspaper, this effect can be considered as a negative factor that withdraws resources from the Russian economy and indicates the reduction of investment. However, economists stress that Russia does not need foreign credits because Russia is on the list of the world’s least indebted countries: in the last year its external debt has been reduced by about 10%.

Gold instead of dollars

During the last decade, the composition of Russian international reserves has changed significantly: investments in US Treasury bonds have been drastically reduced while the percentage of gold has increased.

According to data from the Central Bank of Russia, on 1 February 2019, Russia accumulated estimated gold reserves of more than $89 billion, that is, precious metal accounts for 18% of all international reserves from the country.

Over time, Russia and other countries are showing less and less confidence in the US currency. For example, between June 2017 and June 2018, the Russian Central Bank reduced its dollar-denominated assets from 46% to 22%.

“From the point of view of the development of the financial system, there is no alternative to the dollar. It is a kind of hedge against exchange risks, a safeguard against sanctions and, no doubt, a good opportunity to earn money. financial system based on the dollar, gold will unequivocally retain its value, “concluded the analyst.

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