Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Russia’s central bank deserves some serious credit

by Brad Setser
July 31, 2006

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.


  • Posted by MrBill

    Russia faces several problems. The appreciation of the ruble is going to squeeze what little exports outside of oil & gas and natural resources exist. Keeping the oil & gas stabilization fund out of the hands of politicians. And succession in 2008.

    Other than that, by running a budget and trade surplus as well as paying off all foreign debt Russia looks to be in a very strong external position.

    The economy seems to be transitioning from the accumulation of cheap assets to effectively employing those assets to generate income. The challenge will be radiating growth in incomes and living standards from Moscow to all its regions. Focussing on developing the SME sector is the best bet, but runs contrary to the Kremlin’s centralized controlling instincts.

    I will be interested to see how the power grid and transportation infrastructure develop to allow growth outside of the Moscow-St.Petersberg corridor?

    Russia seems to share more problems in common with say a Chile than say a China, unless Russia just wants to remain a drawer of water and hewer of wood for China’s industrial development?

  • Posted by Guest

    Part of the difficulty in responding to the most recent posts may be some sense of confusion about the drivers and any number of end games that seem to be playing out, along with the task of determining which represent the underpinning of sustainable developments, let alone viable solutions. Noticed 2 related articles on Russia yesterday.

    “…So what Russia has now is an infantile democracy built through Soviet tools, and the freedom to shop. It is better than nothing, but not enough. It takes only a moment for the fragility to show. I remember the queues at cash machines in the summer of 2004, with Russians desperate to put their savings back under the mattress after rumours spread that the authorities might withdraw licenses from some banks. Banks had proliferated across the country, but their spread had not been matched by confidence in the banking system…”,,1834009,00.html

    “Speaking English with a thick German accent, Adolf Winter occasionally slips into his native tongue as he tries to fathom why Russia declared him a threat to national security…”, ’10 Businesspeople Barred in 2 Years’,

  • Posted by Guest

    Wondering about just how much of the UK alone may be owned (controlled?) by Russian interests and what overall strategies may be driving future acquisitions.

    “…The firm becomes the second Russian owner of a UK automotive firm. In 2004, Nikolai Smolensky, son of Russian banking magnate Alexander Smolensky, bought sports car maker TVR.”

  • Posted by bsetser

    Russians own less of the uk than americans, but they are increasing their holdings rapidly …

    as for centralizing and controlling v. decentralizing, well, some degree of centralization seems inherent in a resource based economy. decentralization for a while menat spinning off the oil rents to well-connected oligarchs. that was a form of decentalization (tho not really from moscow) but it implied such a huge concentration of private wealth that it was politically unsustainable. figuring out how to allocate oil profits so that they don’t support centralization or concentration of power in the hands of a few (Kremlin now, oligarchs before) = huge, huge task. Norway is a lovely model, but not clear if it is applicable for larger countries with less well-established institutions.

  • Posted by Guest

    Might we have to think more about what exactly is meant when referring to ‘Russian’, ‘Chinese’, ‘American’ or ‘Canadian’ or any other national interests as wealth polarizes and so much seems to be invested outside of domestic economies?

    (Aren’t there some concerns that Norway’s model may be stressed by external forces?)

  • Posted by Julia

    Let’s not forget that what Russia (learned through its Soviet schooling days) has always been very good at, is data manipulation. Not something to be dismissed entirely in this case, even though may seem unlikely, and hopefully is not true here. But cannot shake the suspicion of what if… Then, any guesses or theories about Russian economic recovery, growth or stabilization would be totally inadequate.
    Russia’s economy is a lot more co-dependant on its political rule than in most countries, as it is the economic growth is gripped by the government, which only allows reasonable free market, not a free market economy as such. From the most recent laws and events we have observed, especially in the last 2 years, Russian economy may be stabilizing but at what cost. Political freedom? I would not be as worried about succession of power in 2008 but rather a potential absence of succession…