(Bloomberg Opinion) -- Russia is preparing to sell bonds denominated in euros for the first time since 2013. Despite the recent drop in oil prices, it has a budget surplus and doesn’t really need to borrow; the bond placement is a test of the “dedollarizarion" program, put in place by President Vladimir Putin this year.
If the test and the plan are successful, the European Union will get an unlikely but important ally for its efforts to bolster the global role of its common currency.
Russia has reduced its U.S. Treasury holdings from $96.1 billion in March to $14.4 billion in September. The Russian Central Bank had $460 billion in gold and foreign currency assets, 29.4 percent of it in U.S. assets in March, the latest month for which data are available. The Treasury sell-off, then, would have reduced those holdings by about 60 percent. Even if Russia didn’t sell off all of the U.S. debt but shifted part of it offshore to protect it from sanctions, as some researchers have suggested, the central bank’s investment in U.S. assets has shrunk, unlike its holdings of European debt. Purchases of gold have increased, too: the Bank of Russia has been the leading buyer, adding a record 92.2 tons to its reserves in the third quarter of this year.
Russia is not doing this entirely by choice; dollar-denominated assets are still the most liquid. Rather, the Kremlin fears that U.S. sanctions may end up freezing a significant portion of the country’s international reserves. This concern is justified. In a speech on Monday, Klaus Regling, the head of the European Stability Mechanism, which provides emergency funding to crisis-hit euro area nations, criticized the Trump administration for “not shying away from using the dollar as a ‘weapon’ to achieve foreign policy goals.” If even the U.S.’s Western allies worry about this, it would be prudent for an adversary like Putin’s Russia to have as little to do with the dollar as possible.
On Putin’s orders, a non-public plan to cut Russia’s dependence on the dollar was submitted to the cabinet in October. Few details of the program are known. Companies that invoice their exports in rubles would get quicker value-added tax refunds. They also wouldn’t be required to repatriate all of their export revenue.
That on its own won’t change the global energy market, where most contracts are in dollars. But the plan likely contains other measures to get Russian companies to rethink their currency policies. The central bank is already making it harder for Russian banks to lend foreign currencies, raising reserve requirements for such assets.
Andrey Kostin, the head of VTB, Russia’s second biggest state bank, has also proposed a “dedollarization” plan. It includes bond sales on the domestic market only, without using Western organizations such as Euroclear for settlements. The government, however, clearly isn’t going that far: Although VTB’s investment banking arm is organizing the new bond placement, Euroclear will be used to settle trades.
The bond is meant to test whether there’s enough demand, primarily among big Russian investors worried about sanctions, for euro-denominated bonds with a lower yield than Russian dollar-denominated bonds have offered. If the sale goes as well as the $4 billion placement did in March, Russian officials will be more secure in hoping the country can shift its liabilities as well as its assets out of the dollar. That hope is especially important when sanctions on new Russian government debt are being considered in the U.S. Even if Western investors shy away, no matter what currency Russia tries to borrow, at least Russian companies and wealthy individuals will have an opportunity to shield their investments from the U.S. government.
Russia’s experiments with the euro as the most viable alternative to the dollar should please EU officials, who have called for a special effort to increase the global use of the common currency. As Regling made clear in his speech, EU officials believe the euro cannot fully supplant the dollar as the leading global reserve currency for reasons ranging from the incompleteness of the EU’s banking union to the dominance of U.S. cloud service providers in financial infrastructure. But thanks to investors and borrowers worried about the U.S. weaponization of the dollar, the European currency can already pick up market share, and become one of the poles in a more decentralized global currency system.
Regling mentioned that a third of international bonds are denominated in euros; that share may grow in the near future. Russia isn’t the only big emerging-market borrower lining up a previously rare bond sale in euros: Turkey, which mostly has been selling dollar bonds, hired banks earlier this month to handle a euro-denominated placement.
Russia’s growing support for the euro project may be one of the reasons why, as the U.S. steps up its sanctions, the EU isn’t doing the same. There has been fresh discussion of punitive measures after a Russian attack on Sunday on Ukrainian navy vessels in the Kerch Strait, but the likelihood of a rapid response is low.
Europe probably doesn’t need support for its euro-boosting project from authoritarian leaders such as Putin and Turkish President Recep Tayyip Erdogan. On the other hand, the autocrats are the most receptive audience for talk of U.S. abuses of the dollar's dominance. Turning them away might just bury the dream of taking on the No. 1 global currency. That’s the flip side of selling the euro as a non-politicized alternative to the dollar.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is a Bloomberg Opinion columnist covering European politics and business. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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