There’s circumstantial evidence that Russia may have yanked tens of billions of dollars in assets out of a custodial account at the U.S. Federal Reserve, possibly to keep it from being frozen by U.S. authorities in case of heightened conflict in Ukraine.
The Federal Reserve holds U.S. Treasury securities in custody on behalf of foreign central banks and other official institutions. This chart from Bloomberg shows the sharpest percentage drop in the Fed’s custodial holdings in records going back to 2002. It’s a decline of $105 billion, or 3.5 percent, from March 5 to March 12. (The Fed’s own report is here.)
The Fed doesn’t say who its custodial customers are. I spoke today to Marc Chandler, global head of currency strategy at Brown Brothers Harriman, who suspects Russia accounts for a big share of the draw-down. “It’s just to avoid being frozen,” Chandler says, not a protest against the U.S. He adds, ”You don’t let your politics dictate these decisions.”
In a note to clients, Chandler wrote, “The logic now is that Russia is bracing for the next round of sanctions.” He pointed out that this has happened before. In 1957, Russia shifted dollars from the U.S. to London, he said, fearing the U.S. would punish Russia financially for its invasion of Hungary. According to some accounts, that event gave birth to what’s known today as the Eurodollar market—dollar-denominated assets stashed outside of U.S. borders.
Bloomberg’s Susanne Walker reports today that Chandler isn’t the only one who sees Russia behind the big decline in Fed custodial holdings. She quotes Wrightson ICAP: “Escalating talk of sanctions over the Ukraine conflict would give [Russia] every reason to move those holdings to an off-shore custodian.”
Chandler suspects that Russia didn’t sell the Treasuries, but only moved them somewhere out of U.S. authorities’ reach. According to data compiled by Bloomberg, as of December, Russia held $139 billion in Treasuries, making it the ninth-largest country holder, accounting for about 1 percent of the total.