U.S. Cedes Top Spot in Russian Reserves to France for First Time

France leapfrogged the U.S. as the top destination for the Russian central bank’s investments, dethroning America for the first time and underlining the challenge faced by Europe as it weighs sanctions over Ukraine.

The amount of reserves in French assets, including government bonds and deposits, rose to 32 percent as of June 30, a jump of 4 percentage points from three months earlier, the central bank said in a quarterly report on its website today. Bank Rossii decreased investments in the U.S. to 29.7 percent from 33.8 percent in the period, and the portion of German assets shrank to 19.3 percent. U.K. and Japanese holdings rose.

The U.S. slid into second place for the first time since records began in 2006. President Vladimir Putin, who has criticized the dominance of the U.S. dollar and stood by Russia’s investments into the euro during the continent’s debt crisis, faces the threat of further Western sanctions over Russia’s annexation of the breakaway Ukrainian region of Crimea.

“Geopolitics is on the agenda now,” Vladimir Miklashevsky, an economist at Danske Bank A/S in Helsinki, said by e-mail. “There were statements that Russia may be exiting U.S. Treasuries in response to sanctions, but the drop last year clearly wasn’t linked to geopolitics.”

The central bank declined to comment on its allocation of reserve assets beyond the figures included in today’s report.

Fed Custody

A record drop in U.S. government securities held in custody at the Federal Reserve has fueled speculation that Russia may have shifted its holdings out of the U.S. after Western nations threatened punitive measures.

Treasuries held by foreign central banks dropped by $104 billion to $2.86 trillion in the week ending March 12, according to Fed data released March 13, as the turmoil in Ukraine intensified. Russia held $138.6 billion of Treasuries as of December, making it the ninth largest country holder. Russia’s holdings are about 1 percent of the $12.3 trillion in marketable Treasuries outstanding, according to data compiled by Bloomberg.

Russia holds the world’s fifth-largest foreign-currency reserves after China, Japan, Saudi Arabia and Switzerland, according to data compiled by Bloomberg. The Russian central bank has signaled that it probably won’t add currencies to its reserves after expanding into Canadian and Australian dollars.

The U.S. and the EU have branded Crimea’s March 16 referendum that paved the way for Russia’s annexation illegal, imposing sanctions and warning of escalating measures to come.

Assigning Blame

In a March 18 speech to lawmakers, Putin blamed Western encroachment for forcing him to take control of Crimea. While he said Russia doesn’t plan to further split up Ukraine, he asserted his right to defend Russian speakers in Ukraine’s east.

Ukraine said yesterday that it plans to reinforce its eastern border with Russia and withdraw troops from Crimea.

Europe is tugged between trade, financial and energy links with Russia and calls by neighbors such as Poland and the Baltic states for a firmer response. European Union heads of state and government meeting in Brussels today will widen a list of so-called stage-two measures decided two weeks ago that include travel bans and bank account lockouts, German Chancellor Angela Merkel said today.

The Russian central bank’s investments in U.S. assets rose to as high as 41 percent at the end of the third quarter in 2010, Bank Rossii data show. France never rose above second place, which it’s occupied since 2011 when it overtook Germany as the runner-up.

U.S., France

The U.S. has held the top spot since the Russian central bank began publishing the data eight years ago, which it releases with a lag of at least six months. France’s share fell to as low as 9.7 percent in 2007 and rose above 20 percent for the first time three years ago, according to the central bank. The U.K., which was in second place with a 21.6 percent portion as of Sept. 30, 2008, is now forth, almost 10 percentage points behind Germany.

France, Russia’s 10th-largest trading partner in 2012, accounted for 2.3 percent of the nation’s trade volume in January, according to Federal Customs Service data compiled by Bloomberg.

France won’t yet suspend military contracts with Russia, President Francois Hollande said this month. Russia in 2011 ordered two Mistral-class helicopter carriers warships from France for more than $1 billion.

France may halt delivery of the warships if it agreed to a wider package of measures with other Western countries, according to French Foreign Minister Laurent Fabius.

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