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Russia’s Wealthy Investors Are Buying US Treasuries – What’s The Reason?

Russia has demonstrated a rising interest in US Treasuries.

This is not about Russia’s international reserves, considering the Central Bank of the Russian Federation (CBRF) has reduced its exposition to U.S. state debt.

Indeed, the CBRF is currently exposed to $8.5 billion according to the latest data available.

However, wealthy Russians and companies are those ready to invest in U.S. debt. That means the private sector is increasingly being exposed to U.S. debt.

The case of one of the prominent players at the country’s banking market shows that “developed-market bonds” account for 22% of wealthy Russians who’re pouring into the financial market, starting roughly from $1 million.

Allocating The Wealth

The median average of such investments is about $7 million. The “developed-market bonds” is a broad category, but US Treasuries hold their part in it. It is worth pointing out that Russia’s wealthy people and companies have started allocating their wealth in U.S. treasuries for the first time in history.

They also defy Chinese government bonds while the CBRF has increased the allocation of its reserves into such instruments, from a mere 4.7% last year to 13.4% this year. The CBRF has also directed money into German and French government bonds devoting for this purpose 13.2% and 11.6% of its reserves, respectively.

US Treasuries are wooing Russians despite the warning raised by Alan Greenspan, former US Fed chief, that the US state debt rates may go to zero or into negative territory soon.

The US President Donald Trump continues exercising pressure on Jerome Powell, the current chief of the American central bank, getting interest rates lower and the US dollar cheaper.

Pursuit Of The Cheaper Dollar

Last year, the Fed suggested a base interest rate of 3.375% at the end of 2020, but now the regulator has a target of 1.875%. The market is more bearish and anticipating interest rates to fall below 1% by the end of the next year.

This may drive US Treasuries’ profitability from the current 1.6%-1.9% to new low levels. At the same time, Trump’s pursuit of a cheaper dollar may at least postpone the realization of such a scenario.

Moreover, the US Treasury is going to issue more bonds to finance a whopping $1 trillion US state budget deficit.

Anyway, wealthy Russians try to use this window of opportunity to get conservative investment returns, slightly less than 2%. There is a big deal citing a tendency when the rates on US and euro nominated bank deposits in Russian banks allow getting only a few tenths of percent return a year.

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Vladislav Ginko

Vladislav Ginko is former vice rector of Moscow-based Jewish University. He worked as a Corporate Finance lecturer at New York-based Touro University. Now he is an analyst affiliated with Russia’s leading state think-tank, Presidential Academy. He is frequently commenting world financial issues and advises a number of international investment companies.