The US dollar is the world's reserve currency, but a growing de-dollarization trend may threaten its supremacy. Photo: Reuters/Gary Cameron

Despite US President Donald Trump’s best efforts to make nice with Russia, it seems the Kremlin is not putting all of its eggs in the détente basket. As a hedge against the success reproachment – and possible accompanying sactions relief – Moscow is reportedly dumping US government debt, and doing so fast.

“A US Treasury report this week appears to show Russia liquidating dollar assets at a record pace, selling four-fifths of its cache of US government debt, $81 billion worth, over a two-month period. It started in April, when the U.S. imposed the most onerous sanctions yet on allies of Putin,” Bloomberg reported Friday.

The move is “the obvious way to limit a country’s exposure to US sanctions,” according to Brad Setser, a former Treasury Department official who is now at the Council on Foreign Relations in New York.

“I would never underestimate the reach of US sanctions. That said, it would be a major step for the US to contemplate blocking a country’s dollar reserves as opposed to sanctioning a bank or a firm.”

Russia’s decision to drop US bonds begs the question: why not China? There has been widespread speculation, amid an escalating trade war and a ballooning US deficit, that China might consider doing it.

In response to an unconfirmed report in Bloomberg early this year that China was eyeing the move, there was a deluge of articles arguing that it wouldn’t be an effective way to challenge Washington in a trade war. But America’s massive deficit, which is set to expand under Trump’s tax cut, has led to increased speculation about the move.

“On the surface, it looks like the US is extraordinarily vulnerable,” Setser wrote in a recent blog post. “The stock of Treasuries that the market has to absorb to fund the rising US fiscal deficit is objectively quite large, as the US has ramped up issuance while the Fed is reducing its Treasury holdings…

“And if China started to sell, the amount of US paper that non-Chinese investors would need to absorb would be extremely large,” Setser went on.

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