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supplies of diamond in rubles. “This purely technical and experimental operation should not materially affect the company’s bottom line,” BCS GM said in a note. Even if the volumes and market are limited, Russia is unlikely give up on the idea as the clash with the US has increased the urgency of loosening the US hold on international commerce for the Kremlin. In a precursor to the move away from dollars the Central Bank of Russia (CBR) dumped a large part of its US Treasury bill holdings in July, briefly causing the price of US bonds to rise as Russia took itself out of the top 30 largest holders of US sovereign debt almost overnight. Russia cut the share of US Treasury bonds (T-bonds) in its Fx/gold reserves to $14.9bn in May 2018, down from $48.7bn in April, and $96bn in March, Reuters reported citing US Treasury data on July 18. Russian foreign minister Sergei Lavrov said on August 15, “the dollar’s days as a global trade currency are numbered,” speaking at a news conference with his Turkish counterpart. Turkey has echoed the call to end the dollars dominance of international trade and echoed Lavrov’s comments. As another step in the same direction, both countries have agreed to settle their bilateral trade deals using their own national currencies and eschew the dollar. This week Turkey has also sold off most of its US T-bills also taking itself out of the top 30 biggest holders of US debt. And China is on board with the idea of settling trade in national currencies. In 2008 none of the $56.8bn Sino-Russian bilateral trade was settled in local currencies, but last year about a quarter of the $84bn trade was. China has not sold its US T-bill holdings, but as the largest holder of US debt with $1.18 trillion of bonds getting out of the bonds is more difficult as if China started selling aggressively the price of the bonds would collapse destroying a lot of the value of China’s sovereign reserves. Collapsing the US bond market would also lead to a full-blown diplomatic crisis that could easily spin out of control. If China exits the US bond market it will do so slowly and over a long time.
The ruble fell the furthest it has fallen in the last two years on August 8 and bond yields jumped following an announcement by the US government of new sanctions on Russia for the chemical weapons attack on former spy Sergei Skripal in the UK in June . The ruble lost as much as 1.8% at the start of trading in Moscow on August 9 reports Bloomberg after a more than 3% rout on a day earlier after the new sanctions were announced. Bond yields rose to the highest since 2016, while most of Russia’s blue chip equity names took a battering, lead by Sberbank and the national flag carrier Aeroflot. Yields on 10-year government debt rose 18 basis points to 8.26%. Aeroflot shares sank 9.1%, leading declines on the IMOEX Russia Index, which fell 1.1%. Credit default swaps jumped to 154 basis points, the highest in a year, Bloomberg reports. The rout was made worse by the suddenness of the announcement. “Big moves in Russia - was very positioned. Lots of pain around the sanctions story - am surprised people did not see it coming. Complacency in the market,” Tim Ash, Senior Sovereign Strategist at BlueBay Asset Management said in a note to clients. Traders say that the volatility could persist as investors take on board the content of the new sanctions. The US government didn't release all the details of the new bill which will be presented to congress in 15 days time after the summer recesses is over. However, some general details have been released and include more restrictions on exports to Russia of US goods and technology considered sensitive on national security grounds, according to a State Department officials. The restrictions may be followed by a round of more sweeping penalties later this year. In addition to the Skripal sanctions the US government also threatened a separate round of “crushing” sanctions in a separate bill that will be heard this autumn and could target Russian sovereign debt.
Despite Russia’s high current-account surplus of $48bn in second quarter of this year, strong US growth, geopolitical risk, and the budget rule led to a depreciation of the ruble of almost 10%. Analysts at the Gaidar Institute see the ruble as overvalued, and with the US Senate debating further sanctions, a rebound may not be on the cards.
58 RUSSIA Country Report September 2018 www.intellinews.com