The Implications of Russia's Declining U.S. Debt Purchases

The week ahead in the financial markets is sure to excite with Ben Bernanke testifying and Apple (AAPL) reporting earnings, but one hidden indicator that investors may have overlooked suggests that China still remains a buyer of U.S. Debt, while Russia…not so much. The Treasury International Capital flows (TIC) data show what, where and how much foreign governments bought of U.S. debt.

There are two key developments in this month’s TIC data:
1. China continues to buy U.S. debt while Russia has significantly reduced holdings
2. Foreign investors are increasing holdings in T-bills

Click to enlarge:

Despite contradictory rhetoric, China continues to be a massive buyer of U.S. debt. The most recent data show China increased holdings by 4.9% to a record high. On the other hand, Russia’s holdings dropped by 10%. As one of the top 4 holders of U.S. debt a decline in Russian holdings is a significantly negative event.

Examining the data more closely we find that the preference for T-bills has waxed.

Click to enlarge:

Short term U.S. securities are the investment of choice for today’s stylish central banker. The implication is that as the Treasury attempts to finance the deficit they may find it more difficult to do for a long period of time.

Disclosures: None

Comments

[User 353732:]

1. Russia hardly has the excess foreign reserves(at current oil, gas, and non energy-commodity prices) to keep buying dollars, esp since the Russians have been even more blatantly public than the Chinese in seeking to demote the dollar as the sole reserve currency
2. The Russians do not need US markets (while the Chinese still do) since they produce very little besides energy and minerals that the US wants to buy and there are global markets for Russia's exports ( commodities, weapons and nuclear technology) so Russia has the easiest task among major nations in decoupling itself from the dollar
3. For geo-strategic reasons Russia is keen to hasten the dollar's decline(i.e the decline of the US as a hyperpower) since the net benefits to Russia from a debased and discredited dollar exceed the investment losses: Russia, more than any other nation, will benefit from a global flight to commodities, including and especially oil and gold.
4. Russia is trying both to re-emerge as the leading geo-strategic opponent of the US(hence its unpleasant alliances with the most repulsive regimes in the world) and portray itself as the champion of the Global South in resisting US+EU attempts to impose their agenda on the developing world(eg carbon suppression; nuclear technology controls ; limiting or preventing bioengineered agricultural innovation); as such it can hardly ,at the same time, be viewed as a substantial holder of dollars(it must try to lead by action as well as words)

Jul 20 05:46 AM

[TradingHelp...:]

Excellent article thank you. Russia buying of treasuries is an issue but a drop in the ocean compared to China, Japan and the Gulf / Saudi states isn't it?

Jul 20 06:04 AM

[Paul Triolo...:]

Looking at the chart on short and long term securities, it looks as though there was consistent long term buying up until May of 2008.
Then the buying became erratic. I would be interested in a longer term chart to see what 2006 and 2007 make the chart look like.

Jul 20 06:14 AM

[Moon Kil Woong:]

The move to short term treasuries is fundamentally bearish for treasuries even if purchases by China rise. In addition, it puts upward pressure on interest rates and adds to the fundamental instability of US bonds since they need to be reauctioned in larger and larger tranches more often just to keep the financing flowing.

As for Russia, I think posters are right, they have their own problems to deal with and are insignificant in terms of US debt funding. I seriously doubt they have ulterior motives in shunning US debt since they have such a minor effect.

Jul 20 06:54 AM

[atlasman:]

The problem of a few million uninsured citizens will be a drop in the bucket when this bomb goes off.
-AM

Jul 20 07:55 AM

[Wesley Mouch:]

The utilization of the short end of the curve is going to come back to haunt us, as if a recovery does eventually come, we will have to refinance into higher rates. I would have liked to see the treasury push more of its debt into the longer end of the curve. Scratch that, I would have liked to see the treasury not borrow anything at all.

Jul 20 08:00 AM

[Ferdinand E...:]

The Russians probably have better things to do than to buy dollars. I certainly would if I were giving the orders in their country. And I also do NOT believe that Russian leaders thinks of itself as the natural enemy of the United States. If Messrs M and P are as smart as I think they are, they are trying to figure out how to work closer with the U.S:

Jul 20 08:50 AM

[doubleguns:]

As we attempt to finance our spending we are adding more and more to the amount financed at the short end.

Refi's plus new borrowing. How big can this number go? A sudden full stop would be a devastating train wreck. QE scared everyone to the short end but additional QE might end that game too.

Another nose dive by Ben in his helicopter could be disastrous.

Jul 20 09:16 AM

[kennyjoede:]

As foreign debt purchases decline, hyperinflation will be raising its monstrous head. This will be great for those holding lots of cash but disastrous for those needing it.

Jul 20 09:41 AM

[ksmithdc:]

Interesting read, thanks.

Jul 20 10:13 AM

[nobby73:]

The initial policy of avoiding long term issuances and flooding the market with shorter term debt was a ruinous decision. The housing market needs to be allowed to correct itself, but the bigger hazard is the concentration of shorter term debt, that will need to be rolled over in the next 48 months. The US has essentially placed it's future in the hands of foreign creditors, who now can plan over the next few years to become less reliant on exports to the US, so they can extract their pound of flesh from the US when the need to rollover the avalanche of debt occurs.

There is no exaggeration in saying the US will have to cede ground from a geo-political perspective to the rival powers. I think it's game over, but I hope I am wrong..

Jul 20 10:16 AM

[ksmithdc:]

Interesting read, thanks!

Jul 20 10:18 AM

[CLH:]

Sounds like good news. Russia is of no concern.

Jul 20 11:09 AM

[MSimon:]

In ten years Russia will have no fleet.

powerandcontrol.blogsp...

They are reverting to what they always have been - a continental power. The question of course is with their declining population (they are losing 1 million a year) can they even remain that?

China has designs on Siberia - maybe the Russians will sell it to them - ala Alaska.

Jul 20 11:55 AM

[inthemoney:]

> China has designs on Siberia - maybe the Russians will sell it to them - ala Alaska.

The hell will freeze sooner than Russia will part with anymore of its territory.

As for the Russians not buying US Treasuries, do you remember that oil collapsed? They don't have the spare money. Whatever they have they are using to deal with the recession and credit freeze.

Jul 20 12:06 PM

[Canadian Guy:]

On Jul 20 12:06 PM inthemoney wrote:

> > China has designs on Siberia - maybe the Russians will sell it
> to them - ala Alaska.
>
> The hell will freeze sooner than Russia will part with anymore of
> its territory.
>
> As for the Russians not buying US Treasuries, do you remember that
> oil collapsed? They don't have the spare money. Whatever they have
> they are using to deal with the recession and credit freeze.

Actually, over a million Chinese citizens move into Siberia every year and have been since the 1980's. They now dominate commerce everywhere in the region and Mandarin is spoken more commonly than Russian. Even the local Russian traders have learned to speak it in order to continue to stay in business.

China has a long memory and has stated for over a century that Siberia was stolen from them back when they were a weak basket case. This will not be the case in the next few decades.

I personally believe that the Taiwan issue is just a smoke screen that the PRC leadership uses to deflect the world's attention from their eventual seizure of most of Siberia from Russia. The next half of the 21st century is going to be very, very interesting.

Jul 20 01:21 PM

[coldcall:]

Lots of countries are dumping us debt holdings on the sly..ie Canada. So far its being masked by the Fed buying some of its own debt, but i dont think they can keep the lid on this for much longer.

Jul 20 01:53 PM

[dcb:]

US hyperpower LOL you benn hanging around the republicans too long we are a burning rome on its last legs and the banks are making sure they loot all they can before it collpases


On Jul 20 05:46 AM User 353732 wrote:

> 1. Russia hardly has the excess foreign reserves(at current oil,
> gas, and non energy-commodity prices) to keep buying dollars, esp
> since the Russians have been even more blatantly public than the
> Chinese in seeking to demote the dollar as the sole reserve currency
>
> 2. The Russians do not need US markets (while the Chinese still do)
> since they produce very little besides energy and minerals that the
> US wants to buy and there are global markets for Russia's exports
> ( commodities, weapons and nuclear technology) so Russia has the
> easiest task among major nations in decoupling itself from the dollar
>
> 3. For geo-strategic reasons Russia is keen to hasten the dollar's
> decline(i.e the decline of the US as a hyperpower) since the net
> benefits to Russia from a debased and discredited dollar exceed the
> investment losses: Russia, more than any other nation, will benefit
> from a global flight to commodities, including and especially oil
> and gold.
> 4. Russia is trying both to re-emerge as the leading geo-strategic
> opponent of the US(hence its unpleasant alliances with the most repulsive
> regimes in the world) and portray itself as the champion of the Global
> South in resisting US+EU attempts to impose their agenda on the developing
> world(eg carbon suppression; nuclear technology controls ; limiting
> or preventing bioengineered agricultural innovation); as such it
> can hardly ,at the same time, be viewed as a substantial holder of
> dollars(it must try to lead by action as well as words)

Jul 20 02:29 PM

[WS1835:]

Although it is a commonly accepted concept that China will become a major world power both militarily and economically in the coming decades, I think most people view China's dominance as flowing into the SE Asia and the Pacific rim. Few take note of the influence China has historically exerted over central and eastern Asia.

Tibet and Mongolia come to mind just for starters. China is also a player in the India/Pakistan conflict and an affected third party in Afghanistan. As mentioned in this article, China has quietly been co-opting eastern Siberia due to its demographics, Russia's loose (and failing) local presence, and China's de facto control of the border area around North Korea. A little bit of research will turn up numerous business articles citing the lack of Russian manpower in Siberia and the rising prominence of cross border Chinese commerce. It isn't official government policy as far as I know, but Siberia is well on its way to sharing the fate of Tibet.

Jul 20 03:11 PM

[a. palmer jr.:]

We have foreign countries buying up our debt, while on the other hand we are sending millions out as foreign aid. I know the foreign aid isn't as large as our debt but the fact is it will never be expected to be paid back. I think that until this national debt thing is taken care of we should cut all unnecessary spending.

Jul 21 07:54 AM

[perceptions...:]

Agreed, the Russian reserves are hardly excessive!

But, the same is likely to be the case for a number of other players who would usually be purchasers of US Debt.

Because of losses incurred, so far in the GFC, the usual supporters are going to have a tough time keeping up past levels, let alone vastly increasing their purchases, as would be required, with the spiraling US Debt.


On Jul 20 05:46 AM User 353732 wrote:

> 1. Russia hardly has the excess foreign reserves(at current oil,
> gas, and non energy-commodity prices) to keep buying dollars, esp
> since the Russians have been even more blatantly public than the
> Chinese in seeking to demote the dollar as the sole reserve currency
>
> 2. The Russians do not need US markets (while the Chinese still do)
> since they produce very little besides energy and minerals that the
> US wants to buy and there are global markets for Russia's exports
> ( commodities, weapons and nuclear technology) so Russia has the
> easiest task among major nations in decoupling itself from the dollar
>
> 3. For geo-strategic reasons Russia is keen to hasten the dollar's
> decline(i.e the decline of the US as a hyperpower) since the net
> benefits to Russia from a debased and discredited dollar exceed the
> investment losses: Russia, more than any other nation, will benefit
> from a global flight to commodities, including and especially oil
> and gold.
> 4. Russia is trying both to re-emerge as the leading geo-strategic
> opponent of the US(hence its unpleasant alliances with the most repulsive
> regimes in the world) and portray itself as the champion of the Global
> South in resisting US+EU attempts to impose their agenda on the developing
> world(eg carbon suppression; nuclear technology controls ; limiting
> or preventing bioengineered agricultural innovation); as such it
> can hardly ,at the same time, be viewed as a substantial holder of
> dollars(it must try to lead by action as well as words)

Jul 22 11:28 PM

[Brian Kelly:]

Agreed that Russia's purchases of US debt is a drop in the bucket, but the speed at which they jumped to fourth place made them a country to watch.With the amount debt the US needs to sell, Tim Geithner can us all the help he can get!


On Jul 20 06:04 AM TradingHelpDesk wrote:

> Excellent article thank you. Russia buying of treasuries is an issue
> but a drop in the ocean compared to China, Japan and the Gulf / Saudi
> states isn't it?

Jul 23 06:01 PM