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Yuan for a Rainy Day: the Dedollarization of the NWF
November 28, 2019 18:31

In the medium term, the changes in the currency structure of the NWF proposed by the Ministry of Finance look reasonable, however, the desynchronization of reserves with the currency liabilities of the financial system will weaken their anti-crisis function.

Last week, the Finance Ministry announced plans to change the currency structure of the NWF and reduce the share of the dollar in the structure of the fund. This is planned to be done in 2020.

Normally, the NWF should be at 45% in euros and dollars and 10% in British pounds. The real structure of the fund is slightly different, but this is more likely to be related to technical factors and reflects the currency revaluation and the presence of the ruble component of the fund. Taking into account purchases in 2019, by October 30, about £ 14 billion, $ 63 billion and € 54 billion should have been accumulated in the accounts of the Ministry of Finance at the Bank of Russia.

Considering the fact that the Central Bank significantly adjusted the structure of its reserves in 2018 and the dollar share in them ranges from 20-25%, there is a situation where more than 50% of all Bank of Russia dollar reserves are funds of the Ministry of Finance. While maintaining the current structure of the NWF, this share will grow rapidly, significantly limiting the free dollar liquidity of the Bank of Russia in the future. Since the political decision to diversify the international reserves of the Russian Federation was made last year, the change in the currency structure of the National Wealth Fund is more technical in nature and is aimed at synchronizing the NWF and the Bank of Russia international reserves.

The question remains open: how exactly will the Ministry of Finance implement the decision to change the structure of the NWF? Will this be done gradually in the mode of purchasing the corresponding currencies or by direct conversion between the ministry and the Bank of Russia? What courses will be used and how quickly is the option implemented? Answers to these questions may have some impact on the totals, but still  the question of the long-term impact of the decisions taken on the dynamics of the fund is more important.


If the Ministry of Finance needs to spend the NWF, it will be necessary to sell part of the currency. According to the Bank for International Settlements, the dollar remains the dominant currency in terms of foreign exchange transactions in the world: about 88% of all transactions are carried out with the participation of the dollar, about 32% are operations with the participation of the euro. But both of these currencies should reduce their share in the NWF in favor of the Chinese yuan, the Japanese yen, the Australian and Canadian dollars.

The most controversial choice here is the yuan, which share in the global turnover of foreign exchange transactions is only about 4%. On the Russian market, the share of the yuan in the turnover of the foreign exchange market does not reach 1%: in our market, the dollar and the euro dominate. The Chinese currency market, of course, will develop in the future, and its share will grow, but so far this is a distant prospect. In the current design, we can only talk about non-market operations between the Ministry of Finance and the Bank of Russia in such currencies. 

Since the use of the NWF itself is an anti-crisis mechanism, the wide diversification of the fund may create certain additional challenges and restrictions if it is necessary to use it. At the same time, given that the use of the fund is possible only in rare crisis scenarios (it is more likely an “untouchable reserve”), the profitability factor is more important in the long run.


The current yield of the fund in nominal terms does not cover inflation of the respective currencies, since real rates in developed countries are stably negative or close to zero. Considering the addition of the yuan to the reserve basket, the overall profitability will increase slightly, since the yuan rate of 3-4% per annum is significantly higher than the dollar (+ 1.5 ... 1.75%) and not comparable to the euro (-0.5 ... 0.0 %). But the real return on assets will still remain negative, that is, assets will continue to be discounted by inflation.

The policy of central banks in the last decade has led to the fact that savings (not to be confused with "investments") in developed countries have negative real returns. The only way to get positive real returns is to increase the share of risky assets in the NWF that generate returns. Whether this profitability will be positive “after risk” - this is already a question of the effectiveness of fund management - the regulator does not yet have such competence.

Currency Risk

The decision of the Bank of Russia to change the structure of reserves and its implementation in the second quarter of 2018 was not the most successful tactical decision: after the yuan and the euro increased in reserves, both currencies decreased significantly. This decision led to a negative revaluation of reserves over a year and a half in the amount of more than $ 7 billion, but this is more likely the effect of the general trend of the dollar strengthening. However, prerequisites are being formed for completion.


The usual reaction of the dollar to the crisis is strengthening. The Japanese yen and Swiss franc are also strengthening. The main factor in the strengthening of the dollar in times of crisis is that about 2/3 of the debt in foreign currency on international markets is formed precisely in US dollars (about $ 15 trillion). In a crisis situation, the need for dollars to service the debt leads to an increase in demand for the American currency, which in the face of reduced liquidity leads to its strengthening. As for Russia, about 3/4 of the obligations in the foreign currency of the financial system are formed in dollars (most of these obligations are domestic), and in this regard, our concentration is even higher than the global average.
Thus, there is a desynchronization of foreign exchange reserves and funds with foreign exchange liabilities of the financial system. This will weaken the anti-crisis function of reserves. Of course, the situation has been mitigated by the fact that over the past few years, foreign exchange liabilities have been declining and reserves have been growing, so there are no significant risks to overall financial stability (the entire external debt of the Russian Federation at the beginning of October amounted to $ 472 billion, international reserves - $ 531 billion) . The situation is also smoothed by the fact that there is a clear bias in foreign trade: more than 60% of revenues are dollars, and the dollar’s ​​share in imports is only 35%. In fact, the flow of dollar incomes of the economy is significantly more than expenses.
In general, the decision to change the currency structure of the NWF is rather a consequence of the general decision to change the structure of foreign exchange reserves. In crisis periods (and the risks of crisis processes in the next 2 years are high), apparently, this will lead to greater volatility of the fund in dollar terms. At the same time, given the fact that the Chinese economy is in a slowdown phase and the financial system is overloaded with debts, right now, too much concentration of reserves in the yuan looks like a risky decision. Yuan in our market is not perceived as a reliable and liquid means of saving, and the euro, yen and Swiss franc are negative rates.
In the medium term, on the contrary, amid growing unpredictability of US policy, a decrease in the concentration of funds in one currency looks reasonable. But the currency structure is probably not the most important issue. Long-term savings in most liquid currencies now have negative real returns, actually gradually “burning” their value. In such conditions, accumulating them more than the “necessary budget minimum” is not economically feasible. At the same time, we do not see coordinated decisions on more efficient allocation of excess resources.

Author: Anna Dorozhkina

Tags: Russian business Russian economy Russian government   

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