Prime Minister Dmitry Medvedev of Russia was quite talkative in last week’s “all star” gathering in Davos, unfortunately every time he spoke it sounded very much like that Russia was giving up on the Eurozone. Russia, it seems has no intention of buying anymore Eurozone bonds, and instead may very well start to run down its holdings. Very bad news for continental Europe. At roughly $500 billion, Russia has the world’s third largest foreign exchange reserves, with the euro component the second largest section, coming in around 42 percent. That’s roughly around 200 billion dollars.
We already have enough euro risk,” said premier Dmitry Medvedev. “Right now we don’t have any plans to buy these bonds.”
“We now have a different mission: 42pc of our reserves are euros, so we could get rid of them by investing in equities,” Mr Medvedev told the German daily Handelsblatt.
According to the UK’s Daily Telegraph:
He said efforts to stabilize the euro structure had dragged on too long, leaving the currency bloc in a “miserable condition”.
The Russian leader said Europe had launched a risky experiment – “never seen before in the world history” – by lashing weak and powerful economies together under a strong currency, warning that the Club Med bloc may not survive the ordeal.
—-Mr Medvedev said the world needs a multi-legged currency system with China’s yuan playing a role. Russia has been buying gold, aiming to push bullion to 10pc of its total holdings.
Unnamed analysts, cited by the Telegraph, suggested that the Russian central bank might have another more sinister reason for wanting to dump its 42 percent holding of European Monetary Union bonds. “Perhaps sharing widespread fears of a global bond rout as deflationary forces give way to a new cycle of rising prices.” In very bad news for the ECB, Russia selling out might just be Russia trying to beat the coming crowd as others sell out of Euro debt later in the year.
All this makes very good long term news for holders of precious metals. If Russia and China and others do sell out of EMU debt this year, they have to place the cash raised back into some other class of asset. Simply holding onto the euros raised doesn’t do anything to lower their euro risk. Changing the euros into US dollars isn’t much of an option either, both Russia and China are already over weighted in US dollars. While much of the cash raised might get placed via the sovereign wealth fund into equities or takeovers of strategic companies, my guess is that both countries would use much of the cash resource to quietly add to physical precious metals on any dips. For central banks that means gold rather than silver.
Thanks to the talkative Mr. Medvedev, the Eurozone has a big problem. Soon the only significant buyer of EMU debt is likely to be the European Central Bank itself. Europeans now have yet another incentive to keep adding to their gold holdings. Keep talking Mr. Medvedev, keep talking. We will continue to closely watch Russia’s actions all year.