Russia plans to reduce U.S. Treasury holdings in its reserves

NEW YORK (MarketWatch) -- The Bank of Russia intends to cut the proportion of U.S. Treasurys in its foreign exchange reserves, a central bank official said Wednesday, according to media reports.

Alexei Ulyukayev, first deputy chairman of Russia's central bank, said Wednesday the bank plans to reduce the amount of Treasurys it holds in reserves, the Interfax news agency and other media outlets reported.

Ulyukayev also said that Russia would switch some of its reserves into bonds issued by the International Monetary Fund, according to the reports. As of May 29, Russia's international reserves stood at $401.1 billion, the third biggest in the world.

"The idea is basically sound. It all depends on the mix and timing," said James Fenkner, principal and portfolio manager of Red Star Asset Management, a hedge fund that invests primarily in Russian assets.

Russia exports commodities denominated in U.S. dollars, while its imports, such as machinery and luxury goods, are primarily denominated in euros.

The "reserve mix should represent economic interests," Fenkner said. "Of course, the Russians are also well aware of U.S. fiscal and monetary weakness and, like the Chinese a few weeks ago, don't want to hold a potentially depreciating asset."

China, which has the world's biggest foreign exchange reserves, held $767.9 billion of Treasury securities at the end of March, making it the world's largest holder of U.S. government debt, according to the Treasury Department's Web site.

It is followed by Japan, which holds $686.7 billion, while Russia is number fifth with $138.4 billion.

Russia, China to invest in IMF bonds

In late May, Dominique Strauss-Kahn, the IMF's managing director, said in a statement that Russia intends to invest up to $10 billion in the first-ever notes to be issued by the fund.

On Tuesday, Strauss-Kahn said in a separate statement that China plans to invest up to $50 billion in IMF notes, thereby helping other fund members weather the global crisis.

"The new notes will offer members a safe investment instrument with reasonable return," Strauss-Kahn said.

Paul Biszko, senior emerging markets analyst at RBC Capital Markets, said that Russia's statement Wednesday is similar to comments made in the past.

"This is very preliminary, and I'm not sure it would be market-moving given the size of it," Biszko said. "It's not a material amount -- we're talking about $10 billion relative to the size of the Treasury market. The motivation would be to diversify away from the dollar."

The IMF bonds, which haven't been issued yet, would most likely be denominated in the so-called Special Drawing Rights (SDRs), so in a basket of currencies.

"I don't think it's new news," Biszko said. "We've heard [similar] comments from many countries over the last several years. Maybe we've had a bit more frequency in recent months. It's a lot of talk and we're unlikely to see any significant action in the short term."

Biszko said that some more clarity on the issue may come next week, when Russia will host the first summit of the leaders of the so-called BRIC group of major emerging markets, which includes Brazil, Russia, India and China.

By Polya Lesova