Russia’s international reserves grew again in the last week by $8.8bn to just shy of the $600bn that the Central Bank of Russia (CBR) had in gross international reserves (GIR) at the start of the war in Ukraine just over a year ago.
The CBR reports that total reserves are now $594.6bn as of March 24 and that positive revaluation was the primary reason for the 1.5% increase, up from $585.8bn on March 17. (chart)
Russia's international reserves are made up of highly liquid foreign assets available to the CBR and the Russian government, including foreign currency, IMF Special Drawing Rights (SDRs), a reserve position in the International Monetary Fund, and monetary gold.
In the first week of the war one of the most painful sanctions imposed on Russia was the surprise CBR sanctions that saw some $300bn of CBR reserves held in European accounts frozen, but not seized by European governments.
While there has been a lot of talk about using these funds to pay for the reconstruction of Ukraine, that is legally difficult, as there is no basis in law to seize the assets of another government unless war against that government – something that the West has been adamant it will not do for fears of sparking a direct conflict between Nato members and Russia that could lead to WWIII.
Technically the frozen $300bn still belongs to the CBR, and it has been including the amount in its reports of Russia’s reserves. In March last year Russia reported a total of $605bn as reserves, but as the sanctions bit and the CBR scrambled to stave off a financial crisis caused by multiple shocks to the economy, including the imposition of the SWIFT sanctions that were imposed only days after Russia’s invasion of Ukraine in February that cut Russia’s banks off from the international financial system, reserves rapidly dropped to a low of $540bn in September last year.
But a question mark hangs over the frozen £300bn, as the EU legal team says it can’t identify more than about $37bn of this money. The rest is missing. The EU said the problem is partly to do with the complexity of the way the CBR reports its overseas holding, but also said that the actual amount of CBR money in Europe could be significantly less than $300bn, as that number was originally based on the CBR’s own calculations of its holding in Europe, not what EU banks were reporting. A pan-EU bank holding reporting system is now being set up to try to get to the bottom of this mystery.
At the same time, efforts to identify and freeze sanctioned Russian oligarch money are going slowly and so far only a total of $22bn has been identified and arrested.
Booming oil exports to Asia and extraordinarily high gas prices brought a flood of money into Russia, which posted an all-time record current account surplus of $227bn at the end of the year – more than twice the previous all-time high of $120bn posted at the end of 2021.
Since September reserves have recovered to end 2022 at $567bn, a gain of $27bn, and have now gained another $28bn. However, that is well short of the $227bn in current account surplus Russia earned in 2022.
Analysts say that some of the difference has simply been spent on funding the war and other large purchases such as building up Russia’s “ghost fleet” of oil tankers that can dodge sanctions.
As some 85% of Russia’s oil shipments that used to go to Europe now go to Asia and are presumably settled outside normal banking channels, analysts speculate that the Kremlin is keeping large sums of money in the banks of friendly countries that are opaque. And in addition, Russian oil refineries have been exporting oil to their European refineries at very low prices but accumulating the profits from legally selling refined products on the European market at normal prices in their Europe-based trading companies.
According to the calculations of Alexander Isakov, head of Russia and CIS macroeconomics at Bloomberg, Russia has accumulated an invisible $80bn slush fund abroad via these various means.
The CBR used to hold several currencies as reserves but sold off all its dollars before the war. It also held significant amounts of euros, pound sterling, yen and, unusually, Chinese yuan, as well as significant amounts of monetary gold.
This year the CBR reports it will sell off its remaining holdings in “unfriendly” currencies and, in a radical departure from central banking norms, hold its entire reserves in yuan (60%) and gold (40%).