Why Russia Keeps Investing in US Economy Despite Political Tensions

Despite deep political tensions between Russia and the West, Moscow will continue to invest its surplus of currency in US Treasuries, a reliable and stable investment tool, analysts say.

As for the end of June, Russia increased its holdings of United States Treasuries to $90.9 billion, three percent more against the previous month, according to data from the US Treasury.

A year ago, Russia held $72 billion in US Treasuries. Thus, in 12 months, Russia increased investment in the US economy by 26 percent.

Moscow is the 16th biggest holder of US debt. The top three countries are China ($1.24 trillion), Japan ($1.15 trillion) and Ireland ($270.6 billion).

Currently, Russia is dealing with a sluggish economy. However, the government has ruled out the possibility of a default. Flexible exchange rates and low sovereign debt are helping to stabilize the economy. In addition, Russia has formidable gold and foreign exchange reserves of nearly $400 billion. The Russian Central Bank plans to increase reserves, from the actual $400 billion to $500 billion.

In theory, Russian gold and foreign exchange reserves, including the Reserve Fund ($38 billion), should be put in operations and bring profits.

Currently, there is a discussion between Russian economists and politicians about the ways to boost the Russian economy.

Some say that all reserves should be accumulated within one investment fund and used to invest in the economy. However, there is the risk that such a measure will not be effective and would only accelerate inflation rate. Finally, the Russian government has confirmed it would continue to investment in foreign assets.

Relations between Moscow and Washington now seem to be their worst phase since the end of the Cold War. At the same time, nearly fourth of the sum ($91 billion) has been invested to the US economy. 

Many in Russia have repeatedly called to abandon investment in US debt. One of the arguments is that US Treasuries have a low yield. The most popular 10-year bonds have an annual yield of 1.5 percent. This is higher than the dollar inflation rate (0.7 percent in 2015), but is still extremely low. If all of Russia’s reserves were invested in US Treasuries Moscow would gain $6 billion of annual profits and only $3 billion in real terms (adjusted for inflation in the US).

However, Russia’s gold and foreign exchange reserves as well as its sovereign wealth fund are very limited financial tools. These funds can be invested only in the most reliable assets, including bonds issued by countries with high credit ratings. By contrast, for example, Norway’s welfare fund can invest across the world, buying stakes in European, Asian and American companies.

Russia invests the bulk of its money in conservative low-yield assets denominated in US dollars and euros. In this context, investing in US Treasuries is logical and clear.

Currently, bonds issued by European countries are a bit more profitable than US debt but their reliability is in question, taking into account the permanent debt crisis in the eurozone and uncertainty about the bloc’s future.

"Treasury bonds of the US and other developed countries are the most popular tool to invest surplus of currency. It is risk-free, in terms of liquidity, volatility and the possibility of a default. In fact, US Treasuries are a low-yield deposit account that can be closed at any moment and the money can be used for other needs," Evgeny Loktyukhov, senior analyst at Promsvyazbank, told the Russian news website Lenta.ru.

According to the expert, the Russian government is investing in the US economy because this is the only possible way to invest. Loktyukhov said that there is no significant domestic demand for foreign currency in Russia. What is more, Russia does not have a large-scale international investment program.

US treasuries are high in demand because of their reliability and high liquidity, Bogdan Zvarich, analyst at Finam, added.

"The default risk on US Treasuries is extremely low. Of course, the flip side is their low yield. Nevertheless, US Treasuries are very attractive as an investment tool. As for their liquidity, US Treasuries can always be sold in the market at actual prices without serious losses," he pointed out.

As for the increase of Russian investments in the US economy, analysts say the reason is that the situation with moving capital across Russian borders has improved.

"Increased investment in foreign obligations, including US Treasuries, is the consequence of the improved situation with the current account balance," Loktyukhov said.