Russia cuts dollar holdings from $119 billion wealth fund amid sanctions

Russia said it will eliminate the dollar from its oil fund to reduce vulnerability to Western sanctions just two weeks before President Vladimir Putin holds his first summit meeting with U.S. leader Joe Biden.

The National Wellbeing Fund will shift its dollar holdings into euros, yuan and gold, Finance Minister Anton Siluanov said.

The dollar pared gains on the news Thursday before bouncing back as analysts said the immediate market impact is likely to be limited. The transfer, which affects about $119 billion in liquid assets of which about a third is held in dollars, will take place within the central bank’s huge reserves.

“The central bank can make these changes to the Wellbeing Fund without resorting to market operations,” said Sofya Donets, economist at Renaissance Capital in Moscow.

Coming ahead of the June 16 Biden-Putin meeting, the move marks another milestone in the Russian leader’s drive to reduce his country’s dependence on the dollar after years of steadily increasing U.S. restrictions.

“They’re expanding sanctions and for us, the dollar is becoming riskier,” Deputy Finance Minister Vladimir Kolychev told Bloomberg.

Russia can make the change within a month, but it’s up to the central bank to determine whether to adjust the distribution of its overall reserve holdings, Siluanov told reporters at the St. Petersburg International Economic Forum.

“This decision is logical in the context of the stubborn standoff with the U.S.,” said Oleg Vyugin, a former senior central bank official. “But in terms of risk/return, exiting dollar assets to replace them with the ones they list is most likley to be economically unattractive.”

While it will have “no initial market impact,” the move will probably lead the central bank to sell dollars ultimately, said Jordan Rochester, currency strategist at Nomura International PLC. “It’s not clear how quickly they will do it.”

There could be market impact if the central bank sells its remaining holdings of U.S. treasuries, he added.

The wealth fund currently holds 35% of its liquid assets in dollars, worth about $41.5 billion, with the same amount in euros and the rest spread across yuan, gold, yen and pounds.

After the change, the fund’s assets will be held 40% in euros, 30% in yuan, 20% in gold and 5% each in yen and pounds, Siluanov said.

The central bank doesn’t comment on plans for its foreign-exchange reserves. “Of course, the currency structure of the government’s reserves is one of the factors we take into account,” Bank of Russia Governor Elvira Nabiullina said, according to Interfax.

The wealth fund holds savings from Russia’s oil revenues above a cutoff price and is used to help offset shortfalls when the market falls below that level. Together with illiquid assets, its total value is $185.9 billion. With the economy recovering faster than expected, the budget deficit will be 1% of gross domestic product this year, Siluanov said, narrower than the 2.4% initially planned.

The central bank reports the currency distribution of its reserves with a six-month lag, declining to provide information on its current holdings.