Russia Increases Yuan and Gold Reserves in Wealth Fund

Russia's Finance Ministry has doubled the amount of Chinese yuan and gold it can hold in the national wealth fund. This is in response to international sanctions over the invasion of Ukraine, which have frozen much of the country's savings.

The potential share of yuan in the National Wellbeing Fund was raised to 60% while the share of gold was reduced to 40% in order to make investments in the fund more flexible, according to a statement from the Finance Ministry on Friday. The ministry also said that its accounts in British pounds and Japanese yen at the central bank have been set at zero.

Russia has increased its holdings of yuan-denominated assets in recent years, in line with its goal of diversifying its foreign exchange reserves. The move reflects China's growing economic clout and the two countries' deepening economic ties.

The Wellbeing Fund increased by $31.7 billion from February to November, when President Vladimir Putin ordered troops into Ukraine. This represents a 20.5% increase in the Fund's value over this period.

After years of accumulating savings in dollars and euros, the Kremlin overhauled its economic strategy and began limiting savings in assets of “hostile” governments as the US and its allies started imposing sanctions over the annexation of Crimea in 2014. In response to these sanctions, the Kremlin froze its assets denominated in dollars, euro, pounds and yen. Of all “friendly” assets, the yuan is the most appropriate currency for the country’s reserves, Finance Minister Anton Siluanov said earlier this week.

The shift may not have a strong effect on the market, as it can be carried out by shifting assets the central bank already holds, according to Bloomberg Economics. This means that there is no need for the central bank to buy or sell any assets in order to implement the policy change.

The Finance Ministry's new rule on how the Bank of Russia should allocate windfall oil and gas revenues is not likely to have any immediate market implications. This is because (1) the rule only applies to revenues above 8 trillion rubles per year, but reduced oil exports suggest there will be no such revenue in 2023; and (2) the Bank of Russia will not need to sell or buy any assets on the open market to accommodate the new structure - this can be done internally.

Alexander Isakov is a Russia economist who specializes in economic policy and development. He has worked extensively on issues related to the Russian economy, and has published numerous papers on the subject. Isakov is a respected authority on the Russian economy, and his work is highly respected by his peers.

As of the end of the third quarter, the yuan was used for 14% of exports, up from close to zero at the start of the year, as companies shift currencies, according to an estimate from Natalia Lavrova, chief economist at BCS Financial Group.

"These changes are a logical response to the ongoing market processes," Lavrova said about the wealth fund's new structure. "The yuan is becoming the 'new dollar' due to its growing liquidity and relatively low volatility."