A friend was nice enough to send me a blog posting about the USD no longer being the Russian Reserve Currency. Shocking stuff, surely, but let’s take a look at the cited MarketOracle.co.uk article…

The US dollar is not Russia?s basic reserve currency anymore. The euro-based share of reserve assets of Russia?s Central Bank increased to the level of 47.5 percent as of January 1, 2009 and exceeded the investments in dollar assets, which made up 41.5 percent, The Vedomosti newspaper wrote.

The dollar has thus lost the status of the basic reserve currency for the Russian Central Bank, the annual report, which the bank provided to the State Duma, said.

In accordance with the report, about 47.5 percent of the currency assets of the Russian Central Bank were based on the euro, whereas the dollar-based assets made up 41.5 percent as of the beginning of the current year. The situation was totally different at the beginning of the previous year: 47 percent of investments were made in US dollars, while the euro investments were evaluated at 42 percent.

The dollar share had increased to 49 percent and remained so as of October 1. The euro share made up 40 percent. The rest of investments were based on the British pound, the Japanese yen and the Swiss frank.

The report also said that the reserve currency assets of the Russian Central Bank were cut by $56.6 billion. The losses mostly occurred at the end of the year, when the Central Bank was forced to conduct massive interventions to curb the run of traders who rushed to buy up foreign currencies. The currency assets of the Central Bank had grown to $537.6 billion by October 2008. Therefore, the index dropped by almost $133 billion within the recent three months.

The majority of Russian companies, banks and most of the Russian population started to purchase enormous amounts of foreign currencies at the end of 2008. The dollar gained 16 percent and the euro 13.5 percent over the fourth quarter. The demand on the US dollar was extremely high, and the Central Bank was forced to spend a big part of its dollar assets, experts say.

There’s another way to read the Russian currency reserves situation…

The Russian central bank didn’t change it’s reserve ratios because of some macro analysis, they did so because of the domestic demand for foreign currencies (specifically the USD) and their intention to defend their currency.

Last October, Russia had US$500b in currency reserves (I’m rounding to make the math easier but less precise), 49% of it in USD ($245b) and 40% in EUR ($200b).

At the beginning of 2009, Russians started trying to buy foreign currencies, “The demand on the US dollar was extremely high.” To defend their currency, Russia removed funds from their currency reserve to meet the foreign currency demand and keep the ruble from collapsing.

Within the last several months, the Russian foreign currency reserves dropped by $133b. Let’s say 80% of the demand was for USD (“extremely high”). That would be $106b of the amount the reserves fell. Let’s say the other 20% is EUR, or $27b.

After transferring out $106b of USD, the Russian reserve would have $139b in USD. After transferring out $27b in EUR, they would have $173b in EUR. After these transactions, the new % split for the currency reserve would be 38% USD and 47% in EUR (relatively close to the percentages cited in the article, close enough for my loose arithmetic).

Instead of being proof of low demand for the USD, this article is actually evidence of incredibly high demand for the USD.

I think I’ve said it before… the USD is the worst currency in the world, except for all the others.