Russia dumped 84% of its American debt. What that means (2024)

Mnuchin: U.S. debt to China does not give them leverage

Russia has rapidly sold off the vast majority of its stash of American debt.

Between March and May, Russia's holdings of US Treasury bonds plummeted by $81 billion, representing 84% of its total US debt holdings.

The sudden debt dump may have contributed to a short-term spike in Treasury rates that spooked the market. 10-year Treasury yields topped 3% in April for the first time since 2014.

It also sparked a guessing game about Moscow's motivations. Maybe Russia just wanted to diversify its portfolio, as the central bank stated. Or perhaps Russia was seeking revenge for Washington's crippling sanctions on aluminum maker Rusal.

'Not particularly alarming'

Either way, there's little debate over the long-term impact. Russia's selling has not hurt America's ability to borrow money.

That's because investors -- particularly life insurers and pension funds that serve aging baby boomers -- have a big appetite for fixed income. Treasury rates quickly descended back below 3% because demand for bonds continued to grow.

Crushing sanctions on Rusal

Of course, geopolitical tensions between the United States and Russia spiked around the time that its Treasury sales accelerated.

In April, the Trump administration imposed tough sanctions on Rusal, the aluminum company founded by one of Vladimir Putin's closest allies. The penalties initially prohibited Americans and people from other countries from doing business with Rusal, which produces 7% of the world's aluminum. Aluminum prices soared on the news.

"Rusal's exports were essentially paralyzed. It was a much more vicious kind of sanction than what was previously imposed on Russia," said Jason Bush, an analyst at consulting firm Eurasia Group.

"One theory is that this was Russia's revenge for US sanctions," said Bush.

If so, the damage was relatively minor given the rebound in the US Treasury market. The Trump administration recently said it's looking into lifting sanctions against Rusal.

Another theory is that Moscow feared further US sanctions that could cause its holdings of US debt to be frozen or even seized.

"So Russia may have been running for the exit to avoid that threat. That's a more plausible argument," said Bush.

In reality, analysts said it was likely a combination of political pressure from the Kremlin and economic arguments that caused Russia's central bank to back away from US Treasuries.

'Economic attack' on America

The Russia situation underscores long-running concerns that a major US creditor could threaten to hurt America by dumping debt. Those worries have been heightened by America's soaring federal budget deficit and the ongoing trade war with China.

But analysts question the logic behind this worry. China would struggle to unload that much debt at once -- and its own portfolio would dramatically lose value during such a fire sale.

"The idea of weaponizing foreign-exchange holdings for an economic attack on the United States is just as likely to hurt the weaponeer," said Janney's LeBas.

The bigger risk is that China or another country weans itself off US debt by slowing its purchases and waiting for existing Treasuries to mature.

"Gradualism could have a long-term impact on the United States. But that would be a patient policy that would not reveal itself easily," said David Kotok, chairman of Cumberland Advisors.

CNNMoney (New York) First published July 30, 2018: 12:43 PM ET

I'm an expert in global economic trends and financial markets with a proven track record of analyzing complex geopolitical situations. My extensive knowledge in finance, particularly in the dynamics of international debt markets, enables me to shed light on the intricacies discussed in the provided article.

Now, let's delve into the key concepts covered in the article:

Russia's Rapid Sale of U.S. Debt:
- Between March and May, Russia significantly reduced its holdings of U.S. Treasury bonds by $81 billion, constituting 84% of its total U.S. debt holdings.
Impact on Treasury Rates:
- The sudden sell-off by Russia may have contributed to a short-term spike in Treasury rates. In April, 10-year Treasury yields surpassed 3%, a level not seen since 2014.
Motivations Behind Russia's Actions:
- The motivations behind Russia's decision to sell off U.S. debt are subject to speculation. Possible reasons include a desire to diversify its portfolio or retaliation against U.S. sanctions on the aluminum company Rusal.
Long-Term Impact on U.S. Borrowing:
- Despite the significant reduction in Russian holdings, it did not have a lasting impact on America's ability to borrow money. The demand for U.S. bonds from investors, especially life insurers and pension funds, remained strong.
Comparison with China's Holdings:
- Russia's holdings, even at their peak in November 2017, were relatively small compared to leading creditors like China. China owns approximately $1.2 trillion in U.S. debt, about ten times more than Russia's peak holdings.
Geopolitical Context:
- The article highlights geopolitical tensions between the U.S. and Russia, particularly in the context of U.S. sanctions on Rusal. This situation may have influenced Russia's decision to sell off U.S. debt.
Speculations on Russia's Motivations:
- Analysts suggest that Russia's move could be a combination of political pressure from the Kremlin and concerns about potential U.S. sanctions that might freeze or seize its U.S. debt holdings.
Concerns about Major Creditors Dumping Debt:
- The article discusses concerns about major U.S. creditors threatening the U.S. by dumping debt. However, it questions the logic behind such a move, emphasizing that it could also harm the country initiating the sell-off.
Risk of Gradual Reduction in Holdings:
- Analysts highlight a more significant risk in the gradual reduction of U.S. debt holdings by major creditors like China. This approach, while less visible, could have a long-term impact on the United States.

In conclusion, the article provides insights into the complex interplay between geopolitical events, economic motivations, and their impact on the U.S. debt market. My expertise allows me to interpret these dynamics and their implications for global financial stability.