Treasury bonds

Russia's laughable economic threats against the U.S.

March 4, 2014: 2:58 PM ET

It's a dollar-denominated world, and Putin's just living in it.

Russian President Vladimir Putin

Russian President Vladimir Putin

FORTUNE -- While stock markets believe that the U.S. and Russia will avoid an economy-destabilizing conflict, representatives of both countries continue to lob threats of sanctions at one another.

The latest came from Sergei Glazyev, an advisor to Russian President Vladamir Putin, who said on Tuesday that the Russian government would consider selling its stockpile of U.S. government debt if America and the EU went forward with threatened trade sanctions, according to the Russian news service RIA Novosti.

"We hold a decent amount of treasury bonds -- more than $200 billion -- and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner," he said. "We will encourage everybody to dump U.S. Treasury bonds, get rid of dollars as an unreliable currency, and leave the U.S. market."

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The saber rattling of great powers is often made up of empty threats, but this one is particularly laughable. Russia's $200 billion in U.S. government debt is part of its foreign exchange reserves, a fund built up by the Russian government to help protect it against financial crises, stabilize its own currency, and to enable banks and other businesses to function during financially stressful times.

In other words, Russian investment in U.S. government debt isn't some kind of altrusitic action to help their buddies over in North America pay their bills. It's a fund that the Russian government has built to help its economy function in a world that trades primarily with U.S. dollars.

That said, let's assume the Russian government doesn't care about having access to dollar-denominated assets to lubricate the gears of its own economy and decides to dump that $200 billion on the market. What would happen?:

  • It would raise interest rates in the U.S., dinging the American economy for sure, but also drastically lowering the price of the very bonds Russia wants to sell, causing Russia's foreign-exchange fund to suffer massive losses.
  • Russia could try to sell its assets slowly, but doing so would have very little effect on the American economy. Remember, the Federal Reserve is buying $35 billion per month of U.S. government debt, and it could buy up Russia's entire stockpile of debt in less than six months just by maintaining its current policy.

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If the situation in the Ukraine were to devolve into a full-scale trade war, the Fed would have the motive and ability to increase those bond purchases. And this is even before you take into account the fact that investors of all stripes would begin flocking to U.S. treasury debt at the first sign of a crisis.

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