The country isn’t afraid of using its military strength to crush small states, or threaten the likes of Poland and it has cut off gas supplies to some of its former allies who step out of line, such as Georgia and the Ukraine; and it has seized businesses from local and foreign businessmen and companies and virtually nationalised them.

Now there’s strong suggestion that Russia is cutting back on its purchases of US Government debt, especially the debt of those struggling mortgage twins, Fannie Mae and Freddie Mac.

It’s not overt, and certainly not as large a withdrawal as we have just seen from Asian buyers (Japan, Taiwan, China) but it seems to have got tongues wagging given the rising tensions over Georgia, Poland and the surge we saw yesterday in commodity prices.

The Russian move came in this week’s eye-catching Freddie Mac auction of five year reference notes which saw the quasi-US Government mortgage group pay 1.13% above the five year Treasury note issue. It also showed up in the sale the week before of three year notes by Fannie Mae, the other struggling mortgage twin.

US and local banking sources say that Asian buyers picked up 30% of the Freddie issue this week, down from 41% in a May sale. Asian investors bought 22% of last week’s Fannie issue, around half what they bought in May.

European buyers bought 10% of Freddie’s issue this week, down from 15% in May, and then the Russian Finance Minister, Alexei Kudrin, said in Moscow that Russia was still buying debt issued by Fannie Mae and Freddie Mac, but on a smaller scale.

Those comments and the slide in sales to Europe, plus the tensions over Georgia and Poland have raised suspicions that the Russian Government is cutting its purchases of US Government debt to make a point to Washington that it has the financial clout, while the US doesn’t.

In June and July when Fannie and Freddie’s woes forced the US to put together a support concept, Russia let it be known that its Reserve wealth fund held around $US100 billion in Fannie Mae, Freddie Mac and Federal Home Loan Banks’ debt at the start of this year.

Now Moscow reports say this has been cut by around 40% with maturing short term debt not being rolled over.

As Fannie and Freddie have around $US223 billion in bonds maturing by the end of next month, a lack of interest from Russia, along with Asian investors (Central banks and wealth funds) would be disastrous. The maturing bonds won’t be rolled over or replaced if that’s the case and the US Government will have to take control of both groups to protect bondholders and allow shareholders to lose their shirts.

Peter Fray

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