Russia and the Birth of the Eurodollar Market

"Talk that Russia could be behind the bulk of the more than $100 bln drop in the Federal Reserve’s custody holdings for foreign central banks, in the week ending Wednesday has many observers scratching their heads. This would represent about eighty percent of the dollar holdings.

As we noted earlier, rather than selling the Treasuries that Russia simply transferred them from the Federal Reserve out of the US. The incentive would be the threat of sanctions following this week’s Crimean referendum.

There is precedent for this kind of behavior from Russia. Recall that the origins of the Eurodollar market. The Eurodollar market has nothing to do the European Economic and Monetary Union (EMU) or the euro itself. Rather the Eurodollar market refers to dollars outside the US, initially Europe.

In 1956, the US and Soviet Union opposed British and French (and Israeli) invasion of Egypt (Suez Crisis). The US threatened to sell British pounds and intensify the pressure it was already experiencing in maintaining it peg to the dollar under Bretton Woods. It also threatened to veto the UK ‘s request for a large IMF assistance package. Russia witnessed the US willingness to use its financial acumen to impose its will on its special ally.

At roughly the same time, a reformist government came to power in the Hungary and among other things tried to leave the Warsaw Pact. The Soviet Union invaded. Russia feared that the US would use its financial superiority against it in protest. In 1957, Russia-based Narodny Bank shifted dollars from the US and deposited them in its branch in London. Viola, the birth of the Eurodollar market.

There were other advantages of this offshore market for US dollars beyond the Soviet Union’s intentions. Those dollars were not subject to US interest rate cap or regulations. These dollars, as we know with the benefit of hindsight, became the basis for a new bank credit, and a critical part of international finance.

The logic now is that Russia is bracing for the next round of sanctions..."

at http://www.creditwritedowns.com/2014/03/russia-birth-eurodollar-market.html