China is helping Russia hide money?

The Kremlin may have put a lot of money in off-shore accounts.

Ursula von der Leyen, the head of the European Commission, said on February 26 that sanctions "will stop Putin from using his war chest." This was just a few days after Russia invaded Ukraine. "We will stop the assets of Russia's central bank from moving."

Following the attack on Ukraine, Russia has been subjected to the harshest sanctions it has faced since the Cold War came to an end. A day after Russia agreed to let the self-proclaimed separatist republics in eastern Ukraine claim land, the United States and its allies blocked major Russian businesses from selling their goods in the West. It was four days later, after Russia launched a full-scale attack on its southern neighbor and was sanctioned by many countries. The U.S., the UK, Canada, and the European Union kicked Russia's central bank and its banks off of SWIFT, which is used to clear international transactions. President Joe Biden made a big move as the second week of the invasion came to an end, blocking the import of Russian oil, gas, and coal into the US. This cut the Kremlin off from a big source of money.

Russia has so far been able to get around an EU ban on its important oil and gas exports, but its exclusion from global financial markets has already hurt its economy. People from other countries started leaving Russian markets as soon as February 26 came around. Rubles lost almost a third of their value in a matter of hours. Russia's central bank raised interest rates from 9.5 percent to 20 percent in an effort to stop people from selling rubles and keep the value of the currency from dropping. The government also told Russian exporters to give back 80% of their foreign currency profits. Such measures will help the government save money in the short term, but they will hurt Russia's ability to fight for a long time in a major war by putting a huge strain on business capital and consumer borrowing.

Vladimir Putin appears to have underestimated the size and scope of the sanctions response to his invasion of Ukraine. Having amassed $630 billion in foreign reserves, Putin was sure that he could handle anything the West would throw at him. In the past, he had a lot of money because of the sanctions that Russia had put on its central bank.

Is he?

It looks like Russia may have hidden billions of dollars in reserve assets in secret offshore accounts, where it holds dollar-denominated securities that are out of reach of international sanctions and asset freezes. In fact, there are signs that Russia may have hidden up to $80 billion in Treasury securities outside of the United States during two different periods, one in mid-2018 and one late last year, when Russia built up troops on the Ukraine border. Russia's total offshore dollar holdings could be even more than that, of course. There are also signs that Russia may have moved some of its money with help from another country.

People say that if the West wants to make Vladimir Putin pay for and stop his illegal actions, then it should look for ways to make him pay. It may also be necessary to come up with new ways to stop him from using that money to keep the war going for a long time while still keeping Russia's economy going strong.

Tucked away in plain sight

Though today's financial crisis may be the worst Russia has had since the ruble crisis of 1998, when Moscow had to restructure more than $70 billion in debt, the West's sanctions may not be as strong as the media and world leaders say. It's important to think about how the Russian government might have been able to keep going even if the U.S. and its allies tried to cut off its money. Because we think that Putin's government may be holding a lot of U.S. Treasuries that can't be linked to Russia, this is very important.

Back in 2018, there were shocking stories in Western media that Russia had thrown away almost all of its debt to the United States. During this time, Russia's assets dropped from $96 billion to $15 billion over the course of two months. We thought that Russia had not sold the $81 billion difference. After all, the majority of international trade and almost 90% of foreign exchange transactions are done in U.S. dollars. Given that Treasuries are the investment of choice for any government that needs money soon, a selloff of that size seemed like a stretch.

The Treasury Department's data, on the other hand, did not mean that Russia had sold all of its $81 billion worth of securities. Russia could have just moved the Treasuries out of the United States and kept them there. We then looked at figures from Russia's central bank, which said that Treasury sales should be less than $43 billion. That left $38 billion in the dark. It was gone.We then looked at how many Treasuries were held in the two most popular offshore places: the Cayman Islands and Belgium, where the international custodial bank Euroclear is based. Euroclear holds securities on behalf of depositors. Our research found that over the same two months that Russia is said to have dumped money, there were big rises in Cayman and Belgian stocks. In the end, the $45 billion figure was more than enough to account for the missing Russian money.

The Treasury Department doesn't reveal the names of people who buy securities, and it's not likely that U.S. officials would have this information. People who work for the government don't get it from surveys. Euroclear might not even know who owns the securities it deals with. Russia's central bank could, for example, give its securities to a financial intermediary, like a private bank, a shell corporation, or even a foreign government. Then, the financial intermediary would deposit the securities with the custodian. Such maneuvering could make it look like Russia was not involved at all.

It didn't surprise anyone that Russia would move its Treasuries outside of Russia in 2018. It was widely known that this option was both easy and effective. It had long been thought that China was keeping its Treasuries at Euroclear to hide who owned them and keep them out of the public eye. In China's case, it may have taken the bonds out of the country to hide its involvement in the foreign exchange markets, since it had long used Treasury securities to keep the value of the renminbi's dollar value stable. Russia, on the other hand, would have a different reason for wanting to do this.

Stowing dollar-denominated assets in offshore accounts makes them more difficult for the U.S. to punish. Because of its 2014 annexation of Crimea and support for pro-Russian separatists in eastern Ukraine, the Kremlin has been very worried about sanctions. This is because Western countries have frozen Russian assets and cut off trade with the country. For this reason, Putin might want to hide the Treasuries offshore. If his $38 billion stash of dollars is still hidden in Belgium, the Cayman Islands, or another safe place, it could be very important for Russia to be able to buy important goods or pay its debts.


As soon as Putin started planning for a big invasion of Ukraine, the stage was set for a big move in Russia's Treasury funds. According to data from the U.S. Treasury Department that was released on February 15, Belgium's (Euroclear's) holdings of U.S. Treasury bonds rose by $47 billion in December 2021. There were no big changes in the Cayman holdings that month. As far back as early 2014, Belgium has seen the biggest one-month rise in prices.

China is almost certainly to blame for the rise in 2014. That year, China's central bank, the People's Bank of China (PBOC), saw its assets rise in line with the value of Belgian government bonds. There is a strong chance that the People's Bank of China (PBOC) was building up its war chest of dollars and putting them in Treasuries, which were held through Euroclear. In 2021, however, the PBOC's reserves stayed the same, which means that a different source is to blame for the sudden rise in Belgium's holdings of gold.

That country is probably the source of that news. By December, the Kremlin probably knew that if it invaded Ukraine, harsh Western sanctions would cut off its ability to get money from the West. In order to avoid the worst effects of sanctions, Russia should buy up dollar-denominated assets before it invades. They should then store them in off-shore accounts to keep them safe. That would explain why there has been a huge rise in Belgian Treasury holdings. Anyhow, no other country with a reason to hide its assets from the U.S. government could possibly account for it.

Following Western sanctions, Euroclear has stopped clearing purchases of Russian securities and other transactions in rubles. It's not clear if these moves are in line with other Western companies' moves to fight Russia's invasion. As far as we can tell, Euroclear has been following all of its obligations under existing sanctions. But Euroclear has not said that anyone who wants to sell non-Russian securities, like Treasury bonds, can't. And even though major Russian banks aren't allowed to do business with each other, Moscow could have used non-Russian intermediaries when it put its Treasury holdings with Euroclear. In other words, the Russian central bank could have set up its transactions in a way that would have been completely unhindered by sanctions. In the months before it was supposedly hit with "comprehensive" financial sanctions, then, Russia may have hidden another $40 billion or more in Treasuries, from which it could draw in a pinch.

China's helper?

Russia hasn't said yet which people it would have used to hide Treasuries in another country. One strong possibility, though, is China, which now looks like a friend of Putin's. During the same time that Belgium's Treasury holdings jumped by $47 billion, Russia's central bank reported a huge $41 billion rise in its currency and deposits held by "other national central banks," as well. If you look at the statistics Russia has kept since 2005, you'll see that there have been a lot of big changes. There's a good chance that the People's Bank of China will get the money that people deposit.

Four times as many Chinese bonds are held by the Russian central bank and sovereign wealth fund as they were in early 2018. People who looked at data from June 2021 also say that China has 14.2% of Russia's foreign reserves, which is the largest share of any country. They also have a lot more in common than just money: last year, Russia and China did a lot of military exercises together and made a lot of joint statements against the West. In this case, it would make sense for Russia to deposit $41 billion in renminbi or other currencies with the Bank of China. Russia could then have been given $41 billion by the PBOC in exchange for the currencies. The PBOC could have bought Treasuries for storage at Euroclear with that money. President Xi Jinping, who called Western sanctions "harmful to all sides" just a few weeks ago, appears to be on board with this kind of maneuvering.

Not every line on the PBOC's $3.2 trillion balance sheet would show this money. The central bank could have spread it out over many different lines. The PBOC could have, for example, put some money in state-owned banks and told them to buy Treasuries for safekeeping at Euroclear. PBOC's currency and deposits with China-based banks rose by a record $13 billion in December, at the same time that Belgian and Russian financial data were recorded that were out of the ordinary. This would explain why. Instead, the PBOC could have kept the transaction off its balance sheet. It's not possible, based on the information we have now, to know how Russia and China might have set up a deal like this. Regardless, Russia would be able to get the dollars it wants at any time. The PBOC would just sell the Treasuries and send the money to Russia. Western authorities would not know, and Western financial institutions would not likely have broken any sanctions policies. This way, China and Russia would try to weaken Western financial and political power.


In early December, the Biden administration released intelligence reports that predicted that Putin would invade Ukraine, and they said that these reports were true. As a result, the U.S. government didn't report on the huge Belgian bond stash until nine days before Russia attacked in February. Having real-time access to Euroclear's stock would have added to the early signs that Moscow planned to invade.

From our desks, we can only do so much financial detective work that we can't do any more. Western governments may not be doing as much as they should to stop Russia from getting the money it needs to fight in Ukraine. It's thought that Russian money is flowing through Brussels and Beijing, which are two places where people can buy things.

Increasingly, financial sanctions are being used by the West to fight against aggressive autocracies. The United States and its allies need to better integrate cross-border "follow the money" strategies into their diplomatic and military arsenals to make sure they can win. People who use these strategies can help the government close loopholes in existing sanctions, find and stop evasive transactions through financial intermediaries, and punish state and third-party actors who break global rules. In addition, they can help with conventional intelligence efforts to predict and fight back against adversary behavior. Sanctions programs, on the other hand, won't be able to stop or change the behavior they're trying to stop or change.


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