The Russian Central Bank is one of the most transparent of the global central banks about the make-up of its reserves. Its latest annual report reveals that the euro overtook the dollar as its primary currency holding within its foreign currency reserves. The percentage of reserves held in euros rose to 47.5% as of January 2009, up from 42.4% a year earlier. As the euro's price fell by around 4.5% between the two dates we know the change is not a result of valuation effects.

Over the same period, the dollar's share in Russia's FX reserves fell to 41.5% from 47% previously. Given the valuation effects, if the Bank did nothing dollar reserves would have risen to around 49%. This is particularly important if other central banks start to do, or are doing, the same. With global central banks holding USD6.7trn of FX reserves at the end of 2008, even small shifts are likely to have a big impact on the market.

Every 1% move amounts to USD67bn of dollar sales. The deputy governor has subsequently said that this does not represent a fundamental change in the way the Bank intends to keep its reserves, but the annual report is factually correct. The IMF's latest data on the composition of global currency reserves showed that there was significant selling of dollars in the final quarter of 2008, as we have mentioned previously.

There was USD176bn of USD selling in the 4Q 2008 suggesting that central banks had already started switching out of dollars although this is difficult to ascertain for certain given the financial crisis that unfolded during the quarter and the associated reserve declines that occurred for many EM central banks as they sought to defend their currencies from excessive weakness.

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