Saudis hint at selling euro bonds if G7 seizes Russian assets

Bloomberg, citing anonymous sources, reported that the Saudi Ministry of Finance is warning the West against seizing Russian savings held in European accounts. Should this happen, the Saudis would start selling off European bonds.

The decision regarding the Russian money lies with the G7. After the invasion of Ukraine, these funds were frozen—Russia cannot use them. However, the United States is pushing to permanently deprive the Kremlin of these assets, estimated at around $260-$300 billion.

Saudi Arabia's Ministry of Finance has officially denied Bloomberg's reports, asserting that "no such threats have been made." However, the agency insists that Saudi Arabia presented its stance unofficially before the recent G7 meetings. During this gathering, the fate of the frozen Russian funds was discussed.

At the June summit, G7 leaders decided to provide Ukraine $50 billion from the profits of frozen Russian assets held in the EU and G7 countries.

Not only Saudi Arabia objects to the plans to confiscate Russian assets. China and Indonesia also urged the EU to refrain from seizing these funds, fearing a precedent.

According to Bloomberg, the G7 fears that other countries might follow the Saudis' lead and also begin selling European bonds. The consequences of such decisions are hard to gauge, but they would certainly affect the exchange rates and bond prices.

Let's recall how it started: after the outbreak of the war in Ukraine in 2022, the G7 group (United States, United Kingdom, Germany, France, Italy, Canada, and Japan) froze Russian financial assets worth around $300 billion.

The assets, mainly currencies and government bonds, are held in banks outside of Russia. Their freezing aimed to pressure Russia and support Ukraine in its struggle.

An analyst at Xelion Investment House confirms in an interview that the Saudis, by threatening Europe with a bond sell-off, have potentially strong arguments. This concerns papers worth around $75 billion.

- This is likely just a bluff that Saudi Arabia would not fulfill. But there is no certainty about this. And this uncertainty is the point - he explains.

Countries like Saudi Arabia, China, or South Africa have rightly started to fear that the seizure of deposits without a court ruling might also affect them if they antagonize the EU or the USA. Therefore, seizing Russia's funds would be very risky.

The potential impact of the USA's bond exposure limitation by China has resurfaced like a boomerang for years.

- Now there are rumors that Saudi Arabia might use the possibility of selling off EU treasury securities. These rumors should be interpreted rather as an emanation of growing diplomatic ambitions, rather than a real scenario that could shake global markets - the expert assesses.

Countries like China and Saudi Arabia are somewhat bound to assets denominated in dollars and euros. They have no real alternatives to them. In the latter case, it may also be relevant to ask whether assets of sufficient value have been accumulated to destabilize large and liquid markets for European bonds.

He acknowledges that things might be slightly different during lasting tensions or crises. - The strength of such arguments as a debt sell-off will increase. According to Bloomberg reports, the French debt market has recently found itself in a critical position and was the target of the Saudi threat, according to the expert.

He adds that the vision of Marine Le Pen's National Rally gaining an absolute majority in the last parliamentary elections scared off investors.

- As a result, French debt was discounted. Temporarily, the yield difference between ten-year French and German bonds was pushed to over 85 basis points, a level not seen since the European debt crisis.

He adds that the potential consequences of Saudi Arabia fulfilling its threat are too difficult to estimate, as it is an unprecedented situation.

In the face of pressure, the European Union ultimately adopted in June the aforementioned plan to use the profits from frozen Russian assets to finance military aid for Ukraine. It was a compromise between completely confiscating the funds and leaving them untouched.

It is worth noting that despite close ties with Moscow, Saudi Arabia is also trying to build relations with Kyiv. In June, the country unexpectedly hosted Ukrainian President Volodymyr Zelensky, and in August 2023, it hosted a peace summit dedicated to Ukraine, to which Russia was not invited. These actions point to the complexity of Saudi foreign policy and its desire to maintain a balance between different sides of the conflict.