RUSSIAN Bonds Collapse
Summary
TLDRIn this video, Joe explores the Russian economy's challenges, focusing on the difficulty Russia faces in selling bonds to fund its expenditures amidst sanctions and inflation. Despite the Russian Central Bank raising interest rates to 19% to combat inflation, the bond market is not responding positively. The video delves into the historical bond yields, the decline in overseas investment in Russian bonds, and the implications of these trends for Russia's financial future. Joe highlights that while GDP figures might suggest strength, the underlying economic indicators, such as high inflation and the struggle to sell bonds, paint a more concerning picture of Russia's economic health.
Takeaways
- 💼 Bonds are a primary method for governments to fund themselves, acting as a loan with a promise to pay back with interest over a set period.
- 📈 Russia has been increasing interest rates to combat high inflation, which is a common economic strategy.
- 📉 Despite high interest rates, Russia is struggling to sell bonds, indicating a lack of confidence from investors.
- 🚀 The Russian Central Bank has raised interest rates seven times in the past 14 months, reaching a high of 19%.
- 💸 The high yield on Russian bonds, which is near historical peaks, is not attracting investors due to concerns about the economy.
- 📊 Russian bond issuance has seen a significant shortfall compared to targets, especially in the first half of 2024.
- 🌐 Overseas investment in Russian bonds has dropped significantly since the invasion of Ukraine, reducing from 3.4 trillion to 1.4 trillion rubles.
- 📉 The percentage of Russian bonds held by overseas investors has fallen from 28% to 7.2% since the invasion of Ukraine.
- 💹 The Russian economy's fundamentals, such as inflation and interest rates, are more indicative of its health than GDP figures.
- 🏦 Russia's ability to finance its expenditure through bond sales is diminishing, which could lead to a quicker depletion of its reserves.
Q & A
What is the primary method governments use to fund themselves?
-Governments primarily fund themselves by issuing bonds, which are essentially loans.
How do bonds relate to a country's debt?
-When countries are in debt, it generally means they are issuing bonds to raise funds.
What is the role of interest rates in the bond market?
-Interest rates are crucial in the bond market as they determine the prevailing rate of interest a country offers on its bonds, affecting their attractiveness to investors.
How has Russia been using bonds to fund its expenditure?
-Russia has been using bonds to fund its expenditure, especially with its income being limited due to sanctions.
What is the current challenge Russia is facing with bond sales?
-Russia is struggling to raise enough funds through bond sales despite offering high interest rates.
Why has Russia increased its interest rates over the past 14 months?
-Russia has increased its interest rates to tackle high inflation, which is a common strategy used by countries to curb inflation by making borrowing more expensive.
What is the current interest rate set by the Russian Central Bank?
-The Russian Central Bank has set the interest rate at 19%, which is a high yield compared to global standards.
Why might high bond yields not equate to high demand in Russia's case?
-High bond yields might not equate to high demand because investors are concerned about the Russian economy's stability and ability to repay the debt in the future.
What has been the trend of overseas investment in Russian bonds over the past 20 years?
-There has been a general increase in demand from overseas investors over the past 20 years, but this trend has reversed since Russia's invasion of Ukraine.
How has the invasion of Ukraine impacted Russia's ability to issue bonds?
-The invasion of Ukraine has led to a significant reduction in the value of Russian bonds held by overseas investors and a decrease in their percentage share of total bonds.
What are the implications of Russia's struggle to raise funds through bonds?
-If Russia cannot raise enough funds through bonds, it may have to rely more heavily on its reserves, which could accelerate the depletion of its cash reserves and lead to economic instability.
Outlines
📈 Economic Struggles: Russian Bonds and Interest Rates
The paragraph discusses the current state of the Russian economy, focusing on the challenges Russia faces in selling bonds to fund its expenditures. Despite high interest rates, Russia is struggling to issue enough bonds to meet its financial needs. The video will explore the reasons behind this struggle, including the impact of sanctions, inflation, and the country's response to these economic pressures.
📊 Bond Issuance and Investor Demand
This section of the script analyzes the bond issuance by the Russian government and the actual amount raised compared to the proposed levels. It highlights a significant shortfall in bond sales, especially after the invasion of Ukraine. The data shows a decline in both the amount and the percentage of bonds held by overseas investors, indicating a loss of confidence in the Russian market.
📉 Yield Trends and Investor Concerns
The paragraph examines the historical yield on Russian bonds, showing that despite high yields, there has been a decrease in demand. It discusses how geopolitical events, such as the annexation of Crimea and the invasion of Ukraine, have influenced bond yields and investor behavior. The current high yield is juxtaposed with the falling demand, reflecting investor concerns about the Russian economy's stability.
🌐 Impact of Sanctions and War on the Russian Economy
This part of the script delves into the effects of international sanctions and the war in Ukraine on the Russian economy. It discusses how these factors have led to a decrease in foreign investment and a reliance on domestic capital. The paragraph also touches on the potential long-term implications of these economic trends for Russia.
🚨 Alarming Economic Indicators and Future Outlook
The final paragraph summarizes the key economic indicators that signal a crisis in the Russian economy. It points out the rapid rise in inflation, the Central Bank's response with high interest rates, and the lack of investor confidence in Russian bonds. The video concludes with a warning about the potential for Russia to run out of money if it cannot secure more debt financing.
Mindmap
Keywords
💡Bonds
💡Coupon
💡Inflation
💡Interest Rates
💡Sanctions
💡Yield
💡Overseas Investors
💡Russian Central Bank
💡Budget Deficit
💡Wartime Economy
💡GDP
Highlights
Bonds are a primary method for governments to fund themselves, similar to issuing loans.
Russia has been increasing interest rates to combat inflation, reaching a high of 19%.
Despite high interest rates, Russia struggles to sell bonds to fund its expenditures.
The Russian Central Bank has increased interest rates seven times in 14 months.
A 19% interest rate is unusually high, indicating a significant return for investors.
The demand for Russian bonds is falling despite high yields.
Over the last 20 years, there has been a general increase in demand from overseas investors for Russian bonds.
Since the invasion of Ukraine, the demand from overseas investors has significantly decreased.
In 2023, Russia aimed to raise 3.15 trillion rubles but only managed to raise 2.65 trillion rubles through bonds.
In the first half of 2024, Russia faced a shortfall of 700 billion rubles against an ask of 1.8 trillion rubles in bond sales.
Historically, Russian bonds have had high yields, averaging more than 5% over the past 22 years.
The current yield on Russian bonds is close to the highest in the last 22 years.
Overseas investors held a significant portion of Russian bonds, but this has dropped since the invasion of Ukraine.
The value of Russian bonds held by overseas investors has decreased by 60% in two years.
Russia is now largely dependent on raising capital from the Russian market alone.
Russia's economy shows serious problems through rising inflation and high interest rates.
Investors are concerned about the Russian economy's ability to repay debt, leading to low bond sales.
If Russia cannot raise more debt, it may have to dip further into its reserves, accelerating the cash rundown.
Transcripts
hi welcome back to Joe blogs in today's
episode I want to talk to you about
what's happening in the Russian economy
and specifically to talk about Bond
sales now bonds are basically loans and
this is the main way that governments
fund themselves when we talk about
countries being in debt it's generally
bonds that they're issuing so they issue
a note which says I will pay back the
bearer of this Bond $100 or 100 rubles
or whatever the currency is in a set
period of time so it might be in 10
years time 15 20 25 30 years time and
during that period the holder will be
paid interest in the form of a coupon
and the coupon basically is set at
whatever the prevailing rate of interest
is in that country at that time and
Russia has been using bonds recently to
try to fund all of its expenditure
because obviously its income is now
being limited as a result of the
sanctions and in today's video I want to
talk about the fact that Russia is now
struggling to be able to raise bonds and
that's surprising because over the
course of the last 14 months Russia has
been increasing its interest rates as a
result of increasing inflation we've
talked about this many times before on
the channel but most countries use
interest rates as a way of tackling High
inflation so when inflation Rises
generally speaking you'll increase your
interest rate that basically makes
borrowing more expensive so individuals
and companies will generally reduce the
amount that they're borrowing therefore
there's less cash available so they'll
spend less and that means that demand
Falls and therefore prices should go
back down that's the general logic but
in Russia over the past 12 months we've
seen a rapid increase in inflation and
in response to that the Russian Central
Bank has increased interest rates on
seven separate occasions over the past
14 months with the most recent being an
increase of 100 basis points to 19% and
19% is a really high yield if you think
about this in your own context if you
were being paid 19% for money that you
were putting into the bank that would be
a fantastic return people would be
delighted with a yield of 19% but
unfortunately from Russia's point of
view that isn't the case in the market
right now and Russia is struggling to be
able to issue enough bonds to keep
funding all of its expenditure so in
today's video I'll have a look at what's
been happening with Russian Bond
issuance over the course of the last 20
years but specifically we'll be looking
at what's been happening since Russia
invaded Ukraine we'll have a look at
what's going on with bond yields because
yield is really what people invest into
bonds for they want to make a return and
you would think that a high yield would
equate to high demand but that's not
happening in Russia right now we'll have
a look at what's been happening with
with overseas investors because that's
one of the critical things from Russia's
point of view over the course of the
last 20 years or so there has been a
general increase in demand from overseas
investors however since the invasion of
Ukraine that situation has turned around
and then finally today I'll wrap up with
my summary to what I think is happening
with Russia right now with regards to
its interest rates inflation and bond
appetite and what the implications of
struggling to be able to raise enough
money through bonds will be for Russia
going forward but before we get into all
of that I'd like to say once again thank
you so much to everyone that's
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first 30 days as I mentioned at the
start of today's video the way that most
governments around the world are funding
themselves is through the issuance of
bonds if you need to raise money to pay
for all of your budget you raise money
from investors you issue bonds promising
to pay those investors back in five or
10 or 15 or 20 or 30 years time and
those bonds will have a fixed coupon
attached to them and you would think the
fact that interest rates are currently
running at 19% would make Russian bonds
highly attractive in the market because
you can earn a coupon of
19% however unfortunately for the
Russian authorities that isn't proving
to be the case this chart which has been
put together using data from the Russian
Ministry of Finance shows the proposed
level of bond raising by the Russian
government and the actual amount raised
per quarter dating back to the first
quarter of
2022 the blue bars on this chart show
the proposal by the Russian Ministry of
Finance basically how much they were
looking to raise each quarter and the
green bars show the actual amount that
they've raised in terms of issuing those
bonds so we start off by looking at what
happened in the first quarter of 2022
which includes the period when Russia
invaded Ukraine which started on the
24th of February 2022 you can see that
in that first quarter Russia was looking
to raise 700 billion rubles in bonds
however because of the impact of the war
the actual amount it raised was less
than 100 billion now the second quarter
of 2022 is the First full quarter of the
war and at that time commodity prices
were all over the place and nobody
really knew what was going to happen and
you can see that the Russian authorities
didn't look to raise any bonds and
didn't raise any money now in the third
quarter the Russian authorities tested
the market to see if there was any
appetite and there wasn't and in the
fourth quarter you can see that once
again they tested the market and
interestingly there was a lot of
appetite from investors at that time and
they raised 1.2 trillion rubles in that
quarter now unfortunately no details
have been provided as to who the
investors are but it's likely that that
came from pent up demand within Russia
now interestingly in the first quarter
of 2023 the Russian authorities
increased the ask to 800 billion rubles
but unfortunately investor demand was
down and they only managed to raise
650 billion in the second quarter of
2023 the authorities increased their ask
to 850 billion rubles but only managed
to raise 800 and in the third quarter
Russia ambitiously was to raise 1
trillion rubles but only managed to
raise 650 billion in the fourth quarter
of 2023 the as reduced to 500 billion
rubles and the Russian authorities
managed to raise 550 so in total during
2023 Russia was looking to raise
3.15 trillion rubles but only managed to
place bonds to the value of 2.65 billion
which represents a shortfall of 500
billion rubles or around 16% in the
first quarter of 2024 Russia was looking
to raise 800 billion rubles but only
managed to secure orders for
750 however in the second quarter of
2024 which is the most recent statistics
that we have Russia was looking to raise
1 trillion rubles but only managed to
secure orders for
350 billion which represents a short
fall of around
65% and this is despite the fact that
Russia has increased its interest rates
significantly over the course of the
last 14 months from around
7.5% to the current level of
19% and when you look at the performance
over the past six quarters the Russian
authorities have looked to raise 5
trillion rubles however they have only
managed to secure orders for 3.75
billion rubles which represents a
shortfall of
25% however if you look at the
performance in the first half of 2024
the first and second quarters the
combined shortfall of 700 billion rubles
against the ask of 1.8 trillion
represents a shortfall closer to 40%
which is obviously highly concerning
from Russia's point of view particularly
when you take into account that the
yields being offered in 2024 are
significantly higher than they were in
2023 as a result of the fact that Russia
has been rapidly increasing its interest
rates this chart shows the historic
yield on Russian bonds dating back to
2002 and the scale on both sides of this
chart goes from 0% at the bottom to 25%
yield at the top and what this chart
shows is that historically the yield on
Russian bonds has been high averaging
more than 5% over the course of the past
22 years and at certain times the yield
has been extremely high back in 2002
which was a period when the Russian
economy was struggling the yield on
Russian bonds was above 15% and actually
Rose to a high of just under 20% before
coming back down to less than 5% by 2004
now between 2004 and 2008 the bond yield
stabilized at around 6% however
following the global financial crisis
which hit the world in 2008 bond yields
to around 15% and then normalized back
down to around 6 or 7% between 2010 and
2014 now 2014 was the year when Russia
annexed the Crimea area previously of
Ukraine and as a direct result of that
and the sanctions that were applied
against Russia at that time the Russian
economy started to decline and the yield
on Russian bonds increased from around
6% to closer to 20% now as the Russian
economy recovered and got back to normal
Bond gals came back down and by 2021
they were actually down to less than 5%
which is one of the lowest levels that
we can see on this chart however
following the invasion of Ukraine in
2022 bond yields in Russia spiked again
as a result of the fact that there was
concern from investors as to what was
going to happen in Russia and so they
were looking for bigger yields in order
to take that risk and bond yield Rose
above 15% now during 2023 the yield on
Russian bonds actually fell below 10% as
a result of the fact that the Russian
Central Bank significantly reduced the
official rate of interest from the
emergency rate of 20% that was
introduced immediately following the
invasion of Ukraine down to a level of
7.5% however as you can see over the
course of the past 12 months as the
central bank has increased interest
rates in order to try to offset what was
happening with inflation the yield on
Russian bonds has increased to the
current level of around 18 or 19% and
when you take a step back and look at
where these bonds sit in the last 22
years the current yield is close to the
highest that Russian bonds have paid
however despite that demand for Russian
bonds at the moment is falling and
that's as a result of what else is going
on in the Russian economy and concern
from investors both in Russia and
overseas as to what's going to happen
over the course of the next 6 to 12 to
18 months
this chart shows the percentage share of
Russian bonds being held by overseas
investors between February 2012 and
February 2024 which is the latest data
that we have available the blue section
of this chart shows the value of those
overseas Bond Holdings and is measured
against the scale on the left hand side
which is shown in trillions of rubbles
and the red line chart shows the
percentage of bonds held and is measured
against the scale on the right hand side
which goes from 0% at the bottom to 40%
at the top so if we start off by looking
at the total value of the bonds which is
shown by the blue section of the chart
back in February 2022 the value of bonds
held by overseas investors was very
small less than 100 billion rubles
however as you can see over the course
of the following 10 years there was a
significant increase in the value of
bonds being purchased by overseas
investors as Russia became more
attractive to the international markets
more International companies moved to
Russia established businesses and so the
Russian economy became integrated into
the global economy and by the end of
October 2021 the total amount of Russian
Bonds in overseas investors hands was
3.4 trillion rubles which represents an
increase of 34 times over that 10-year
period however as you can see following
Russia's invasion of Ukraine which
commenced in February 2022 there's been
a significant reduction in the value of
Russian bonds being held by overseas
investors and as out February 2024 the
total value was down to 1.4 trillion
rubles which represents a reduction of 2
trillion rubles or around 60% in a
2-year period if we now have a look at
the red line that shows the percentage
of Russian bonds being purchased by
overseas investors back in February 2012
the percentage was sitting at around 4%
which means that at that that time 96%
of all of the Russian Bonds were being
purchased by Russians in the 12 months
between February 2012 and 2013 there was
a significant increase in the percentage
of Russian bonds being purchased and by
February 2012 it was up to
28% now following Russia's invasion of
Crimea and subsequent annexation there
was actually a reduction in demand and
by February 2015 the amount of Russian
bonds being purchased overseas had
fallen to 18% over the following 2 years
the interest in Russian bonds increased
for overseas investors and by February
2018 the percentage being purchased was
up to 32% as a result of the slowdown in
the global economy in 2018 and
particularly in the Russian economy the
appetite for Russian bonds fell and by
October 2018 the percentage being
purchased by overseas investors was down
to 24% however that appetite soon
returned and by February 2020 35% of all
Russian bonds were being bought by
overseas investors however as you can
see over the course of the past 4 years
the amount of Russian bonds being
purchased overseas has fallen
significantly and by February 2024 it
was down to
7.2% and if the current Trend continues
it's likely that the amount of overseas
purchases will be reduced to virtually
zero and that means that Russia is now
fully dependent on raising all of its
capital from the Russian Market
so what's the summary and conclusion
today well I wanted to post this video
because I think what's happening with
regards to interest rates and inflation
and bond sales are really important in
telling us the real story as to what's
going on with the Russian economy right
now if you just look at the press and
look at GDP figures you'd think that
Russia is doing fantastically well and
of course I'm hit with thousands of
comments like that every single week
people telling me that Russia is
actually the strongest economy in the
world and I'm talking a lot of rubbish
but actually you need to look at the
fundamentals because GDP is something
that is relatively easy to inflate
particularly if you do what Russia is
doing right now and start sponsoring all
of the companies within Russia paying
them directly from the central bank to
produce lots of things for Ukraine that
is bound to drive up the profitability
of those businesses and will increase
your GDP however those sales are not
genuine sales Russia isn't selling
things to the rest of the world it's
basically paying itself using its
reserves and if it continues to do that
it will run out of cash at some point in
the future because there's no external
money going into to that whole process
so looking at the fundamental factors on
the economy what's happening with
inflation and interest rates really
gives us a much better read as to how
healthy things are in Russia right now
and what we've seen is that contrary to
the the rest of the world inflation has
risen rapidly over the past 12 months
and is now sitting at more than double
the target rate of 4% and that Target
rate of 4% is actually double the target
rate for most other economies in the
world most developed economies have a
Target rate of 2% so 4% is already more
than you'd expect but the fact that
inflation is actually sitting at 9%
tells us that there are some serious
problems and that inflation is being
driven by a number of factors firstly
the move to the wartime economy has
fueled it because those companies that
are being paid by the Kremlin have been
recruiting heavily they've been trying
to get in as many people as possible to
keep producing as much as possible to
get paid all of that exceptional profit
they're offering higher wages to attract
in those people those people who are
leaving their jobs are then leaving
vacancies behind and those companies are
having to compete in this new market so
they're having to offer higher wages and
as well so if you're an employee in
Russia right now it's a great time
because there's lots of money available
you're being paid lots of salary so all
of the people in Russia have got lots of
free income so they're spending they're
going out and spending in the stores
that's driving up inflation so partly
this inflation is being driven by the
move to the wartime economy but it's
also being driven up by what's happening
with Imports because the sanctions that
have been applied against Russia has
restricted the availability of certain
Goods because companies won't sell to
Russia simple economics tell us that
when there's a restriction in the supply
and demand remains High then prices will
rise and that's what's happening in
Russia right now now in order to try to
counter that high level of inflation the
Russian Central Bank has been increasing
interest rates and it's increased them
on seven separate occasions in the past
14 months from
7.5% to the current level of 19% and
that 19% is really quite interesting
because it's only 1% below what Russia
regarded as an emergency rate back in
February 2022 so Russia is telling us
that its interest rates are now back to
emergency levels that tells us that
there's an emergency going on in the
economy right now and that Russia needs
to solve it so anybody that thinks that
the Russian economy is doing really well
just needs to look at what's happening
with interest rates and the fact that
the Russian Central Bank is still
concerned about what's happening and
when you look at what's going on with
producer prices they're continuing to
rise at more than double digits so
therefore it's likely that inflation
will continue Rising so all of this is
seriously bad news but the biggest issue
I think coming out of today's video is
that Russia is now struggling to be able
to place its bonds because the way that
it's financing a lot of its expenditure
is by issuing bonds basically debt IT
issues a promisory note saying to people
we will pay you back at some point in
the future give us your money now we'll
spend it on whatever we like the war in
Ukraine predominantly and at some point
we'll pay you back now investors would
look at the yield normally and say 19%
wow this is fantastic we will take as
many of those bonds as you can issue
however with any form of lending you
always have to look at the risks and
investors are looking at Russia right
now and saying okay the yield is 19% why
is it 19% is there something happening
and when you look at what's going on in
the economy it tells you that there are
alarm bells ringing there are concerns
about what's happening right now and
whether or not Russia will be able to
pay that debt back in the future because
there's no point taking a bond if you're
not going to be repaying there you'd
rather go for a lower yield and know
that you're going to get your Capital
back and that's what's happening with
investors right now overseas investors
have pulled back from Russia and
investors within Russia clearly are
cooling their demand for these type of
bonds so we saw from the data that
Russia only managed to raise around
oneir of the total of 1 trillion rubles
that they were looking to raise in the
second quarter of 2024 and it'll be
really interesting to see what happens
with the data when it comes out for the
third quarter because if Russia has had
its supply of bonds cut off if it can't
raise any more debt then it's going to
have to dip into those reserves that
it's got already even further and that
will accelerate the rundown of that cash
and could lead to Russia running out of
money so the overall summary of today's
video is that Russia has once again
increased interest rates the reason that
they're increasing interest rates is
because there are serious problems in
the economy right now which is showing
up through Rising inflation if Russia
doesn't sort this out we could get to a
point where inflation rises even further
interest rates go up even further
unfortunately from Russia's point of
view despite the fact that they're
increasing the yield on their bonds
nobody wants to buy the bonds right now
because investors are concerned about
what's happening and all of this is
seriously bad news for the Russian
economy so hopefully you've enjoyed
today's video you found it useful
informative and thought-provoking if
you've liked what I've said then please
give me a thumbs up thank you for
watching this video all the way through
to the end and here's something to put a
smile on your face
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