RUSSIAN Bonds Collapse

Summary

In 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.