Investors are withdrawing from Russian government bonds, they fear measures against Moscow. The weak ruble is driving inflation – a horror scenario for the Russian leadership.
When Russia’s President Vladimir Putin wants to demonstrate that he is solving problems, he likes to condense subordinates on television. This was also the case in December when he spoke to ministers about rising food prices. “People are restricting themselves because their money is not enough for basic food,” Putin grumbled, “and where are you looking?” Shortly afterwards, the government agreed with sugar and sunflower oil producers to freeze prices and imposed export quotas and tariffs for them Wheat a.
For the Russian leadership, inflation is a terrible scenario that could exacerbate the already great discontent in the country in the face of years of stagnation. In his State of the Union address on Wednesday, Putin admitted that state regulation is not a permanent solution. The government should therefore find ways to stabilize prices with “market means”.
The rise in price, which was 5.8 percent in March compared to the same month last year, is also due to the rise in international food prices, but above all to the weakness of the ruble. Since the beginning of 2020, the Russian currency has devalued almost 20 percent against the dollar, and one dollar currently costs a good 75 rubles.
The ruble under pressure
The oil price, which fell during the pandemic, also played a role last year, but it has since recovered. The Kremlin is largely responsible for the fact that the ruble remains at a low level: the imprisoned opposition leader Alexei Navalnyj is still in critical health, even though he has now ended his hunger strike. In addition, Russia massed troops on the borders with Ukraine. Although these should now be withdrawn again, the situation can worsen again at any time. In principle, this is suitable for unsettling investors, even if the ruble has appreciated again from its annual lows in the past few days.
In particular, there is great fear of new sanctions from Washington. When American President Joe Biden answered yes to the question of whether he considered Putin a “killer” in mid-March, the ruble depreciated against the dollar by one percent within a day, and yields on ruble government bonds rose significantly.
The sanctions imposed by Washington at the beginning of April, including for cyber attacks, also caused the ruble to plummet. However, he made up for the losses when it became clear that the measures had been rather mild. Although they prohibit American financial institutions from buying Russian ruble government bonds for the first issue from mid-June, they can continue to buy the paper on the secondary market. Again, the pattern of tightening and relaxation seems similar.
Washington can tighten measures at any time
The share of foreign buyers in the ruble government bond market has already fallen significantly: at the end of March, their share was around 20 percent, of which 7 percent were American investors. In February of last year, the proportion of foreign investors was still 35 percent.
Russia itself is no longer as dependent on foreign money as it was before 2014: At that time, the country got into a severe economic crisis because of the sanctions following the annexation of the Ukrainian Crimea and the drop in oil prices. Since then, Moscow has cut spending and eased its debt burden. It can cover a large part of its money needs – in addition to selling oil and gas – in its own country. The state-controlled VTB Bank demonstratively bought 72 percent of the debt in an issue last week.
The withdrawal of foreign investors from Russian government bonds intensified in 2019 when Washington imposed sanctions on dollar-denominated stocks. Even now, the American government could tighten the measures at any time. Washington has to do so by the beginning of June at the latest – then the second round of sanctions for the poisoning of Navalnyj is due.
If American banks are also banned from buying Russian government bonds on the secondary market, not only will their risk premium rise dramatically, but the ruble will also depreciate significantly. But the prospect of further sanctions has an impact on investors. The analyst Stanislaw Muraschow of the Raiffeisenbank assumes that the “sanction premium” in relation to the dollar is about 10 rubles. According to this, without political risks and at the current oil price, one dollar would not have to pay 75 rubles as is currently the case, but only 65 rubles.
The Kremlin cannot want such a bonus – despite all assurances that the financial sanctions have so far only brought good things, namely more independence for the financial market. A weak ruble serves exporters, who are paid in dollars, and fills the state budget through the sale of oil and gas. But it also makes imports more expensive.
Since components from abroad are used in a number of production areas – in mechanical engineering, pharmaceuticals, agriculture – the prices for them also rise, which is ultimately felt by consumers. The real disposable incomes of Russians have been falling or stagnating for years – at the end of last year they were 10 percent lower than in 2013. Putin therefore announced aid payments to selected groups in his speech on Wednesday, but these are unlikely to have any major effects. Market participants reacted with relief: After all, the president had not announced a military escalation.