Home > BRICS, Global Finance, Oil, Politics, USA, World Economy > Rock-solid Russia Returns to Bond Markets for $5.5 Billion

Rock-solid Russia Returns to Bond Markets for $5.5 Billion

With Government debt level ranging between 2%-20%, Russia is in a league of its own. No other major government in the world has such low-levels of debt.

Dependance on raw materials can be the first step!

Dependance on raw materials can be the first step!

Russia is selling dollar bonds for the first time since the government defaulted on $40 billion of domestic debt in 1998. The five-year notes yield 125 basis points over similar-maturity U.S. Treasuries and the 10-year bonds have a 135 basis-point spread.

The sale is the second-biggest public dollar debt offering in emerging markets on record, after Qatar sold $7 billion of five-year, 10-year and 30-year bonds in November, Bloomberg data show.

The yield on Russia’s 11 percent dollar note due July 2018 has dropped 77 basis points to 4.489 percent this year, according to prices by Renaissance Capital. The nation’s debt is rated BBB by Standard & Poor’s, two levels above non-investment grade, and one step higher at Baa1 by Moody’s Investors Service. (via Russia, Egypt Return to Bond Markets for $7 Billion Update3 – BusinessWeek).

The Russian conundrum

After decades of boycott, machinations and confrontation, the Russian Government is in  a strong position of being low on debt. With the lowest levels of Government and private (household) debt, it is the Russian corporate sector that is the main debtor. With debt levels ranging between 2%-20%, Russia is in a league of its own.

At the start of the Great Recession, the Russian industrial and corporate systems were on the verge of bankruptcy. Russian industry with hugely in debts to Western banks, payable in the next 12 months, were in difficulties, refinancing these debts. Defending the Russian rouble, riding the treacherous waves of the The Great Recession, Russian foreign exchange reserves went down from nearly US$400 billion to US$275 billion.

Without depositors panicking about Russian banks.

Squeezing Russia

Russian crisis and default are ‘artificial’ and opportunistic creations of Western bankers, trying to squeeze a recalcitrant country. Russia managed the “budget deficit to hit 6.8% of GDP this year and wants to lower that to around 3% by 2012.” G7 and OECD countries have created a club for themselves, by giving each other unlimited line of credit – while the developing world gets credit based on fast-depreciating dollar/euro foreign exchange reserves.

Maybe this needs an inversion.

As demand and prices crashed ... so did Russian economy!

As demand and prices crashed … so did Russian economy!

Russia’s Achilles’ heel

Russia is too dependent on high raw material prices. High prices result from hot demand from the world economy. Russia feeds on high growth rates – but cannot be the reason for growth of the global economy.

What happens to Russia if a ‘new’ Caribbean Republic (Cuba, Haiti, West Indies, etc) were to start drilling for oil? In 5 years, the world would be awash with oil – and Russia’s mineral earnings could evaporate.

The Russian economy remains structurally weaker than widely perceived. High oil prices of the last 5 years built up foreign exchange reserves – as did inflows in the Russians stock market. Russian entrepreneurs remain an endangered species.

Large swathes of Russian enterprise have reverted back to the state – albeit in a corporate form, in the hands of oligarchs, a proxy for the State . The world has not yet forgotten the Russian debt default. Russia has come out from a default about a decade ago – with a nearly US$400 billion reserves – flexing its muscles in Georgia and dependent on a high oil prices.

Russia should get off its high military horse. Instead Putin-Medvedev should build alliances, sign agreements within the BRICS framework and rebuild the Russian system.

Heads you lose, tails I win

Russia's mineral resources map - (Courtesy - Der Spiegel)

Russia’s mineral resources map – (Courtesy – Der Spiegel)

Like Quicktake has pointed out in earlier posts, the US has alternated between an overvalued currency to gain ownership over large sections of world economy – and now with a devalued dollar, it seeks to gain an upper hand in merchandise exports. The three main points that one needs to understand are: –

One – It reduces the real value of US debt. The Chinese, the Rest of BRICS and the Others need to be paid a lot less in the future. (as pointed out earlier in various posts linked here.) Two – It makes US exports artificially competitive. (as pointed out earlier in linked posts). Three – US competitiveness will be anchored to assets purchased with over-valued dollars.

What the US is now proposing is that the Chinese Yuan must become ‘stronger’ – and the dollar must become weaker. This will mean a real reduction in US debt – and a subsidy for US exports. Of course, a devaluation has never helped any regime in the long run – but in the short run it reduces imports and increases exports. But is a ‘fix’ that the patient begins to become dependent on!

Is that the US is wanting to do to itself?

Related Quicktakes
  1. Ya Huyeyu
    October 7, 2011 at 5:58 am

    you might want to look at this site sdelanounas.ru it’s a blog on various socio-economic developments in Russia that paints a different story using various independent internet based Russian media sources. it’s in Russian so might wanna use a google translator or smth

  2. Ya Huyeyu
    October 7, 2011 at 6:04 am

    oh and btw the size of the Russian govt tax proceeds that accounts for energy sector and especially hydrocarbons has gone down to 1/3 of total amount collected and keeps shrinking. it’s the booming consumer market in Russia that is the main driver of growth as evident by recent investment deals by virtually all major automakers including Ford. Pepsi is investing billions. Boeing continues investing in R&D facilities and has 20 billion allocated for investment into supplier chain producing composite structures for its airplanes (AVISMA corp)

    so plain and simple your using your analysis and approach investors are sure to miss on many opportunities to come. Russia sure is risky but Jim O’Neal the economist and fund manager that coined the term BRIC seems to be of the opinion that Russia is going to dominate the emerging market play in the mid term. just google it 😉

  3. John P
    October 7, 2011 at 6:06 am

    Looks these folks outsource analysis to India hence the quality of the analysis.

  4. May 3, 2012 at 9:28 am

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