How bad is it for the Russian ruble these days? Consider this: The junk bonds issued by Midwestern supermarket chain Supervalu are now more attractive to investors than the sovereign debt issued by the Russian Finance Ministry.
Last week, Supervalu went to market with a $350 million offering rated at below investment grade (i.e., junk) by the major ratings agencies. The company wanted to borrow the money for eight years and investors were happy to oblige, at an interest rate of 7.75 percent.
Compare that to what happened when the Russian Finance Ministry went to the markets Wednesday morning.
Ahead of the sale, the Finance Ministry had been forced to withdraw five consecutive debt offerings for lack of investor interest. The sixth time wasn’t exactly a charm – but with the markets in need of a benchmark rate, the Finance Ministry allowed the auction to proceed and wound up selling just under 10 percent of the total amount on offer, reflecting a lack of investor interest at rates the government found acceptable.
The original plan had been to offer 5 billion rubles’ worth of bonds set to mature in 18 months. The result was the sale of 491 million rubles’ worth of bonds (about $10 million) at an interest rate of 10.06 percent.
WHY THIS MATTERS
The Russian government’s inability to borrow in the financial markets won’t hurt the Kremlin in the near term, but the markets’ utter lack of confidence in the ruble is impacting the prices Russian consumers pay for imported goods and making life increasingly difficult for them. How long can Putin’s current sky-high popularity endure widespread economic discomfort?
The Finance Ministry received bids for less than half the debt it was offering. It also rejected more than three-quarters of the bids because it considered the interest rate demanded by investors too high.
To be clear: Whereas Supervalu, the parent company of Shop ‘n Save and Save-a-Lot, was able to place $350 million in 8-year junk bonds at 7.75 percent, the Russian government couldn’t place $100 million for 18 months at 10 percent.
Consider for a moment just how different Russia’s situation is from that of the U.S.
The Treasury Department doesn’t issue debt with an 18-month maturity, yet at the end of October, it offered $29 billion in two-year Treasury notes. The entire issue was purchased at an interest rate of .425 percent or lower.
Russia’s troubles reflect investors’ lack of confidence in the ruble, which is has lost a third of its value this year against other currencies. The question isn’t whether Russia will pay its debts – the Kremlin prints rubles, after all. It’s whether the rubles it pays investors will be worth anything when they are delivered.
Russia’s government can get by without borrowing at the moment. The government actually runs a surplus, and its primary export, petroleum products, ensures a steady stream of income in U.S. dollars. But how long that will continue is unclear.
The Russian central bank has reported that the economy is essentially stagnant and has no prospects for growth in the next year or two. The international sanctions that have been pinching Russia ever since it invaded neighboring Ukraine over the summer, and which have ratcheted up as the Kremlin supports rebels eastern Ukraine, are not going away and could get worse.
The ruble’s decline has already started to affect Russian consumers, who are paying higher prices for imported goods, particularly food, and are watching the value of their savings erode at an alarming rate. How long Russian President Vladimir Putin’s popularity can endure with the increasing economic privation is the big question.
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