Russia’s crumbling economy is facing a potential “massive credit crunch”, it has been claimed, as the rapid sell-off in bonds continues.
Last week the Kremlin had to scrap an auction of government bonds worth around £5 billion due to a lack of buyers.
Both banks and private investors appear reluctant to purchase more debt without higher yields, which ultimately could send future borrowing costs for the government soaring.
Russia’s government bond index (RGBI) subsequently plunged to its lowest levels since the introduction of Western sanctions following the invasion of Ukraine in 2022.
In a further sign of a crisis of confidence among investors, bonds belonging to construction firms suffered substantial losses over the last few days.
The biggest fall was registered in bonds belonging to the firms Samolet, Brusnika, and Strana Development. The companies’ bonds lost between 4% and 5% of their nominal value, while yields rose to between 34% and 37%.
The crashing bond market has prompted some Russian analysts to predict turbulent times ahead for the Kremlin.
Jay, a regular pro-Ukrainian blogger living in Kyiv, noted in a post to his X social media account: “Very likely that next week will be a massive credit crash in Russian markets.”
Russia’s spending on national defence has skyrocketed since the start of the full-scale Ukraine war in February 2022.
It has more than doubled in just three years – rising from £39 billion in 2021 to an eye-watering £93 billion in 2024. Due to the soaring expenditures on the military, Russia is having problems balancing its budget.
Before the invasion in 2021, Russia’s federal budget had a surplus equivalent to 0.4% of GDP. However, for 2024, it is expected to run a deficit worth 1.1 percent of GDP.
Alexander Mertens, a professor of finance and economics at Kyiv’s International Institute of Business, warned Putin faces a serious dilemma over the economy.
In an article for the Atlantic Council, he wrote: “He currently appears intent on continuing the war indefinitely while hoping to outlast the West and exhaust Ukraine.
“Alternatively, he could seek to move toward a settlement of some kind. However, there is a very real danger that either option could end up plunging Russia into a serious economic crisis.”
The volatility in Russian financial markets comes as the Kremlin scrambles to secure new supplies of butter to prevent shortages of staple food shortages.
Scarcity of butter has seen a hike in prices of more than 23 percent since the beginning of 2024.
An increasingly desperate Kremlin started to import butter from Turkey and the UAE at the end of October.
Now it has asked the Eurasian Economic Commission to grant Russia a licence to import 30,000 tonnes of butter duty-free for a six month period.
Additionally Russia has recently signed a deal to sell chickpeas to Pakistan in exchange for mandarin oranges.
