"Hey, buddy — lend me $10,000 today, and I'll pay you $1,686 a year for ten years, then give you the $10,000 back, too."
"Hey, where you going? You can't walk away from a deal like this!"
Except that's exactly what happened last week when the Kremlin attempted to sell OFZs (like U.S. Treasuries), but buyers said Nyet! so hard that "Russia’s Finance Ministry pulled the plug" on bond auctions until further notice, Crypto Briefing and others reported this week.
Monday's suspension "follows two prior skipped auctions on June 24 and July 8," CB reported. "The Finance Ministry framed the halt as a stabilization measure. Russia uses OFZ sales to finance its federal budget deficit. When those auctions fail repeatedly, the government loses a critical funding tool."
The Kremlin's borrowing for this quarter was supposed to bring in 1.5 trillion rubles, or about $19 billion. But lenders didn't like the risk, and — brace yourself for this one — Moscow raised a piddling 8.8 billion rubles. That's a little under $112 million, or just six-tenths of one percent of what Moscow needs. That isn't a rough patch; that's a debt market that's shuttered the windows and locked the door.
Moscow has a war in Ukraine to finance, but investors apparently don't see much of a future in it.
And that's at a promised return of nearly 17%.
"The Finance Ministry has relied heavily on domestic borrowing to help finance a budget deficit that reached 5.7 trillion rubles ($72.39 billion) at the end of June," Moscow Times reported on Tuesday, "while military spending continues to outpace initial government plans."
So let me get technical for a sec because bond markets are a little weird.
Let's say the U.S. government — surprise! — needs to borrow some money. The Treasury offers bonds for sale (known as Treasuries) at 5% interest for 10 years. The promise is that the government will pay 5% on the face value of the bond for those ten years, and at the end of the term, will also pay back the face value principal.
But notice I said "face value," and I said it twice.
Bonds are sold at auction, and depending on market conditions, $10,000 worth of bonds might sell for more or less than the face value. But the interest paid and the principal returned are based on the bond's face value, not the actual auction price.
As I said, it's complicated.
Now imagine that the government offers to pay 16.86% instead of a measly 5% — you'd start with $10,000 and end up with $26,860 in ten years — but still couldn't find buyers willing to bid up prices high enough to justify the sale.
So instead of allowing bond prices to collapse, Moscow simply stopped selling bonds. When sales will resume is anybody's guess because the Kremlin won't say.
Bonds, however, aren't the only way governments cover their deficits. Here's another:
"Russia’s gold reserves have declined by 1.4 million ounces, or 43.5 tonnes, since the start of the year, according to the latest data from the Central Bank of Russia," Kitco claimed on Tuesday. "This marks the sixth consecutive month that Russia’s official gold reserves have dropped, and the decline has been dramatic."
The Kremlin claims to still have about 2,200 tons of gold in reserve, but that figure is widely regarded as fiction. Whatever the true figure is, the Kremlin had better keep a respectable amount of gold in reserve, or risk completely shattering institutional trust.
With bond markets stalled and Moscow having sold much (most?) of the liquid assets in the country's sovereign wealth fund, the next step might be letting the money printers rip.
What happens after that is anyone's guess, but nothing good.
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