US-Russia talks boost demand for bonds that finance Putin’s war

Demand for Russian bonds that finance Putin’s war has surged since the resumption of talks with the United States. This has led to record borrowing in the domestic market, as changes in geopolitics have pushed investors to buy local assets despite sanctions and rising military spending. This is reported by UNN with reference to the publication Bloomberg.

Details

The latest bond placements by the Ministry of Finance were the largest since the beginning of 2022. In the last three auctions, the government has sold 608 billion rubles ($6.9 billion) worth of bonds, 60% of the planned volume for the first quarter, according to Bloomberg.

Local debt is the main source of funding for Russia’s budget deficit, which has grown since the outbreak of the war in Ukraine. Military spending accounts for about one-third of the budget, and rising demand for bonds helps finance this spending.

Government spending surged by over 70% in January, resulting in a large deficit. At the same time, export revenues were under pressure due to US sanctions, in particular on the Russian oil industry.

The main factor and driver of the growth in demand for OFZs was events in geopolitics

He was referring to the resumption of negotiations with the United States.

Bets that the war will end soon are leading to increased interest among local institutional investors, management companies and banks, he said.

After a telephone conversation between the Russian and US presidents, Washington moved closer to Moscow, and Trump’s criticism of Vladimir Zelensky, whom he called a “dictator,” and his call for personal talks with Putin shocked European allies. This reinforced the impression of a major turnaround in US foreign policy.

It is noted that the changes have caused a boom in the financial markets of Russia and other Eastern European countries. The Russian ruble has become the best performing currency among developing countries, strengthening by 15% against the dollar. The country’s main stock index also rose by 15%.

Many market participants believe that the war in Ukraine will end soon, leading to expectations of further ruble appreciation

She suggested that there may be an expectation that the Trump administration will not monitor compliance with the last phase of sanctions.

The government bond index is up 4% since February 12. Putin’s conversation with Trump pushed OFZ yields to levels previously expected only next year.

Demand for the two bond issues amounted to 324 billion rubles, which allowed the government to raise about 148 billion rubles at a rate of about 16%, according to the Finance Ministry.

However, as of January 1, the share of non-residents in the OFS market was only 4%.

Lutsko noted that the end of the war will be “beneficial” for the Russian economy, as it will help reduce budget expenditures and stimulate the production of civilian products, which in turn will reduce inflation. This could lead to a loosening of monetary policy and lower long-term bond yields.

For most of the second half of 2024, the central bank tried to contain persistently high inflation by aggressively raising rates by 500 basis points. However, policymakers kept the target at a record high of 21% at the last two meetings

The Ministry of Finance found it difficult to raise sufficient funds through the bond market, and so the government started offering floating bonds, which increased risks to the budget and debt service costs.

Although the situation remains uncertain, Moscow does not plan to cease fire until it gets “a stable result that suits Russia.” The date of the summit between Trump and Putin has also not yet been determined.

Central Bank Governor Elvira Nabiullina is in no hurry to change monetary policy, emphasizing that tight conditions for fighting inflation will continue to be maintained, and does not rule out another rate hike.

Lutsko noted that the Ministry of Finance’s auctions reflect these expectations.

Recall

The sanctions package that Joe Biden’s administration adopted on January 8, 2025, and which will now begin to take effect, could cost Russia up to 1.5% of its GDP. 

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