Russia’s government has suspended bond sales after a series of auctions failed to attract buyers, the latest sign of strain in an economy creaking under the cost of a fifth year of war. The standoff between the Ministry of Finance and the country’s largest banks has intensified as lenders demand ever-higher rates to finance the conflict, with government bond yields ranging between 13 and 17 percent.
The central bank has been forced to keep interest rates painfully high – its key rate currently stands at 14.25 percent – to curb inflation at a time when the budget deficit is widening sharply. Businesses typically pay well above that rate for credit, and the Kremlin’s competition for the same limited pool of savings has made matters worse. The Russian Union of Industrialists and Entrepreneurs, the country’s biggest business lobby, warned of a wave of “autumn defaults” on Wednesday if the central bank does not cut rates. Corporate bankruptcies were already up by 10.8 percent in the first half of the year.
“Russia halts bond sales after auction failures as Ukraine drone strikes strain finances, corporate defaults rise, and European wheat prices hit two-year highs.”
Moscow had originally budgeted to cut military spending this year, but instead it has ballooned and accounted for nearly half of government spending in the second quarter, according to Janis Kluge, an analyst with the German Institute for International and Security Affairs. Kluge said the bond market standoff does not herald any imminent collapse, but is consistent with other signs of strain in Russia’s financial markets. The benchmark stock index, dominated for years by the oil and gas industry, has fallen 30 percent in the last two months as Ukraine has shown its ability to hit important economic infrastructure as far afield as Omsk in Siberia.
Ukraine has spectacularly broadened its drone offensive during that time. In addition to refinery attacks that have caused long lines for fuel across the country, its armed forces claim to have struck 183 ships in the Black Sea and the Sea of Azov, severely disrupting Russia’s attempts to resupply Crimea with fuel and hampering its exports of grain to world markets. The disruption has pushed European wheat prices nearly 20 percent higher to their highest in two years, a development that will feed through to UK consumers and global food costs.
