An exercise in buying 17% Russian bonds

If you’re still doing that fiat thing, if you still haven’t embraced Bitcoin with both arms and hugged it so tight that a SHA256 hash popped out, your options are pretty limited.

The housing market is a mess,i the domestic bond markets are a wasteland, resources/metals are getting beat up, and the stock market is, as ever, a crapshoot boobytrapped by fees on taxes on fees on taxes. So where do you go? Where do you find yield in fiat?

Well, there are always the old money avenues: commercial real estate, jewelry, and art. But those have high barriers to entry, require specialised knowledge, and the markets for them aren’t known for their liquidity, making purchasing and selling a challenge.ii So what else is there?

Well… have you considered foreign bonds? More specifically, have you considered Russian Federation bonds? You need only look at their relative debt level to see the appeal:

The Russian federal government’s debt-to-GDP level is a paltry 13% compared to the US’ 101%, Germany’s 77%, and Canada’s 89%.

Given the aforementioned debt levels, could Putin’s debt really be riskier than Canada Savings Bonds or US Treasury Bills? Really. Who seems shakier at this point, Putin or the Harpbama twins?iii Who will still be ruling the roost in another decade?

With his understanding of economics, religion, capitalism, diplomacy, and his peoples’ dispositions, Putin is poised to stretch out his legacy well beyond his already impressive 15-year reign. He seems like he could keep rocking for another decade or more.

So, sensibly enough, in the more solid and more active should you invest your fiat. And that’s given equivalent interest rates. If higher interest rates are being offered by one party, implying that the underlying asset is riskier, you should also be willing to bear more uncertainty as to repayment. But is Putin really less likely to pay his creditors? While you aren’t likely to swallow such codswallop, there apparently exist, if the markets and press are to be believed, magical businessmen who do. As MP notes:

Explain the logic of this, if you can. So somewhere exists this magical business man, we are told, who judges that the best thing to do is sell a currency whose bonds are yielding 17%, in favour of a “better return” to be sought in a currency whose bonds are yielding nothing. In what world is this sensible ?

The only world in which this is sensible is one where even intelligent retail investors have no part. There’s no way on God’s green earth that you or I would buy a 1% USG bond over a 17% Russian bond.

I mean, in what world other than the current one, where the AML/KYC nonsense has managed to reduce the independence of everyone to nothing, so that basically the entire “business world” consists of a bunch of Washington agents ? Sure, if you exist to do what Washington tells you, then you will sell 17% to buy 0%. Because “it offers better returns”, in the sense that you can cook your books any which way with the help of the Fed’s magical genie lamp – and then hide under the masquerade of US justice to avoid any sort of consequences once your “customers” realise you’ve bankrupt them.

So that’s pretty much that. If you or I, that is, independent actors capable of responding to signals according to their direction and intensity, were buying bonds, based on existing debt levels, the ability to balance future budgets, and the trendlines of economic expansion and contraction, Russia should be able to offer significantly lower interest rates than the US or Canada.

But enough preamble, how does one go about actually acquiring what is clearly a better bond?

Option 1: Exchange-traded funds

While not composed entirely of Russian bonds, there are low-fee ETFs available that are heavily weighted towards Putin’s high-interest debt, such as the Vanguard Emerging Markets Government Bond ETF (VWOB) or the iShares JPMorgan USD Emerging Markets Bond Fund (EMB).

Option 2: Broker

Unlike the enlightened and civilised era of Bitcoin investment, if you want to purchase a foreign bond, you need a counterparty to get you in the door. Brokers may have minimum investment requirements of $5,000 – $100,000 dollars and fees of goodness only knows. Basically, contact your local broker, cross your fingers that they even have the necessary licences and connections, and go from there.

After a few hours of research, that’s pretty much what I came up with. There’s no clear, published way for a retail investor to buy Russian bonds directly. Still, if you’re doing that fiat thing, the juice of 17% is probably worth the squeeze of calling your broker.

Really, it couldn’t be riskier than pirate bonds.

Or, for that matter, USG bonds.

___ ___ ___

 

 

 

  1. Particularly in that housing stock inflates not only unpredictably, but in North America, rapidly. Or, as we saw recently in Detroit, it deflates rapidly. It turns out that urban sprawl doesn’t just confine you to a car, isolating you from your city and forcing you to be sessile instead of active, it also reduces the value of your soon-to-be-leapfrogged suburban property. Land downtown, on the ocean or on the river particularly, is much harder to dilute. Also, the housing market is a sitting duck for the taxman, not to mention mortgage rate increases. []
  2. And you thought buying Bitcoin was too hard for the common kangaroo. So, pray tell, where are the Silicon Valley start-ups trying to make commercial real estate more accessible? []
  3. Isn’t it cute how they’re both trying to “sanction” Russia over the Crimea conflict? As if they were both teenagers who grew up in Micronesia in the 1970’s and 1980’s. Look mom, I can suicide too! []

20 thoughts on “An exercise in buying 17% Russian bonds

  1. BingoBoingo says:

    When you called this an exercise I though… Maybe you would actually pull the trigger on buying some bonds.

  2. mh says:

    So it rather goes, would you like to be defaulted on your 0% bonds or your 17% bonds?
    It’s akin to asking your kid if he wants to wear his blue shoes or green shoes today. He’s even proud and happy he gets to choose his footwear in a sovereign manner.
    Meanwhile the little shit doesn’t realise he can just walk outside barefoot if he so pleases.

    • If government bonds are defaulted upon is rather different than when.

      It’s therefore more akin to asking your child if he wants to wear the size 5 shoes that fit his feet easily today but will outgrow next year, or the size 8 shoes that look a bit silly today but he won’t outgrow them for another 3 years. Given, of course, that you’ll only buy one pair or the other, that his feet are currently size 5, and that his feet grow one size per year. Maybe he’ll plan ahead, maybe he’ll short-term it and choose the path of least resistance. It’s his call.

      And not that the birthday suit option is ever excluded.

  3. Zeke says:

    I think it’s more likely than not that Russia will continue to honor its obligations for the foreseeable future. They would not default under present management unless there were no other option, and as you pointed out, there’s plenty of options left. Also doubt the present commodity price levels will prevail for more than a year, and a recovery in extractive industries will take the heat off. At the same time, in conditions of greater adversity, Russia certainly *could* give its creditors the finger, and would have plenty of political cover for it if sanctions and other punitive measures remain in place at that time.

    • Also doubt the present commodity price levels will prevail for more than a year

      A bold prediction! Maybe you should throw up something to this effect on BitBet and put some skin in the game :D

      Russia certainly *could* give its creditors the finger, and would have plenty of political cover for it if sanctions and other punitive measures remain in place at that time.

      As every government always has and always will, Russia can find excuses. A shrewd politician doesn’t let a good crisis go to waste, whether it’s “sanctions” or some random natural disaster. This is nothing new, just see how Moses sweet-talked our peoples’ way out of Egypt.

  4. […] And the writing is on the wall for the usd. Mikhail can’t wait to buy some 17% Russian bonds. He’s also 6’8″ and not even 50 years old. Jeebus. Oh, and worth ~$11 bn. […]

  5. […] idea eh. So the question becomes: why bother ?vi Agent: FIFA thinks it looks bad when Saudis and Russians buy all the good players for their English/French club teams. Smuggler: God forbid anyone admit […]

  6. Fred_Flintstone says:

    So, if this isn’t a ‘mental excercise’ how exactly can one invest in Russian debt at 17%? Wouldn’t I have my principle back in less than 5 years? Why is it I can buy US debt practically on the street but there is no fund, etf, or easy way to buy Russian debt? Seems fishy to me.

    If you know of an easier way to invest in Russian debt, please advise.

    • Since this post was originally published, it looks like the RCB successfully feigned weakness, obtained its desired result, and has now reduced its 10Y rates to 10.56%, which means that you’d now be looking at closer to 7 years for repayment.

      Regardless, there’s nothing inherently fishy about an asset having high barriers to entry or being inaccessible to the masses. This is, in fact, a mark of pedigree.

      Finally, to answer your question : if you want to invest in Russian debt, find a broker the same way you’d find a tailor or a girlfriend, have a friend recommend one to you.

  7. Chris Bolgar says:

    You may buy and hold Russian government bonds, as well as some Russian corporate bonds, at the Danish brokerage firm Saxo Bank. i have done the same, everything is alright, no excessive fees etc. Note that those bonds are nominated in rubles. Alternatively, you may buy the FXRU ETF at the London Stock Exchange (maybe it has an American version as well, I am not sure), that one contains Russian government and corporate bonds, it is denominated in US dollars and yields 5%+.

    I for one prefer the ruble-denominated Russian bonds, although I admit that they may involve additional volatility (due to the changing currency rates).

    i have found the above mentioned instruments after months of research and agree absolutely with the author that it is rather difficult for an individual investor to invest in any Russian bonds, at a time when thousands of investment funds and ETFs cover actually all regions and segments of the global economy. Not Russia, though, interestingly. I still have not been able to find a Russian-bond focused fund or ETF, traded in any “developed” market, apart from the above mentioned FXRU.

    • Fantastic Chris ! Well done, my good man ! Goddammit it makes me happy when this blogging thing rustles the bushes a bit and out pops the distributed intelligence and abilities of the world. Yet another reason to abhor social media, I suppose.

      For posterity, then, from the FXRU website :

      FinEx Tradable Russian Corporate Bonds UCITS ETF (USD) : The fund is a UCITS IV compliant fund, which is denominated in USD. The fund provides an exposure to Russian Corporate Eurobonds with good liquidity and denominated in hard currencies i.e. USD/EUR/GBP/CHF

      With the Top 10 holdings being :

      GAZPRU 9 1/4 04/23/19 5.38%
      GAZPRU 6.605 02/13/18 5.02%
      VTB 6 7/8 05/29/18 4.75%
      VTB 6 04/12/17 4.66%
      GAZPRU 3.755 03/15/17 4.6%
      RSHB 5.298 12/27/17 4.59%
      RSHB 5.1 07/25/18 4.55%
      LUKOIL 3.416 04/24/18 4.31%
      EVRAZ 6 3/4 04/27/18 4.18%
      VEBBNK 3.035 02/21/18 3.8%

      Not quite a 100% holding of 17% Russian government bonds*, but then again, those don’t really exist anymore and FXRU.L still provides an unusual degree of exposure to the Russian economy.

      *10Y Russian government bonds are currently on offer at 10.83% with the exchange rate of 61.3757 RUB/EUR and 54.5235 RUB/USD.

  8. Chris Bolgar says:

    Pete: You are right, sorry. FXRU is a Russian corporate bond-only ETF. No government bonds there.

    (Though Gazprom and most large Russian energy companies are majority-owned by the government.)

    • Russia, like every other nation state extant of any scale whatsoever, is largely a command economy. Additionally, the Central Bank of Russia serves as a measuring stick for all other bond offerings in that market. Buying “corporate” bonds therefore isn’t meaningfully distinguishable from “government” bonds. Not really.

  9. Chris Bolgar says:

    Pete: FYI, the yields of FXRU components shown are nominal yields, those are the yields that the companies pay on their debt, assuming that you buy (bought) their bonds at nominal value, i.e. you pay 100% of the nominal value. However, most of those bonds trade at a considerable discount, i.e. you – or the ETF – can buy them at 80% or 90% of the nominal value. If you hold them until expiry, and the debtor i.e. the issuer of the bonds pays on schedule, then you get that additional 10-20% as well. So, if you buy a bond e.g. with a maturity of 1 year, with 5% nominal yield, at 90%, then your total yield in a year will be 5%+10%=15%.

    • Interesting, Chris. Now do you know why these corporate bonds would trade at a discount on the open market ? Seems odd that what are essentially short-term government bonds would bear much risk premium. But hey, what do I know.

  10. Chris Bolgar says:

    Pete: Yes, it seems odd, I do not really understand either. But it certainly has something to do with politics and media, as has the fact that an individual investor cannot easily buy those bonds, as we can see. According to the following link (it is in German, sorry), you may buy a Russian government bond maturing in 2023 at 80.52% at the moment, with a total annual yield (Rendite) of 11.10%:

    http://www.finanzen.ch/obligationen/Russische_FoederationRL-Bonds_201323_26211RMFS-Obligation-2023-RU000A0JTJL3

    Please note that it is denominated in rubles, which may devaluate or appreciate against the dollar during the years.

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