Russia: Real interest rate exists, isolation from Western dependency

God forbid! Who are we that we hereby advise you to buy Russian government bonds or Russian stocks. We do not give concrete advice to anyone for any investment! But hey… in Russia there are, unbelievable but true, real positive interest rates! Because not the official interest rate is decisive, but the real interest rate. That means the official interest rate minus the inflation rate (increase of the consumer prices).

In the Eurozone, the real interest rate is negative. The investor loses money if he parks it on the good old savings book or buys German government bonds. In Russia there is a clearly positive real interest rate. With a key interest rate of 6.5% and an official inflation rate of 3.8%, the real interest rate is 2.7%. The Russian ten-year government bond currently has a yield of 6.37%. The ruble is relatively stable against the US dollar. So: an interesting investment idea? Again… we do not recommend anything here. You should take your time to consider whether you want to take on foreign currency risks. The following chart shows the trend from key rate to inflation since 2010. The key rate has been kept noticeably above the inflation rate for three years.


Independence from the Western financial system

It’s not really a secret. The Western sanctions introduced five years ago after the annexation of Crimea made Moscow think twice. At that time, at the latest, people were probably thinking about how dependent they were on the Western financial system. And for some time now they have been in the process of isolating themselves. This can be seen very clearly, for example, in the Russian gold reserves. The Russian reserves in US government bonds have fallen to such an extent that Russia is no longer even listed in the list of the 35 largest owners at the US Treasury. So the volume will be at least somewhere close to the zero line.

At the same time, the gold holdings of the Russian central bank continue to rise. The following chart shows the Russian gold reserves over the past 20 years. After the financial crisis there was a surge starting with 500 tons. Then from the beginning of the sanctions there was the increasing upward thrust in the gold reserves, from a good 1,000 tons. So far they have risen to over 2,200 tonnes, and continue to rise!


Elvira Nabiullina, the long-time head of the Russian central bank, has for some time been openly admitting that a policy of de-Dollarisation is being pursued, i.e. an exit from the US Dollar. She even mentioned that the US Dollar is an unreliable tool. Through its central bank, Russia wants to ensure that citizens and companies, as well as the state, are no longer dependent on the Dollar and the Euro, which becomes a problem with loans in these foreign currencies if the Rouble devaluates. They even actively create incentives to reduce foreign currency positions and make sure that there is not too much of it in the books of Russian banks. A truly total independence from Western money flows will probably not be achieved so quickly, but Moscow is trying to do what is feasible.

Red Square in Moscow. Photo: Alvesgaspar CC BY-SA 3.0

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