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In Germany in the 1920s, prices changed several times a day. In 1990s Russia, inflation reached up to 1,000% per year.
Analysis of Russia's inflation risk compared to Turkey's 40-50% inflation and historical hyperinflation scenarios.
Key Takeaways
- Russia is not currently at risk of hyperinflation comparable to Turkey's 40-50% inflation.
- The Central Bank must carefully balance interest rates to manage inflation without triggering recession.
- A weaker ruble and lower interest rates could boost investment but will raise inflation moderately.
- The defense sector supports growth but cannot compensate for civilian sector decline.
- Investors should prepare portfolios with short-term bonds or floating rate instruments to mitigate inflation risks.
What the video covers
- The video compares historical hyperinflation in 1920s Germany and 1990s Russia with current inflation trends in Turkey and Russia.
- Turkey's inflation rate of 40-50% is used as a reference point to discuss whether Russia faces a similar risk.
- Russia's economy has been under stress for over 2.4 years due to an armed conflict, with government and Central Bank efforts to control inflation.
- The Central Bank faces a dilemma balancing high interest rates to suppress inflation and lower rates to avoid recession.
- The defense sector is driving GDP growth but has reached its capacity, while the civilian sector is declining.
- To support civilian business investment, the key interest rate should be lowered below 10%, possibly requiring a weaker ruble (around 90 per dollar).
- Lowering rates and a weaker ruble could increase official inflation to around 10% and real inflation to about 20%, still significantly less than Turkey's 40-50%.
- The video advises against panic, emphasizing that Russia's inflation scenario is complex but manageable.
- Investment advice includes favoring short-term ruble bonds or floating rate bonds over long-term securities in inflationary conditions.
- Stocks may not reliably protect against inflation due to state interventions limiting price increases in key sectors.
Chapters
- 00:00Historical Hyperinflation: Germany 1920s and Russia 1990s
- 00:42Introduction and Host Background
- 01:32Inflation in 1990s Russia and Currency Devaluation
- 02:33Current Russian Economic Context and Conflict Impact
- 03:22Risk Assessment of Turkish Inflation Scenario for Russia
- 04:10Economic Sectors: Defense Growth vs Civilian Decline
- 05:02Monetary Policy: Interest Rates and Exchange Rate Effects
- 05:57Inflation Projections and Comparison to Turkey
- 07:25Investment Advice in Inflationary Environment
- 09:03Stocks and State Intervention Impact on Inflation Protection
Full Transcript — Download SRT & Markdown
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Today, some are talking about a similar scenario again. Only now, they use Turkey as a comparison, where inflation accelerated to 40-50% a year. Is Russia threatened by something like this right now? Why does the Central Bank have to balance between inflation and recession
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at the same time? And what should you even do with stocks and bonds in such a situation? In this video, I will analyze what is actually happening to the Russian economy. I will calculate what kind of inflation a rate cut and a
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rise in the dollar exchange rate could lead to, and I will tell you what to do with your portfolio if the Turkish scenario actually starts to unfold. My name is Alexander Rybin. I am the host of the Telegram channel "Manika
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Obligatsiya" (Money and Bond) and a financier with 25 years of experience. Let’s figure out what hyperinflation in 1920s Germany, 1990s Russia, and talks about the Turkish scenario have in common. Well, let’s start with Germany and what was happening with
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prices there in the 1920s. Those who read Remarque’s "The Black Obelisk" or "Three Comrades" remember the phrases about how money was handed out almost by the wheelbarrow and people wanted to exchange it immediately for something real—food or clothes—
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because it depreciated in literally a day. That is classic hyperinflation, when money ceases to be money. This is not fiction, but a reality that people lived through. How high was inflation in Russia? In the early 1920s, after the Civil War, Russia experienced wild
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inflation. There was even a little song among homeless children: "I run into the buffet, I don't have a kopek of money, can you break 10 million for me?"
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So, the word "kopek" still remained as something small, but in reality, 10 million was worth even less. In the nineties, everything was just as graphic. In the late eighties, for 10-15,000 rubles... you could buy a good car, well, by those standards, or
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a one-room apartment. And after the 1996 reform, those 10,000 rubles... turned into a modern 10 rubles. Well, what can you buy now for those 10 rubles? Forty years have passed, and the main devaluation happened in early 1991 and 1992. Why are people now
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talking about a similar scenario, only using Turkey as an example? Because Turkey is a less extreme, yet at the same time, alarming example. Inflation there is not at the level of 1,000% per year, like in 1920s Germany or 1990s
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Russia, but 40-50%. And that is also a lot. And when people hear the words "Turkish scenario," exactly these images pop into their heads. But it is important to understand that this is a completely different scale. Is Russia
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threatened by such a scenario right now? Let’s figure it out. We have had an armed conflict going on for 2.4 years that is affecting the country's economy. It's not a month, it's not two, it's a long period during which the system
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has adapted. And all this time, the financial and economic bloc of the government and the Central Bank have been working in a constant state of stress. What have they managed to do during this time? I remember an interview with Aksyonov. He said that
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in 2022, a couple of times in March and April, it seems—well, in the spring of '22—we were on the verge of collapse, specifically a financial and economic collapse, but we somehow pulled through. And since then, yes, with problems, but for all these 2.5
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years, the government and the Central Bank have been doing huge work that allows them to keep inflation under control and, albeit slowly, develop the economy. But does this mean that the situation is completely under control?
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No. Do we have a risk of a Turkish scenario? Theoretically, yes. But that doesn't mean everything will collapse tomorrow. The situation is complex, with imbalances, but it is manageable.
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And this is important to understand, because panic is a poor advisor here. Well, okay, but what about the economy right now? Because that is what determines where everything goes from here. And there is a very telling figure here. The Central Bank needs to
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somehow navigate between the Scylla of inflation and the Charybdis of recession, that is, an economic downturn. If you keep the rate high to suppress inflation, the civilian sector suffers. If you lower the rate to support the economy, inflation
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accelerates. There is no ideal option, there is only a choice. And what is happening with the defense sector right now? The defense sector is working three shifts. It is operating at its limit and simply cannot grow any further. It is one part of the economy
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that is single-handedly driving all GDP growth, but it has a ceiling, and it has already reached it. And what about the civilian part? As for the civilian part—construction, metallurgy, industry, coal miners—they are slowly sliding downward. In August, industrial
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production decreased by 0.6%. At the same time, inflation for the third week of September was already at 0.28%. We can already forget about August's deflation, which was also below the norm. That is, the economy is slowing down, but inflation is not going away.
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What needs to be done to support the civilian part of the economy? Because without that, it will continue to slide further. Here is what should happen with the Central Bank rate to make life easier for civilian business. In my
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opinion, we need to launch an investment cycle for this, because right now investments are supported only by the state. Private business does not have the opportunity to make investments. Firstly, the rate is too high, and secondly, there is no demand,
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also because the rate is too high. And in my opinion, the key rate should be below ten for business to start investing. And for this, a higher dollar exchange rate might be necessary. Well, at least 90 rubles. That is
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what it should be. Again, to make it easier for exporters, to reduce competition with the Turks and the Chinese. Yes, consumers will be worse off, but the industry will be better off. I mean, yes, it’s cynical that the average person has to pay for
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everything, but let’s first think about who will have an easier life with a weak ruble. Exporters and the civilian sector, oil workers, metallurgists, coal miners—everyone who sells for foreign currency. With a weak ruble, their ruble revenue grows, and it’s easier for them to breathe.
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It’s worse for the consumer, because imports get more expensive. But let’s also take a look at this consumer. On the other hand, what’s worse: an iPhone that goes up in price by, I don't know what it costs now, but say
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20%, or losing your job because the economy is suffocating and you get laid off? Yes, I think it’s better if the iPhone just gets more expensive.
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Alright, now let’s calculate what the inflation might actually be if they lower the rate and the dollar goes up.
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What inflation has accumulated over the last 3 months, in annualized terms? Right now, our inflation is around 6%, but if you calculate the last 3 months on an annualized basis, the so-called SAAR, it’s about 10%. That’s an alarming signal. Meaning, even without
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lowering the rate, inflation is accelerating. What could the official Rosstat inflation become if they lower the rate and raise the dollar exchange rate? If the rate is 10 and the dollar is 90, then I think official inflation will be 10, not 6. Yes, that’s
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unpleasant. And the inflation that people see in real prices will grow from 10-12 to, well, let’s say 20%.
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Very unpleasant, but is it fatal? No. So, does this mean that Russia is facing Turkish inflation of 40-50%?
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Let’s answer this question honestly. How much do 10% official or 20% real inflation actually differ from the Turkish 40-50%? They differ very significantly—at least by half, if not three or four times. Even 20% a year is still not Turkey, where inflation
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was 40-50%. And that is a fundamental difference. Turkey is 40-50%, while for us, in the worst-case scenario, it’s around 20.
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government's financial and economic bloc and the Central Bank will cope with a potential surge in inflation.
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And I have reason to think so, because for the last four-plus years, they have managed. But, of course, nothing can be ruled out. What probability can I give for such a development? I don’t give exact probabilities, because that would
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be fortune-telling. I assess this scenario as possible, but not inevitable. This is more of a risk to keep in mind than a forecast that is bound to come true. And, of course, it's better to prepare for it in
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advance. Right. So, what should one do with bonds if the inflationary scenario starts to play out? Long-term bonds are the most vulnerable asset when inflation accelerates. Even if the Central Bank lowers the rate, they will react to inflation and fall in price.
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This is not the instrument you need in such a situation. Long-term securities are a bet on declining inflation, not on its growth. What can be bought instead to avoid depending on the ruble exchange rate or inflation? Either short-term ruble bonds, floaters,
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foreign currency bonds, or gold. These assets are not tied to the interest rate. And in the case of foreign currency bonds, they aren't tied to the ruble rate either. Moreover, you should also choose short-term foreign currency bonds. There is, of course, a separate
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issue regarding their pricing, but the main thing is to avoid long-term interest rate risk. What other option is there for those who want to stay in bonds but lower the risk? Stay in short-term issues. They quickly adjust to the new reality and have less
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interest rate risk. If inflation accelerates, short-term securities will suffer less than long-term ones. And floaters specifically adjust their coupons to the interest rate. Though there are nuances there, too. If the Central Bank lowers the rate while inflation rises, then floaters won't
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perform well either. In that case, it's either short-term bonds or moving into currencies. What about stocks? Many people think that stocks protect against inflation. Yes, it is even written that way in textbooks. But it's not so simple here either. And the
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example of Magnit and Pyaterochka shows this perfectly. Which companies should, in theory, win from this inflation?
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Those that can pass their costs on to consumers. In theory, oil companies should benefit from rising gasoline prices. And retailers from rising food prices. The logic is simple. If you can raise prices and the customer buys anyway, you are in the green. But in
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practice, this doesn't always work. For example, were Magnit and Pyaterochka able to pass their costs on to the buyer? No, they cannot pass their costs on to the buyer because the state is fighting inflation. And retailers received a clear directive: "Sacrifice
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your margins, do not raise prices significantly." And they are forced to follow this. Why, then, didn't the large retail chains succeed? Even when logic suggested otherwise, it was because the state intervened. Oil companies similarly cannot just hike gasoline prices to any level. They also
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received instructions to sacrifice margins to prevent social discontent. Therefore, there are surely some issuers capable of passing prices on to clients, but I am not honestly sure there are many of them. At the very least, they need to be chosen carefully
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. Therefore, do not rely on a single instrument. If the inflationary scenario starts to play out, old ruble bonds and some stocks may not protect your capital. It is not as it seems at first glance. Keep a portion of your
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portfolio in foreign currency bonds or gold, and another part in very short-term issues that adapt quickly to the new reality. In conclusion, a Turkish-style scenario with 40-50% inflation is certainly not what awaits us, but it is also not something that
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can be ruled out entirely. As one option, of course, you need to prepare your portfolio in advance, as that is much better than dealing with the consequences later. I explain in detail how to build a portfolio resilient to
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various inflation and ruble exchange rate scenarios, including using foreign currency bonds, in my Telegram channel "Manika Obligatsii"(spelled with an A).
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Join via the link in the description. There are already thousands of my readers there, or rather, tens of thousands. It's free. If this video was useful, please like it and subscribe to the channel so you don't miss new
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episodes. Right now on your screen is a new video where I analyze how to protect savings from ruble devaluation, continuing today's topic. Enjoy watching. Good luck in the market.
Topics:Russia inflationTurkish inflation scenariohyperinflation historyCentral Bank RussiaRussian economy 2024investment strategy inflationcurrency exchange rateinterest rates Russiaeconomic recession riskportfolio management inflation
