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Chapter 524 Russian Debt Crisis

Where did the rest of the money go?

Henry Paulson will find out soon.

Ernst had originally planned to fly to Australia to see Case, but a phone call from Jane Fraser completely disrupted his plans, forcing him to rush to New York overnight.

At Ernst Asset Management, in the hedge fund division, everyone was focused on the various curves and fluctuations on the large screen. No one noticed that Ernst's body was trembling slightly at that moment.

He would never forget the date, August 17th.

Russian President Yeltsin was supposed to appear before the media to formally announce the postponement of the national debt repayment, and the Moscow Stock Exchange would have suspended trading of Russian bonds accordingly, causing a huge uproar in the global financial markets.

But God played a cruel joke on him. On that day, Yeltsin did not stand in front of the media to announce the debt extension, nor did the Russian bond trading market close.

From that time on, Ernst always felt a heavy weight in his heart.

He considered many reasons and had people collect a lot of information. The final answer he received left him both amused and exasperated.

Because he discovered that the one who started this historical turning point was actually himself.

The outbreak of Russia's sovereign debt default is essentially the result of multiple overlapping contradictions.

After the collapse of the Soviet Union, the Russian economy fell into a severe recession. In order to maintain economic operation and social stability, the Russian government had to issue a large amount of national debt, and the scale of foreign debt continued to rise.

However, the most direct trigger for the default was large-scale capital flight.

Japan and South Korea are the main sources of foreign investment in the Russian market, and companies from both countries are keen to invest in former Soviet countries, especially Russia, across multiple sectors.

However, the outbreak of the Asian financial crisis in 1997 severely damaged the economies of Japan and South Korea, and their domestic financial systems were on the verge of collapse.

In an effort to salvage their domestic economies, Japanese and South Korean companies have begun a massive sell-off of their assets in Russia, repatriating large amounts of US dollars to fill their domestic liquidity gaps.

The withdrawal of South Korean capital was particularly drastic. In order to repay maturing debts, they had to urgently liquidate overseas assets, with the Russian market becoming a key area for them to cut their losses. They were fleeing as if their lives depended on it.

This concentrated, large-scale withdrawal quickly triggered a chain reaction, with foreign investors in other countries following suit and selling off their shares. This resulted in severe damage to the Russian stock, bond, and currency markets, creating a dire situation of a triple whammy of stock, bond, and currency losses.

In an effort to stem the sharp fluctuations in the financial markets, the Russian central bank was forced to intervene by using its precious foreign exchange reserves to buy domestic government bonds in an attempt to lower bond yields and stabilize the ruble exchange rate.

However, this passive market rescue has only caused the hidden scale of Russian debt to snowball.

Concerned that an excessively high debt level would affect its ability to raise funds in international capital markets, the Russian government deliberately concealed some of its hidden debt when releasing fiscal data.

But a lie is a lie, and lies will always be exposed one day. When the Russian government's fiscal revenue is insufficient to cover the principal and interest of its debts and it is unable to fulfill its repayment obligations on time, the outbreak of a debt crisis becomes inevitable.

The problem now is that although Japan and South Korea have continued to withdraw capital on a large scale after the economic crisis, it has not been as thorough or as massive as it was in the past.

First, there's Samsung. Because of Ernst, Samsung wasn't driven to the brink of collapse; instead, it quickly weathered the crisis.

As a result of his influence, South Korean manufacturing received more American capital more quickly.

Although the amount was small, it was enough to keep them afloat, giving them a chance to breathe and preventing them from going bankrupt immediately.

Then there's AIoT, whose huge success with the iPod spurred the entire Asian industry chain.

Samsung was the first to emerge from the shadow of the crisis. As one of Axon's core suppliers, it achieved significant growth in performance by providing key components such as memory chips for the iPod, and the company's stock price also rebounded rapidly.

Samsung's recovery acted as a stabilizer, helping the South Korean stock market to stop falling and rebound. Although market confidence has not been restored, it has stabilized.

This positive market sentiment has spread to the Russian market, making South Korean companies more cautious about investing in Russia and slowing the pace of capital withdrawal.

While the Japanese market may not appear to be directly related to the MP3 player industry, it is an unavoidable country in the semiconductor industry.

Although there are no Japanese companies in ASK's direct supply chain, many of ASK's second- and third-tier suppliers use semiconductor raw materials and precision instruments made in Japan.

The iPod drove demand growth across the entire electronics supply chain, indirectly increasing demand for Japanese semiconductor raw materials and bringing additional orders and foreign exchange to related Japanese companies.

Furthermore, with Japanese brands like Sony following suit and entering the MP3 player market, the overall stock market decline has slowed.

On the surface, the MP3 player industry's market size is only in the tens of billions of dollars, seemingly unlikely to have a substantial impact on the global capital market.

However, in reality, the scale of capital flows leveraged by this industry is as high as hundreds of billions.

This has not only driven the development of upstream and downstream enterprises in the electronics industry chain, but also influenced the flow and allocation strategies of international capital.

It was these seemingly minor changes that, through a chain reaction, altered the pace of the Russian debt crisis, preventing the expected collapse on August 17.

Because the Russian debt default was a key part of his plan, Ernst became somewhat uneasy from that day on, fearing that he had actually changed history.

Although he knew it was impossible, the root of Russia's debt crisis lay in its own poor economic structure, huge hidden debt, and fragile fiscal situation.

He can influence the solution, but to solve it indirectly is simply unbelievable.

But as long as it didn't happen, he felt anxious.

However, the ending was good; though late, it came, and what was bound to happen still happened.

The Russian government bond yield curve on the big screen has reached 15.7%, and a red warning sign is flashing frequently next to this number.

Seeing this, Ernst's tense nerves finally relaxed, he let out a long breath, and a relieved smile appeared on his face.

"The Federal Reserve has lowered the overnight reverse repo rate by another 25 basis points." O'Shea Ricardo stood next to Ernst, holding documents, reporting on the intelligence gathered in the previous 24 hours.

"Moreover, Goldman Sachs just released a report two hours ago saying that the spread on Russian debt will narrow to less than 100 basis points within the quarter."

These two pieces of news are genuinely positive signals for the Russian bond market, completely contradicting Ernst Asset Management's current short-selling strategy.

The Federal Reserve's cut in the overnight reverse repo rate means that market liquidity will further ease, and the cost of borrowing funds will decrease.

low.

In such situations, investors often seek higher-yielding assets, and the Russian bond market is one of them.

Goldman Sachs' report predicting a narrowing spread in Russian debt has an even more direct impact.

The so-called interest rate spread refers to the difference in yield between Russian government bonds and risk-free bonds, and it is a core indicator for measuring the risk level of Russian bonds.

The narrowing of interest rate spreads indicates that the market has lowered its risk assessment of Russian bonds, which will boost investor confidence in Russian bonds. This will attract foreign investment to buy Russian bonds, further driving up their prices.

According to normal market logic, the release of these two positive news items should put Ernst Asset Management, which is shorting Russian bonds, in a passive position.

But neither Ernst, nor Jane Fraser, nor O'Shea Ricardo showed any worry on their faces; on the contrary, they revealed an undisguised excitement.

Ernst Asset Management is completely clueless about the current state of Russia's internal finances.

But it doesn't matter if they can't see it, there will always be someone who can.

Goldman Sachs, the major player that divided up the wealth of the former Soviet Union, is well aware of the internal workings of the Russian government.

"Is Goldman Sachs trying to salvage the situation now? No matter what they say now, it doesn't change the fact that Russia's foreign debt has exceeded $1850 billion and 58% of its fiscal revenue has to be used to repay the debt. This is not a matter of interest rate differentials, but a collapse of its debt repayment capacity."

Jane Fraser shook her head, finding Goldman Sachs' move somewhat ridiculous.

She could tell that Goldman Sachs was accelerating its withdrawal and looking for someone to take over.

Ernst glanced at her, smiled, and asked, "Would you have known if I hadn't told you?"

Jane Fraser was stunned; she wouldn't have known this if Ernst hadn't told her the data.

To ensure the authenticity of this data, she specifically sent someone to Moscow, spending over $600,000 to confirm the matter.

"That's the crux of the matter." Ernst's eyes sharpened. "Aside from financial giants like Goldman Sachs, which collude with the Russian central bank and are deeply involved in the Russian market, very few financial institutions can access this core data. And even if a few institutions do know the truth, they will never disclose it easily."

"In the current market environment, Goldman Sachs' market influence is undeniable. Most investors are more willing to trust research reports released by industry giants like Goldman Sachs than unverified rumors."

"Even if someone leaked the true state of Russia's debt, it would be difficult for the market to take it seriously with Goldman Sachs' authoritative endorsement, and it might even be seen as a deliberate rumor aimed at shorting the market."

"These financial giants treat all investors like fools, manipulating them like that." Ernst's tone was full of...

The article mocked, "While quietly selling off their Russian bond holdings, they released optimistic research reports to attract retail and other institutional investors to take over, thus smoothly completing their capital withdrawal and transferring the risk to the market."

However, after saying that, Ernst laughed, glanced at the two of them, and gave a self-deprecating smile.

Because aren't they the same kind of people?