Western sanctions have frozen parts of Russia’s currency reserves. Economist Christian Proaño explains how realistic a Russian default is and what role China plays
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Christian R. Proaño is Professor of Economics, in particular Applied Economic Research, at the Otto Friedrich University of Bamberg and Research Fellow at the German Institute for Economic Research (DIW).
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Numerous sanctions are now in force against Russia, and many assume that Russia will soon no longer be able to service its payments for foreign currency bonds. How acute do you think this danger is?
The sanctions are aimed at precisely this: payments should become increasingly difficult for Russia. Therefore, it could well happen that Russia can no longer make payments. But that would not be due to a lack of liquid funds, but to the sanctions themselves. A distinction must be made here between solvency – i.e. whether the country is able to pay – and willingness to pay – i.e. whether it also wants to pay the liabilities with the money. To speak of insolvency in the case of Russia would therefore be wrong, because Russia has the necessary money.
Why is that?
For one thing, Russia gets 700 million euros a day from oil and gas deals. Paying off the $600 million that’s currently under discussion isn’t really a financial hurdle. But another point is also important, namely that many of our considerations are too Eurocentric: there are enough countries that have not sanctioned Russia: China has not reduced its trade relations with Russia, India recently signed a major gas trade deal with Russia closed. Some African and South American countries still trade with Russia. This means that even if Russia were completely cut off from European and US capital – as long as China is willing to grant loans, Russia has alternative options. Russia could also, for example, sell future oil exports in advance in order to get more fresh capital in the short term. So Russia is not cut off globally.
China has always been a very important trading partner for Russia – and its importance will increase in the short to medium term. In the long term, however, it makes more economic sense for China to have better relations with the West: the markets are larger, as is purchasing power. Russia is a comparatively small sales market. And ultimately nobody wants to be on the losing side – and in the medium term Russia is the loser of this self-initiated war.
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Financial Sanctions
When will Russia go bankrupt?
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Russia is heading for its second state bankruptcy. But as long as money for gas and oil continues to flow from the West, Putin will continue to receive funding. And when in doubt, it will simply print new money, experts say
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The US Treasury blocked payments on two Russian government bonds through US banks this week. What exactly does this do?
The US wants Russia, if it wants to pay, to have to use its own currency reserves, China’s or oil and gas money. But I think it’s wishful thinking that Russia has to withdraw money from the war chest, as some hope. There are tanks and weapons in Russia anyway, the soldiers and mercenaries don’t get very much money, and Russia produces its own oil and gas. So Putin doesn’t necessarily find himself in a dilemma.
Should there be a Russian default: What would the consequences be?
For one thing, the ruble would depreciate further. On the other hand, the risk premiums on new bonds from Russia would increase massively. This in turn would mean that Russia’s financing options would become significantly more expensive. It’s always bad when a country can’t pay its debts. In fact, countries are doing everything they can to ensure that this doesn’t happen.
Would a default affect the course of the war in Ukraine?
A default would have a signal effect. But I don’t think it would influence the course of the war.
An energy embargo is currently also being discussed in Germany. Would that make a Russian default happen faster?
I do not think so. Although a large part of Russia’s currency reserves is frozen, the other part is still there. Our embargo would be offset at least in part by demand from other countries such as India or China. Of course it would aggravate the financial situation in Russia, but it wouldn’t be a game changer, at least not in the short term, in my opinion. If an embargo is to work, we would have to hold out for a long time, around one to two years.
How long can Russia hold out financially if things continue as before?
The national debt of Russia is very low, at 20 percent of the gross domestic product and only a quarter of this is in foreign currency. So we are talking about five to six percent of Russia’s gross domestic product. Since the payment default would only come about as a result of the sanctions, one can assume that Russia could hold out for a relatively long time, perhaps even more than six months.
