Financial Comment - Will Russia Default?

Will Russia default on its debts?

We have lately covered the Ukrainian economy and noted just how difficult the Ukrainian economic situation is. We also noted that the Russian economy is in better shape which is giving Russia an opportunity to press ahead with its intervention in Ukraine. Putin is apparently hoping that Ukraine’s economy will cripple before Russia’s does. But how strong are the Russian economy and financial system?

Russia’s GDP has been growing quite slowly this year, by 0.9% in the first quarter and 0.8% in the second quarter. The Russian government expects that it will slow down to 0.5% of growth in 2014 with the Western sanctions among apparent reasons. Leading banks like Bank of America Merrill Lynch and Morgan Stanley have similar forecasts for this year and expect that in 2015 the Russian economy will be either flat or will decline by 0.5%. For comparison, the International Monetary Fund expects that the global economy will grow by 3% or more annually in 2014-2015.

A couple of revealing facts about the Russian economy: the country’s state budget, which is critically dependent on oil exports, will run an excessive deficit if the price for oil drops lower that $93 per barrel this year and $96/barrel next year (which is around the current market price for the Russian oil). The second fact: in the first half of 2014, the volume of drilling in the oil industry dropped for the first time since the crisis year of 2009, the decline amounted to more than 7%. So, Russia’s economic prospects are becoming increasingly strained.

Russia’s financial system looks relatively stable with the country’s total foreign debt at more than $700 billion while its short-term debt at more than $80 billion. However, the western sanctions have severely reduced Russia’s ability to borrow on global markets. This is why the Russian ruble continues falling. After some strengthening last week, its rate to the U.S. dollar is again above USD/RUB 37.0, the historic high. If the sanctions hold, Russian borrowers may not be able to refinance their debts, especially on the back of the economic crisis. Russian observers have started talking a looming default similar to the country’s default which happened in 1998.

By: Ukrainian Credit Union Limited