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Russia is Wary of Borrowing Abroad but Has Increased Foreign Debt by 10% in 2018 Anyway

Sputnik – 12.06.2018

Worried by Russia’s small foreign debt, international creditors are advising it to borrow more, but Russia’s Central Bank believes that investments, not loans, are the way to go.

Russia’s $525-billion foreign debt is dwarfed by $7.5 trillion in Britain, $5 trillion in France, $4.8 trillion in Germany and a whopping $21 trillion in the US.

This tell-tale ratio was not lost on IMF Managing Director Christine Lagarde who, when speaking at the recent St. Petersburg International Economic Forum, described Russia’s foreign debt as “considerably small” and said that it should borrow more.

The Russian Central Bank disagrees, arguing that “investments, not debt capital” should be the main source for financing the country’s economic growth.

Big Debt – Big Problems

Foreign debt may become a major problem if market conditions suddenly change for the worse. The smaller the debt, the lesser the chances of a default. Economists say that with Russia’s foreign debt accounting for just 33 percent of GDP, this is a fairly moderate debt burden.

Russia’s entire foreign debt is commensurate with the country’s gold and currency reserves of $450 billion. This means that Russia’s financial system can simply buy it back from foreign holders at any time.

Risk Minimization

Experts also say that Russia’s small foreign debt and its ability to pay it back fast makes it less dependent on foreign financing.

“The developing markets have found themselves in a bad fix with money going out and high dollar-denominated debt negatively impacting the national economies. In Russia this risk is virtually nonexistent,” TeleTrade currency strategist Alexander Yegorov told Sputnik.

A balanced budget is another reason why Russia does not need to borrow abroad.

This year Russia will have a budget surplus – the first in seven years with the Finance Ministry expecting state revenues to exceed outlays by more than half a trillion rubles ($16 billion).

A small foreign debt is also an indicator that the economy is performing well and the country is paying less interest on borrowed money.

There is one downside here, though, as this leads to a shortage of funds needed for economic growth. Russia is ready to borrow, provided that the money goes into useful and profitable projects that allow the country to easily meet its financial obligations to its foreign partners

In the first quarter of 2018, foreign sources lent Russia an estimated $17 billion in the form of sovereign Eurobonds. Another $2.3 trillion rubles ($36 billion) came from foreign investors buying federal loan bonds.

Russia’s Central Bank governor, Elvira Nabiullina, believes that Russia could borrow more abroad and use part of the money to finance various infrastructure projects inside the country.

June 12, 2018 - Posted by | Economics | , ,

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