The Russian Economy Relies Minimally on External Borrowing

Tough economic sanctions and the collapse of the ruble raise concerns, among other things, about a possible default. Some of the restrictions have already been introduced, others are preparing to come into force. However, economists are sure that there are no grounds to talk about difficulties with debt servicing. Whether the Russian economy will be able to withstand the unprecedented pressure and whether there may be problems with the fulfillment of debt obligations.

Overwhelmed with sanctions
Because of the situation in Ukraine, the West is bombarding Russia with sanctions. Among them are sanctions against the largest Russian banks with their subsequent possible disconnection from the SWIFT global interbank communication system. The Central Bank also fell under sanctions. The Council of the European Union imposed a ban on any transactions related to the management of assets and reserves of the Central Bank of Russia, including those conducted by third parties and organizations in its interests. The only exceptions will be “operations necessary to ensure the financial stability of the European Union or one of its members,” as the EU decision says.

Questions arise whether the sanctions against the Central Bank and the banking sector will affect the ability of the state to fulfill its debt obligations. According to economists, this should not be feared. The point is that the Russian economy relies minimally on external borrowing. The level of public debt to GDP is extremely low, about 15%, the entire debt is fully covered by reserves. The volume (NWF) as of February 1, 2022 is 13.6 trillion rubles (10.2% of GDP).

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Even if part of the Central Bank’s assets is frozen thanks to accumulated reserves, in particular in the National Wealth Fund (NWF), the Russian government will have enough funds to service the debt, points out Mikhail Khachaturyan, associate professor at the Financial University under the Government of the Russian Federation.

Solid reserves
International reserves are highly liquid foreign assets at the disposal of the Bank of Russia. They are needed to finance the balance of payments deficit, influence the exchange rate through interventions, maintain confidence in the country’s currency and economy, and as a basis for foreign borrowing. Gold reserves consist primarily of foreign currency assets and monetary gold. Also, Russian reserves include special drawing rights – a reserve means of payment issued by the International Monetary Fund. The current volume of Russia’s international reserves is $643.2 billion.

In the structure of reserves, 32.3% ($207.75 billion) are placed in euros, 21.7% ($139.57 billion) in gold, 16.4% ($105.5 billion) in US dollars, 13.1% ($84.25 billion) in yuan, 6.5% ($41.8 billion) in pounds sterling, and the remaining 10% ($64.32) in other jurisdictions. Part of the reserves located in the American, European, Japanese and South Korean jurisdictions fell under the sanctions.

“China did not join the sanctions, that is, we have $ 223 billion in reserve, or about 20 trillion rubles, in total, a little more than 60 trillion rubles are in circulation in Russia,” notes Maxim Mikhailov, an independent financial adviser.

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Thus, a sufficient amount of funds has been accumulated, and Russia has something to service its debts, even taking into account the introduction of a ban on access to 60% ($340 billion) of the reserves of the Central Bank of the Russian Federation. The government has a variety of actions in terms of ensuring the stability of the economy and the functioning of the financial system as a whole. The main guarantor is the National Welfare Fund, economist Inna Litvinenko emphasizes.

The probability of a default is low, because, even despite the freezing of the Central Bank’s reserves, there is enough liquidity in the country to easily service debts, including in foreign currency. At the same time, about a third of the reserves are still at the disposal of the Central Bank, Mikhail Kogan, head of the analytical research department at the Higher School of Financial Management, points out.

gold reserve
As insurance against sanctions risks, Russia has previously accumulated a huge amount of gold worth almost $140 billion in reserves. At the same time, the share of the dollar in reserves has more than halved since 2018. For example, Washington can block Russia’s dollar accounts, but there is no such threat for gold. A large share of the precious metal in an unstable economic situation is a certain safety cushion.

“The regulator can simply start selling the accumulated gold in order to cover the cost of external debt. In addition, the Central Bank, even taking into account the sanctions, has the ability to conduct operations for the purchase and sale of energy resources, that is, the flow of dollar income still remained in the state’s access,” Mikhail Kogan explains.

Tough economic sanctions and the collapse of the ruble raise concerns, among other things, about a possible default. Some of the restrictions have already been introduced, others are preparing to come into force. However, economists are sure that there are no grounds to talk about difficulties with debt servicing. Whether the Russian economy will be able to withstand the unprecedented pressure and whether there may be problems with the fulfillment of debt obligations, Izvestia found out.

Overwhelmed with sanctions
Because of the situation in Ukraine, the West is bombarding Russia with sanctions. Among them are sanctions against the largest Russian banks with their subsequent possible disconnection from the SWIFT global interbank communication system. The Central Bank also fell under sanctions. The Council of the European Union imposed a ban on any transactions related to the management of assets and reserves of the Central Bank of Russia, including those conducted by third parties and organizations in its interests. The only exceptions will be “operations necessary to ensure the financial stability of the European Union or one of its members,” as the EU decision says.

swift bankPhoto: TASS/Zuma
Questions arise whether the sanctions against the Central Bank and the banking sector will affect the ability of the state to fulfill its debt obligations. According to economists, this should not be feared. The point is that the Russian economy relies minimally on external borrowing. The level of public debt to GDP is extremely low, about 15%, the entire debt is fully covered by reserves. The volume (NWF) as of February 1, 2022 is 13.6 trillion rubles (10.2% of GDP).

Affect of influence: how sanctions against the Russian Federation will turn out for foreign markets
EU measures against Russia will also hit the European economy, politicians and experts admit
Even if part of the Central Bank’s assets is frozen thanks to accumulated reserves, in particular in the National Wealth Fund (NWF), the Russian government will have enough funds to service the debt, points out Mikhail Khachaturyan, associate professor at the Financial University under the Government of the Russian Federation.

Solid reserves
International reserves are highly liquid foreign assets at the disposal of the Bank of Russia. They are needed to finance the balance of payments deficit, influence the exchange rate through interventions, maintain confidence in the country’s currency and economy, and as a basis for foreign borrowing. Gold reserves consist primarily of foreign currency assets and monetary gold. Also, Russian reserves include special drawing rights – a reserve means of payment issued by the International Monetary Fund. The current volume of Russia’s international reserves is $643.2 billion.

In the structure of reserves, 32.3% ($207.75 billion) are placed in euros, 21.7% ($139.57 billion) in gold, 16.4% ($105.5 billion) in US dollars, 13.1% ($84.25 billion) in yuan, 6.5% ($41.8 billion) in pounds sterling, and the remaining 10% ($64.32) in other jurisdictions. Part of the reserves located in the American, European, Japanese and South Korean jurisdictions fell under the sanctions.

gold reservePhoto: RIA Novosti / Ilya Naimushin
“China did not join the sanctions, that is, we have $ 223 billion in reserve, or about 20 trillion rubles, in total, a little more than 60 trillion rubles are in circulation in Russia,” notes Maxim Mikhailov, an independent financial adviser.

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Financiers and bankers advise not to worry
Thus, a sufficient amount of funds has been accumulated, and Russia has something to service its debts, even taking into account the introduction of a ban on access to 60% ($340 billion) of the reserves of the Central Bank of the Russian Federation. The government has a variety of actions in terms of ensuring the stability of the economy and the functioning of the financial system as a whole. The main guarantor is the National Welfare Fund, economist Inna Litvinenko emphasizes.

The probability of a default is low, because, even despite the freezing of the Central Bank’s reserves, there is enough liquidity in the country to easily service debts, including in foreign currency. At the same time, about a third of the reserves are still at the disposal of the Central Bank, Mikhail Kogan, head of the analytical research department at the Higher School of Financial Management, points out.

gold reserve
As insurance against sanctions risks, Russia has previously accumulated a huge amount of gold worth almost $140 billion in reserves. At the same time, the share of the dollar in reserves has more than halved since 2018. For example, Washington can block Russia’s dollar accounts, but there is no such threat for gold. A large share of the precious metal in an unstable economic situation is a certain safety cushion.

“The regulator can simply start selling the accumulated gold in order to cover the cost of external debt. In addition, the Central Bank, even taking into account the sanctions, has the ability to conduct operations for the purchase and sale of energy resources, that is, the flow of dollar income still remained in the state’s access,” Mikhail Kogan explains.