Mar 23, 2022 - Economy

Russia's economic long game

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

Russia appears to be making good on the interest payments it owes on tens of billions in dollar-denominated bonds — it paid some last week, and initiated another one that was due on Monday.

The big question is why Russia's paying. The main consequence of default — that you can’t borrow in the market anymore — is basically moot since sanctions have all but removed Russia from international financial markets already.

Why it matters: War — and its aftermath — are expensive. And Russia for the time being appears to have its eye on the long game, acting to preserve its access to global capital.

  • “I think they’re trying to save a shred of credibility,” says George Catrambone, head of Americas trading at DWS Group. “And to leave some optionality down the road, that if — and that's a very big if — sanctions were to start to unwind, that they could say ‘we always paid, Russia has not defaulted, and will not default, and is a sound market participant.’”
  • Last week's payments surprised the market. One of the bonds that received payment (charted above) jumped in price to around 40 cents on the dollar, from 16 cents a few days earlier.

Worth noting: A default would also make Russia's current borrowing options — already limited by sanctions — even more difficult.

  • It would have to rely on domestic banks and friendly countries (China, for example) — and those lenders would surely demand higher interest payments in the wake of a default.

State of play: Russia may not need to borrow money again for a while — it was running a budget surplus going into the invasion, and its main revenue driver, oil and gas sales, have so far largely escaped sanctioning.

  • But significant military operations like its attempted conquest of Ukraine are costly — and it may also need to spend large amounts on social stability to quell unrest, says Catrambone.
  • Moreover, it may need cash sooner if additional countries stop buying Russian oil, or if the price of oil falls, he adds.

What’s next: Russia owes a slew of debt payments on dollar bonds throughout the rest of the year. The biggest one, a maturity of over $2 billion, is looming on April 4.

Go deeper