Cannot Pay Debts, Yet Swimming in Money: Five Signs That Russia is Withstanding Sanctions

Russia has failed to pay interest on a government bond and meet obligations to foreign creditors for the first time since the 1917 revolution, but its economy shows no signs of faltering despite sanctions, writes Reuters.

The sanctions imposed by the West on Russia due to its invasion of Ukraine represent the largest external shock to the $1.8 trillion economy since the collapse of the Soviet Union in 1991.

However, it has so far proven remarkably resilient to punitive measures, notes Reuters.

At the beginning of the week, Russia did not pay $100 million in coupon interest on a government bond after a 30-day grace period expired, and the U.S. announced that it had not met obligations to foreign creditors.

The Kremlin dismissed this assessment. Russia paid interest in May, and the fact that the clearing house Euroclear blocked the funds due to Western sanctions is “not our problem,” said spokesman Dmitry Peskov.

The situation is significantly different from that in 1918 when the Bolsheviks refused to pay debts or in 1998 when Russia did not meet domestic debts, notes Reuters.

Moscow today can and wants to pay its debts, but the West is preventing it. 

Strong Currency

Investors, as well as Russians themselves, have avoided the ruble for decades due to its extreme weakness and instability.

Over the past year, the ruble has strengthened the most against the dollar compared to all other world currencies. On Wednesday morning, it took just over 51 rubles to buy a dollar. At the peak of the crisis triggered by the Russian invasion of Ukraine, more than 124 rubles could be exchanged for a dollar.

The Russian currency is supported by revenues from Russian raw material exports, reduced imports, and capital controls that the authorities have since eased.

In the first five months of this year, Russia recorded a current account surplus of $110.3 billion, more than three times higher than in the same period last year, according to central bank data.

Black Gold

Since the beginning of the Russian invasion of Ukraine, the price of oil, the lifeblood of the Russian economy, has not fallen below $100 per barrel. On Tuesday, it reached $117.

Thanks to high oil prices, Russia, the second-largest oil exporter in the world after Saudi Arabia and the largest global exporter of natural gas, has access to a trillion dollars annually to mitigate the effects of sanctions.

Russian producers sell oil at prices lower than those on the London market, but still high, emphasizes Reuters.

Western sanctions have forced them to sell oil to China and India at discounts of up to $40 per barrel. However, U.S. officials have stated that Moscow is still earning more money from energy exports than before the war.

Interest Rates

Immediately after the invasion began, the Russian central bank raised key interest rates to 20 percent. Borrowing thus became more expensive, but not nearly as much as in 1998, before the ruble’s devaluation, when rates reached an astronomical 150 percent.

By mid-June, the bank lowered them to 9.5 percent, indicating that it could further reduce them as inflation slows.

Prices in May were about 17 percent higher than in the same period last year, but the central bank estimates that their growth will weaken in June.

Forgotten “Bush Legs”

Immediately after the invasion began, citizens started panic buying groceries, such as sugar. However, panic buying has subsided as there is enough food in stores, and banks are not under pressure from depositors trying to access their money.

This is in stark contrast to the panic buying that accompanied the devaluation in 1998 and the food shortages following the collapse of the Soviet Union in 1991.

Back in 1990, to alleviate Russia’s food shortages, the U.S. began sending chicken to Russia, which Russians dubbed “Bush legs,” after former U.S. President George H. W. Bush, a co-signer of the agreement with Mikhail Gorbachev.

Low Unemployment

The unemployment rate in Russia was a record low in April, at just four percent.

Some fear that the actual rate may be higher as large companies have not yet begun laying off workers, but for now, only three million citizens are unemployed.

Data for May is expected to be released soon, notes Reuters.