Western Sanctions on Russian Sovereign Debt Could Prove Counterproductive, Inozemtsev Says

Paul Goble

            Staunton, March 17 – Many Russian analysts and officials have been expressing serious concern about the possible impact of the imposition of Western sanctions on Russian sovereign debt. But their fears, Vladislav Inozemtsev says, are misplaced and reflect a “mistaken identification” of this measure with sanctions against the financial sector as a whole.

            In fact, the Russian economist says, while the latter would as they have in the case of Iran have serious negative consequences, imposing such sanctions in the case of Russia would be impossible or economically and politically counterproductive given Russia’s financial links with the West and its options in managing debt (ridl.io/ru/fizika-sankcij/).

            Russian state debt is “extremely small relative to GDP and the total government budget and the Russian government, Russian banks, and Russian companies including those with government involvement have learned how to successfully operate on world markets, thus reducing to nil the chances that such sanctions on sovereign debt would lead to policy changes.

            “For covering a budget deficit, the Russian authorities have as well instruments for borrowing on the domestic market, the resources of the federal reserve fund” as well as possible devaluation of the ruble or increasing ruble-denominated debt which no one is talking about sanctioning now.

            As a result, Inozemtsev says, “the introduction of a total ban on operations with Russian foreign debt and extending it to American allies would lead only to a situation in which Western financial institutions would suffer serious losses … and the Russian authorities would restructure their obligations, significantly saving on the costs of servicing them.”

            The Russian economist points out that “Russia has many vulnerable points in its economic, industrial and technological spheres, but state debt is not one of them. Indeed, it will not be an exaggeration to say” that talk about imposing sanctions on sovereign debt has become fashionable but would not “inflict serious harm on Russian finances.”

            Indeed, because it would likely lead to the kind of restructuring of existing Russian government debt, it could end by saving Moscow money in servicing costs. (Inozemtsev in his article details the ways in which that could happen.) And thus it is unlikely that the West will take a step that some in Moscow mistakenly fear.