Russian stocks are in freefall, the ruble is rapidly losing value, and 50 oligarchs have collectively lost $12 billion in one trading day—all due to the latest round of American sanctions. The market’s reaction makes the British response to Russia’s poisoning of former spy Sergei Skripal and his daughter look even weaker. After Theresa May expelled Russian diplomats, the Kremlin reacted like it always does. It trolled. Through state TV, its twitter account, and, interestingly, the bond market. Gazprom and the Russian state raised billions through the British markets mere hours after the assassination attempt. The Russian sovereign debt was substantially oversubscribed leading many to highlight the impotence of the British government and the power of the Kremlin. But putting the financial trolling in context, reveals Russia is playing a weakening hand. The Russian sovereign bonds were oversubscribed by a ratio of 2 to 1—demand outpaced supply two-fold. This sounds impressive, but it’s hardly surprising given the absurd liquidity that characterizes today’s sovereign debt market. In the past year, the straw that nearly broke the Euro’s back, Greece, had an oversubscribed bond. Argentina, a serial defaulter, managed to raise a 100-year bond; meanwhile, even countries like Nigeria and Iraq have had their debt eaten up by investors desperate for any form of yield. With this context in mind, Russia’s financial “power” looks run of the mill and just a symptom of an excessively liquid market. Considering Russian bonds were oversubscribed by 3 to 1 last year, the deal is looking a whole lot weaker. At the end of the day, investors only care about getting paid back. Despite recent economic turmoil, Russia’s fundamentals are generally strong and in a good position to meet its debt obligations regardless of whether sanctions worsen. But Putin’s recent budget outlined a number of ambitious plans to keep the public happy, and new taxes, even after his election victory, are an unlikely option. Borrowing from abroad will be essential to maintaining control, and the Kremlin needs to keep investors happy to maintain access. Therefore, defaulting on debt anytime soon is a non-starter, justifying the market’s relatively sanguine take. But the bonds issued have some particularly novel details that highlight the tightrope Russia is walking. Russia inserted a remarkably ambiguous clause that allows it to pay back lenders in a currency other than the dollar (the standard for a Eurobond) for actions beyond the country’s control. In other words, Russia is having to break huge precedent in an attempt to give investors leeway if and when the sanctions do really kick in and their dollar reserves dwindle. The fact that foreign investors still bought the bonds could mean this doesn’t matter, but it also illustrates that Russia is having to adjust to an uncomfortable, sanction filled, reality. Moreover, while the Kremlin brags about British and American investors soaking it in, the opaque nature of financial transactions makes it difficult to make firm conclusions. The Kremlin was open about its efforts to provide Russian elites with investments abroad as a convenient way to get their money back home. Russians are notorious users of foreign holding companies to help with tax evasion and property protection; it is not difficult to imagine that part of the “foreign” demand was in reality Russian. Getting potentially dirty money out of London also falls in line with the British government’s current interests, so it would hardly have been rational for them to try to take action against the bonds issued. Given the state of the global market, Russia should be getting great terms, but they were average at best. The real question is what rate they would have been able to borrow at in the absence of sanctions and current political tensions. There should be little doubt that it would have been much better. Global liquidity, not Kremlin action, is keeping Russia afloat. With rates rebounding from historic lows, investor demand for such a risky debt proposition will wane, particularly as they should soon be able to realize adequate returns through safer assets. Russia’s market turmoil is another illustration that going after individuals is an incredibly effective part of today’s strategy against Russian aggression. Sanctioning sovereign bonds has remained out of bounds, primarily due to fears of spillover effects. The latest sanctions have foreign investors spooked, so they are likely dump these holdings, mitigating the Treasury’s concerns. Given Russia’s foreseeable dependence on foreign capital, and the legal tricks they are already having to play, British and American authorities are going to only have more leverage down the line if, and when, they choose to exercise it. About the author: Nikhil Kalyanpur is the Economics & Trade Fellow at Young Professionals in Foreign Policy (YPFP). He is a doctoral candidate in Government at Georgetown University where he researches the effects of financial and legal globalization on business-government relations. His work has been published or is forthcoming in a number of academic and public outlets including the Review of International Political Economy, International Organization, and the Washington Post.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.