Russia’s current foreign debt is not large: $731 billion, or about 34% of Russia’s annual GDP. Direct government debt is $73 billion and state-owned banks and corporations owe an additional $304 billion. By international standards this is benign. U.S. external debt is close to 100% of GDP, for example. In consideration of Russia’s $478 billion currency reserves, accumulated over the past decade, it seems absurd to worry about default.2 Events in Ukraine, as much as the drop in oil prices, are the catalyst for the current Russian financial crisis. When Ukrainians decided to oppose the transformation of their government into another “friendly bordering dictator” regime, Russia annexed Crimea and instigated a militant separatist movement in eastern Ukraine. While the Georgian conflict in 2008 was short and limited in its effect on the Russian economy (Lawton and Beck, 2014), the Ukrainian conflict has had a much bigger impact. Russian and pro-Russian maneuvers resulted in thousands of deaths (including the 283 passengers and 15 crew members aboard a Malaysian airliner that was shot down in September 2014). In response, Western powers imposed economic sanctions.
To date, the sanctions have been relatively mild. They are nowhere close to the sanctions imposed on Iran, Cuba, or North Korea. Many countries, notably Germany, rely heavily on energy imports from Russia and oppose outright trade restrictions. European banks are ill positioned to absorb defaults on Russian debt. If the present Russian military line persists or becomes more aggressive, then there is room for significantly harsher sanctions; but under the comparatively weak sanctions now in force, Russian companies still generate sufficient revenue to service their debts.
Thus the present crisis is a solvency problem, not an inability to service debts. Many Russian companies need to refinance their hard-currency debts. Sanctions prohibit this refinancing. Russia’s biggest oil company, Rosneft, seems to have created the turmoil which caused the ruble to drop so sharply in December. According to the Financial Times (2014), Rosneft has $19.5 billion in debt due next year. If oil prices stay at the current $60 a barrel level, its revenue will cover only $15 billion; it is short $4.5 billion. Rosneft recently placed the equivalent of $10.8 billion in a ruble-denominated bond offering, and it is rumored that the company substantially converted the proceeds into dollars to replenish its reserves. Apparently, this transaction caused the recent panic in the currency and stock markets.
Rating agencies forecast a chain of bankruptcies and have already lowered Russian sovereign and private credit ratings. The Russian central bank has resorted to emergency measures. In addition to facilitating the Rosneft bond deal, it raised interest rates to 17% (from 10.5%) to make ruble accounts more attractive and discourage residents from converting rubles into foreign currencies.