Russia is limbering up to use its banks as a lifebelt — again. Finance minister Anton Siluanov said on April 11 that domestic lender Promsvyazbank could lend emergency funds to United Company Rusal, whose shares have been smashed by US sanctions announced on April 6. If Rusal heralds the start of a wider assault, Moscow can deploy some familiar airbags.
The good news is that Russia’s economy is in a healthier state than in 2014, the last time it was subject to a sanctions shock. Inflation is low, government debt is under 20 per cent of GDP, and higher oil prices combined with fiscal prudence means the Ministry of Finance added $14.5 billion to the state’s foreign currency reserves last year. A current account surplus has offset persistent private sector outflows.
The bad news is that the new style of sanctions will make it harder for companies to borrow from or even trade with US persons, likely causing outflows to spike. Were the US to impose similar restrictions on more than just a handful of companies, Russia would struggle. The central bank’s foreign exchange reserves only cover two-thirds of the $500 billion total debt owed to non-residents, according to Moody’s. Foreign investors hold about $50 billion of foreign currency corporate debt due this year.
Russia could help with some old manoeuvres. When oil giant Rosneft needed help repaying foreign currency debt in 2014, it got it by issuing bonds to Russian bank Otkritie, which swapped them for foreign currency with the central bank. Given that the Russian state controls Sberbank and VTB, the two biggest banks, it could look into using a similar arrangement again.
The obvious problem with doing this is the risk to bank capital positions. The country is still emerging from a crisis that saw three large lenders rescued last year. But the two big banks are adequately capitalised, and the central bank could repeat another ruse from 2014. Then, it shielded the banks’ capital from losses by a temporary fiat.
Such measures would have to be stop-gaps, but that may be enough. Western countries are unlikely to confer Rusal-style sanctions on all Russian companies. Gazprom supplies a big chunk of European gas, after all. If the picture does deteriorate, Russia will have to get even more creative.