The $42 Billion Debt Trap That Putin Has Three Years to Escape
Comment of the Day

July 20 2015

Commentary by David Fuller

The $42 Billion Debt Trap That Putin Has Three Years to Escape

Here is the opening of this article from Bloomberg:

For the state of Russia’s finances, consider places like Chukotka, the territory separated from Alaska by a narrow strait.

The government there has racked up debt equal to 144 percent of its revenue, excluding federal grants, the highest in Russia, according to Standard & Poor’s. Regions from Belgorod near Ukraine to three North Caucasus republics are also prompting concern with ratios topping 100 percent. The premium investors demand to hold Russian municipal bonds over sovereign securities is the highest in more than a month and 103 basis points more than last year’s average, according to UralSib Capital data.

The clock is ticking for President Vladimir Putin to defuse a situation he set off in 2012 with decrees to raise social spending. That contributed to a doubling in the debt load of Russia’s more than 80 regions to 2.4 trillion rubles ($42 billion) in the past five years. Strains on their finances will grow critical in two or three years, raising the risk of bailouts from a federal budget already running a deficit for the first time since 2010, according to S&P.

David Fuller's view

“Social spending” is certainly not Russia’s real problem, in my opinion.

Putin’s one success is that he was able to organise his command economy, but unfortunately, it is a kleptocracy.  Russia has a highly educated population but no democratic rule of law which would allow potential entrepreneurs to flourish, unless they are cronies of Putin. 

Moreover, the expansionist former KGB operative has developed an expensive military which he assumed would be financed by ever higher prices for oil and gas, Russia’s main exports.  His only other significant export is military hardware, but slow global GDP growth means fewer countries can justify increased armaments, and few democracies will buy weapons from Russia. 

Russia’s RTS$ Index (p/e 7.00 & yield 4.93%) remains in an overall downward trend and is back beneath its declining MA.  The Ruble (shown inversely against the USD) is slowly weakening once again.  Some value investors like Russia because of the valuations above.  They will have to be very patient because Russia’s economy is in a mess and overly dependent on industrial resources. 

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