Russia Risks Default As Financial System Paralyzed
When you're in a hole, the first step is to stop digging. But not if you're Vladimir Putin.
On Monday, amid a collapse in the ruble, a slow motion bank run and an emergency hike from the central bank (among other measures), Putin effectively ordered Russians to voluntarily default on nearly a half-trillion in external debt.
Technically, it's a prohibition on hard currency transfers abroad, but it includes debt service payments. It takes effect tomorrow and could imperil nearly $500 billion in
The gigantic elephant in the room is government budgeting.
It’s obviously impossible to know if Putin’s aggressive behavior is AI driven, like a chess game or if Putin is having a mental meltdown, either state is dangerous. Nonetheless, as this event unfolds, and we see just the financial estimates of funding provided to Ukraine, for security, this support everyone offers will become a budgetary problem, which for the moment is invisible.
As a specific example, recall trumps promise to build The Wall. It basically didn’t happen, primarily because of budget shortfalls related the deficit and statutory complexity of an annual budget. Trump was basically stopped because Congress has to balance budgets, even though they can play games with deficit spending.
Thus, as much as America and other countries allocate funding for security, there are limitations for everyone, including Putin. I assume wartime funding and emergency events can override traditional statutory limits, but after the GFC and COVID QE budgets and the uncountable trillions that can’t be easily managed, adding on a few more trillion to help David’s fight against Goliath, is somewhat awkward.
But, as we’ve been trained, deficit spending doesn’t matter. However, as more and more global GDP is consumed by threats from China and Russia, this becomes a far more pronounced ideological, generational threat to our future…
Mr H, To what degree can China be Russia’s escape hatch, because China has a perpetually voracious appetite for cheap natural resources?? As U know, China has such a huge trade surplus with US, China has plenty of dollars as well as US Treasuries that can be easily converted into dollars in perhaps the most liquid market in the world: the market for US Treasuries. Therefore could Russia get enough dollars from China to remain solvent ??
+1. Same question. How much risk would China be taking to use its financial resources support Russia?
Also, how much would they gain by doing so. Yes China would like to break USD grip but from what they’re seeing, is this the right time to make that effort.
I can’t help but think that China benefits from this whole puzzle. The Ukraine Gambit has a currency war attached to it …
“China is Russia’s biggest trade partner for both exports and imports. In 2020, 17.5% of the trade between the two countries were settled by yuan, an improvement from the 3.1% in 2014, according to CSC.”
China is getting an education on how powerful democratic nations can be when they work in concert. Putin is a test case for how Xi would like to expand his empire, that test case is an abject failure and should deter Xi from taking any actions mirroring Putin’s in the near term.