Russia's External Debt, Solvency and Options for Alternative Capital Inflow

At the beginning of this year, Russia owed about $158 bn to foreign governments, Western banks, and multinational lending agencies such as the World Bank and the International Monetary Fund. Russia inherited a part of this debt burden from the former Soviet Union, while the rest of it has been accumulated during the transition years. The analysis in the report suggests that the problems of Russias ability to service its external debt and the solutions to these problems are to be found in structural issues (especially fiscal issues) rather than in features of the current account. The short-term alternatives for financing Russias external debt are limited. Significant budget cuts in government spending are unlikely in the near future, money printing would only add to inflation, and receipt of new credits is neither likely nor recommended. The hope of investors who are interested in Russia is that the government will take the route of structural reform. The money earned from Russias trade surplus remains a significant source for debt finance. However, the extent to which Russia can rely on this source depends greatly on world market developments, particularly changes in natural resource prices. Also the Russian authorities will only be able to reap the full benefit of the trade surplus if they can drastically reduce capital flight, which again leads us back to the necessity of structural reforms. In the long-run, without significant improvements in state finances and the investment climate, Russia will continue to have difficulty in making external debt payments and attracting new financing from international capital markets. A debt write-off deal with the Paris Club similar to that, which Russia reached with the London-Club, would ease the debt burden in the short-run. However, this would not solve the fundamental problems. Instead, the long-term solutions lies in new investments, which are the engine of sustainable economic growth. Structural reforms, starting with tax reform, will encourage investments and also encourage people to pay taxes. An increase in real income stimulated by investments also leads to an increase in tax revenue, provided that fiscal discipline is maintained. It remains to be seen whether Russian decision makers have enough political will and fiscal discipline to move from words to actions and implement long-promised structural reforms.