Russia – Abundant Signs of Trouble

The unwavering popular support for Vladimir Putin’s foreign policy has been sustained in spite of the sanctions imposed over Russia’s support for separatist rebels in eastern Ukraine, and the president’s popularity only increased following his unexplained 10-day disappearance from the public eye in March, an absence that fueled rumors of illness and a possible political coup in the Kremlin. The latest polls suggest that Putin enjoys the support of more than 80% of the population, indicating that a political strategy that relies heavily on appeals to nationalism to deflect blame for Russia’s deepening economic woes is working.

That said, there is evidence that all is not well in Moscow. Various reports suggest that the powerful business interests who form the bedrock of Putin’s base of support are deeply troubled by the negative effect that sanctions and deteriorating economic conditions are having on their personal wealth. At the same time, the president is increasingly at odds with policy makers at the central bank, and he is said to be losing faith in some of his closest advisers, and Kremlin insiders are also bracing for a shakeup in the political pecking order following the assassination of opposition leader Boris Nemtsov in late February, which bears all the marks of a political hit, but may have been planned without Putin’s knowledge.

More troubling are claims that the patron-client relationship between the Kremlin and the autonomous government in the historically restive republic of Chechnya has become strained as funding for central government transfers to the regions has begun to dry up. A former high-ranking member of Chechen leader Ramzan Kadyrov’s security forces is among five suspects who have been detained in connection with Nemtsov’s death, and one of the many theories about the killing is that Kadyrov ordered the hit in an attempt to sow political instability in Moscow.

The economy is not in any immediate danger of collapse, but the widening of five-year credit default swap spreads is an indication of the rising risk attached to holding Russian sovereign debt, and total corporate debt is estimated at about $550 billion, including roughly $110 billion of liabilities that mature in 2015. Foreign exchange reserves have been depleted by at least $100 billion since June 2014 (to a reported $370 billion), and are decreasing at a pace of some $6 billion per week. The downgrading of Russia’s credit rating to junk status caused another downward jolt to the ruble, which had been stabilizing, triggering debt redemption clauses that only add to the refinancing burden.

The math suggests that there are reasons for concern with regard to Russian creditworthiness. The largest corporations are sitting on huge stockpiles of cash and other liquid assets that could be utilized for debt repayment. However, it cannot be assumed that they will deplete their foreign currency reserves as long as conditions remain so unstable. They may instead opt for ruble conversions that risk sparking an acceleration of capital outflows that will only add to downward pressure on the local currency.