Russia’s Domestic Debt to Rise Considerably

Feb. 8 – The domestic debt of Russia in terms of government securities rose in 2011 at the fastest pace in 15 years, according to data published by the Finance Ministry on its web site today.

Russia’s domestic debt expanded 42.5 percent to 4.19 trillion rubles (US$139.8 billion) as of January 1, up from last year’s 40.4 percent advance to 2.94 trillion rubles, the data showed.

Prime Minister Vladimir Putin has said Russia’s debt grade is an “outrage” that lifts corporate borrowing costs and increases risks.

At the same time, Russia’s debt burden is not high when compared to some other countries. Russia’s domestic debt was only 10.4 percent of GDP, and external debt was 2.5 percent of GDP. For comparison, China’s government debt is 16 percent of GDP and is still considered low.

Last year’s increase was the fastest since 1996, when the government’s total outstanding debt jumped 94 percent to 364.5 billion rubles, the ministry said.

Fitch Ratings Agency downgraded its outlook on Russia’s debt rating from positive to stable on January 16. The agency indicated the recent widespread protests in Moscow and other cities were behind the downgrade.

“Political uncertainty increases the risk of capital flight, which could put greater pressure on the Central Bank of Russia’s reserves and the ruble,” the ratings company said.

Earlier this year, Russia’s Central Bank informed that the country’s external debt for 2011 had grown 10.23 percent and made US$538.94 billion for the start of January, 2012.

The external debt of monetary policy authorities stood at US$11.653 billion as of January, 1, 2012 – down from last year’s US$12.35 billion.

Banking sector debt has increased by 13.7 percent to US$164 billion, while the external debts of other sectors of the economy have grown 10.6 percent to almost US$330 billion.

High public debt can have a significant negative effect on economic activity, IMF and World Bank analysts warn: “It requires high taxes to finance and puts upward pressure on real interest rates, ‘crowding out’ private investment.”

“When a government is no longer able to finance its deficits, it is forced to contract spending or raise revenues, often at a time when fiscal policy is needed to help stabilize the economy,” IMF and World Bank analysts write in Public Debt in Emerging Markets.

“When the government cannot take these actions, a debt crisis ensues and the government is forced to default or inflate the debt away (an implicit default), both of which entail large economic and welfare costs.”