Vladimir Putin’s Russia is venturesome when it comes to things like meddling in foreign elections (allegedly), poisoning spies (possibly), and annexing parts of its neighbors’ territory (definitely). However, the country has become much more conservative about its finances, which have been fortified in part to withstand international sanctions.
The country’s financial footing is improving in some ways: Russia’s credit rating was raised from speculative (ie, “junk”) to investment grade last month by Standard & Poor’s. The agency cited the nation’s “prudent policy response,” which has helped it cope with international sanctions and lower oil prices. (Russia’s BBB- grade is nine steps below the top AAA rating.) Moody’s, which noted authorities’ “pragmatic monetary, exchange rate and fiscal policy responses,” raised Russia’s credit outlook to positive from stable in January.
The Russian Federation has clashed repeatedly with western powers, and sanctions have been a preferred method of punishing the Kremlin for those conflicts. US-led sanctions were levied on the country after its annexation of Crimea from Ukraine in 2014, and the measures targeted state-owned oil companies, banks, and members of Putin’s inner circle. The restrictions put pressure on the economy without completely crippling it.
For now, US investors can still buy Russian government bonds, although it’s always possible that new sanctions could bar them from doing so. Even if that were to happen, Moody’s expects that Russia would be able to finance its spending because of new fiscal rules that have resulted in “very low borrowing requirements.” The government plans to reduce deficits to a level that can be financed domestically, according to Moody’s, and the finance ministry has been on a foreign-exchange buying spree since 2017.
There is the possibility of new penalties. The Kremlin is suspected of poisoning a Russian dissident in England over the weekend; foreign secretary Boris Johnson said the UK is considering—you guessed it—sanctions, depending on the outcome of an investigation, according to the BBC. Sergei Skripal, a former Russian colonel who was convicted of spying for Britain, and his daughter are critically ill following the incident.
Russia’s economy is far from strong. It remains reliant on its oil and gas industry, and its fiscal prudence partly reflects the potential for shocks to that market. It has an aging workforce and businesses suffer from “problems with rule of law, property rights and weak control of corruption,” which deter investment, according to Moody’s. The economy grew by 1.5% in 2017 after suffering nearly two years of recession.
Fiscal pragmatism also has drawbacks. “The overtly prudent measures are stifling the economy,” said Abhishek Kumar, lead investment manager for emerging markets at State Street Global Advisors. International bond investors remain reluctant to buy debt issued by Russian companies and the government, Kumar said.
Investment opportunities aside, the fiscal fortification could provide some insight into the Kremlin’s long-term thinking. Putting its finances on such a careful footing suggests Putin doesn’t expect sanctions to be relaxed any time soon, and may be preparing for more. It also follows that if Russia intends to continue past behavior, the economic consequences of its actions would be muted.