Debt and Currencies: The Soviet Connections

To have a currency crisis Russia suffered this week, a country needs two things: a local currency tied to a volatile international commodity and some external debt.

In oil exporting countries, the local currency is tied to your-know-what. As for the second condition, oil exporters are not supposed to borrow abroad when oil makes new highs. However, when the central bank let the local currency get stronger as export bucks flow in, borrowing abroad becomes attractive.

This opportunity is exposed when the PPP conversion factor to market exchange rate (PPP/EX) ratio is growing. And the ratio had been growing in oil exporting countries, though most of them escaped the temptation to borrow abroad:

World Bank
World Bank

(Russia and many others are missing in the World Bank’s data on debt. Among the remaining countries, red stands for energy producers. Negative changes in debt are due to countries (sometimes) repaying their external debts in 2001–2011. The worldwide average of external debt to GNI halved during this decade.)

And absolute values:

World Bank
World Bank, 2001–2011

The debt is an important addition to yesterday’s currency overview. A currency may diverge from its “value,” but it’s external debt what creates risk. The Russian debt to GDP ratio stood still around 35% for years, but this level became a problem when the private sector had lost access to western credits. Kazakhstan isn’t under sanctions, but its 80% debt together with dependence on oil put the country in a similar position. Also, some other former Soviet republics, like Tajikistan, depend on dollar-denominated remittances from Russia—it’s their “oil” risks.