Russian Deputy Finance Minister Sergei Storchak said today that Russia’s financial troubles may force the country to suspend the issuing of new loans to other countries. Storchak added that Russia will respect its earlier obligations on loans issued to foreign borrowers. Nevertheless, his announcement comes after officials in both Russian-controlled Crimea and the Russian-supported breakaway region of Abkhazia complained of lower funding than expected from Moscow. Low world energy prices have led to several rounds of budget cuts in Russia, with more expected as oil prices reach new lows. Budget cuts are limiting Moscow’s ability to pursue its strategic goals, both in the region and further afield.
Loans are one of the key tools Russia uses to build and maintain diplomatic relationships, both in the former Soviet states and in developing countries. Moreover, Russia has used its funding capabilities to develop close ties with political parties throughout Europe, most notably issuing a loan to France’s National Front. Over the past few years, Moscow has pledged loans to help build nuclear power plants in countries such as Egypt, Bangladesh and Hungary. The Kremlin has used this strategy to gain influence in Latin America as well. Russian state-owned company Rosneft has issued loans to Venezuelan state-owned company PDVSA, while Russian state development bank VEB pledged to lend money for a joint hydro power station project. In the Middle East, Russia is currently in the midst of negotiating a $5 billion loan to Iran.
The geographic spread and diversity of Russian loans highlights their importance for the Russian government’s strategy abroad. On the one hand, these loans allow the government to indirectly subsidize Russian companies, who are oftentimes jointly implementing projects with local counterparts. But above all, these loans, and the prospect of receiving future loans, gives Moscow leverage, even in regions, like Latin America or the European Union, where Moscow generally has relatively little influence. Russia uses this leverage to attempt to win the support of foreign governments for specific projects or strategic goals Moscow is pursuing. This is especially important because Russia’s military abilities are highly constrained; even in Syria, Moscow’s intervention is relatively limited.
The plunge in world energy prices, therefore, is further constraining Russia’s options at a time when it is facing a pro-Western Ukraine and a U.S. government that is working to boost its defense cooperation with countries in Russia’s neighborhood. Russia is becoming weaker, and the announcement that the country may no longer be able to issue new loans to foreign governments signal that it is entering a new phase, where the Kremlin’s options are increasingly limited. The risk is that a weaker Russia, with fewer opportunities to use funding to achieve strategic goals, could ultimately become more aggressive.