Is Russia on Argentina's Credit Highway to Hell?

One financial goner meets another?

This commentary by Mohamed El-Erian struck me as wildly speculative at first: Russia is the next Argentina...yeah right! Are we talking about the same Russia that supposedly has a cool $475 billion in foreign exchange reserves? It isn't pipsqueak Argentina with less than $29 billion in reserves that looks like it may default tomorrow (more on this later after my earlier commentary). El-Erian isn't convinced that Russia's troubles are to be as lightly taken as the markets suggest:

That said, Argentina is not entirely unique. Russia is on a similar path, though the details and the timetable differ. Russia's government, companies and banks neither need nor want to default on their debts. If, however, Ukraine-related geopolitical tensions get worse and pressures mount on Western governments to impose legal limitations on banks’ ability to transact on behalf of Russian entities, they may find themselves unable to make payments despite ample international reserves and manageable debt loads. 

The point isn't that Russia has sufficient reserves to make payments for its energy companies and other state-owned firms' obligations. Rather, like Argentina, it may not be allowed to make these payments due to legal machinations--i.e., sanctions:

After last week’s intensification of U.S. sanctions, Europe is preparing to detail its own set of additional sanctions this week. Absent a change of strategy by Russia -- an unlikely outcome given how President Vladimir Putin readily ignored...financial sanctions could materialize soon.

The market has yet to fully absorb this possibility. Many investors believe that the Russian geopolitical issues will somehow resolve themselves, because it is in nobody’s interest to stumble into a lose-lose situation. Yet, as with Argentina, rationality is not necessarily a good guide to what could happen. Absent a course correction, the conflict is proceeding on a path that limits the flexibility of the parties, along with the control they have on outcomes. Most investors' credit models do a pretty good job of capturing the many factors that impact debtors’ willingness and ability to pay. They have greater difficulty, however, dealing with the one-off exogenous shocks that politics can deliver. Argentina is today’s example, with all the suspense that it entails. If Russia does not change course, it could be tomorrow’s.

World politics are messy and risk models can't predict them; what else is new? It's something to think about as Russia's fate hangs in the balance: economics will not (yet) doom Russia's economy but rather politics. Welcome, friends, to the International Political Economy Zone.