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In the Nation's Interest

Russia and Argentina: Two Nations Behaving Badly

By Jeffrey Hooke
Vice President and Director of Economic Studies

Today’s global economy is based on a complex set of norms under which major nations are supposed to behave. Russia, the eight largest economy, and Argentina, the 26th, are sizeable economic actors, but they have been “breaking the rules” in a highly overt manner this year.  In this blog, we examine a few ramifications of this behavior.


After much domestic protest, the Ukrainian government changed on February 14, 2014. Shortly thereafter, unidentified troops – widely suspected of being of Russian origin – occupied key government installations of Crimea, a Ukrainian province that had been part of Russia prior to 1954. By early March, official Russian soldiers had established control, and Moscow announced its annexation of Crimea.

Among the United States and Eurozone members, this aggressive action spurred diplomatic protests and economic sanctions against Russia. The resultant geopolitical situation contributed to backsliding in the Russian economy, which had also been damaged by lower oil prices as Russia is an important energy exporter. By way of illustration, the World Bank’s latest GDP prediction shows stagnation for 2014 and 2015.

The anemic growth outlook is not dissimilar from the neighboring Eurozone, but, Russia is still classified as an “emerging market,” and such markets recently have tended to have GDP growth rates exceeding those of developed nations. Accordingly, many expect the Russian economy to grow faster than the Eurozone. International sanctions on Russia limit foreign investment and cause uncertainty for local investors, thus cramping economic activity.

The Russian stock market and foreign exchange rate (against the U.S. dollar) experienced negative movements relative to the Eurozone.  See the next table.


On the bond rating side, S&P dropped the Russia sovereign bond (denominated in US$) to BBB- (one step above junk) from BBB. Moody’s kept its Baa1 rating with a negative outlook.


In July 2014, Argentina defaulted on its international debt for the second time in 13 years.  The country’s previous default occurred in 2001, when it failed to pay debt service on over US$ 100 billion in obligations. This year’s default was not caused by financial hardship; Argentina has the money to pay. Rather, arcane legal wrangling over responsibilities owed to some of the earlier creditors rendered the country unable to pay some debtors instead of others.

Back in 2005 and 2010, workout negotiations produced settlements with 92 percent of the prior debt holders (by principal value), providing them with about 35 cents in value for each US$ 1.00 of principal, a substantial lender “haircut“ in a sovereign bankruptcy. Exercising their rights under U.S. law, a small slice of remaining holdouts (8% of principal value) sued Argentina for full payment and remained a thorn in the nation’s financial side.

Deadlines for settlement “came and went” for several years, and matters reached a head in July 2014, when a U.S. judge’s exasperation and Argentine intransigence provoked a default on the 2001 revised debt.

Since the beginning of the year, when the lawsuit started to gain notoriety, the Argentine currency has fallen against the U.S. dollar. In the next table, we show the percent changes to official exchange rate and the frequently quoted “black market” rate.


In U.S. dollar terms, the Argentine stock market is up 73% this year. Many international investors see the default problem as overblown, and some wealthy Argentines use the stock market to convert local money into hard currency.  They can buy local stocks and sell them to foreigners, a tactic which has yet to be blocked by recent currency controls.

Argentina exports multiple agricultural commodities, and low prices for some of these products contribute to a low GDP forecast, along with the default complications. Forecasters see a recession in 2014 (the last downturn was in 2002) and tepid growth in 2015. Table 4 has projections.


In sum, geopolitical concerns surround Russia, and financial market issues hinder Argentina. In both cases, the wounds are largely self-inflicted, rather than imposed by outside forces.