A lot of the commentary on the cost of imposing sanctions on Russia has focused on natural gas dependency and the impact on property in Belgravia. Fair enough, it makes for nice headlines.
But here is an additional area that is worth a closer look: the potential sanctions trigger for a private sector Russian debt crisis, analogous to the Asian debt crisis of 1997.
Russia clearly does not have a public foreign debt problem, but it does have a private foreign debt problem. Its corporates have issued FX-denominated bonds now worth 10% of its GDP (see the chart "Russian External Bonds"). That issuance has grown further and faster than for emerging markets as a whole, as well as commodity-exporting EM economies which tend to be the perennial bad boys of debt.
Who owns this foreign debt? Bonds are bearer instruments so we don't know. But we do know something about bank exposure to Russia, and it is European banks that are exposed to the lion's share of the problem (see the chart "Foreign bank exposure to Russia"). European banks' exposure to Russia totals $272bn, which is about a fifth of their exposure to the GIIPS economies. In and of itself, that doesn't sound like the makings of a crisis, but it is clearly an additional deleveraging headwind that will buffet a banking sector that has barely recovered from its 2011-12 "near-death" experience.
The circumstances under which this exposure could turn into a crisis are where a weakening ruble makes the foreign debt burden difficult for Russian banks and non-financial corporations to service, especially at a time when weakening domestic growth threatens their earnings momentum. Those circumstances are neither distant nor unlikely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.