Russia Cannot Bail Out Cash-Strapped Italy, or Pull It Into Its Orbit

Italy and Russia signed 13 deals worth $1.7 billion during last month’s (October 23–24) visit to Moscow by Italian Prime Minister Giuseppe Conte (TASS, La Stampa, October 24). He and Russian President Vladimir Putin emphasized that the two countries enjoyed solid trade and investment relations, despite the Kremlin’s current frictions with the European Union (Kremlin.ru, October 24). But the impression is that Conte’s Russia trip had more to do with Italy’s need to find new buyers for its sovereign bonds than the mere promotion of Russo-Italian commercial ties. And this could have implications for future power dynamics between Moscow and the European bloc.

The Italian financial market is currently suffering from speculative attacks amid a budget row between the Conte administration and the European Commission (the EU’s executive body). Rome aims to increase public spending in violation of Brussels’ rules and needs to refinance its huge debt. Some believe Putin could ultimately agree to help Italy, a core EU member state, in return for its support for Russian policies within the European grouping.

Maurizio Martina—the leader of Italy’s main opposition faction, the Democratic Party—bluntly said on October 28 that the government was selling out Italy to Russia in a reckless attempt to balance the public books (Rainews, October 28). Conte claimed he did not ask Russia to buy Italian government securities. However, he pointed out that if the Central Bank of Russia or the Russian National Welfare Fund were to take such a decision to buy Italian bonds it would mean they viewed the investment “as a good deal” (Kremlin.ru, October 24).

Putin confirmed he and Conte did not discuss the matter, saying the Italian prime minister did not raise it either. However, he added that there were no political restrictions to Russia’s acquisition of Italian sovereign debt (TASS, October 24).

The Italian coalition government is Russia-friendly and basically Eurosceptic. The right-wing and anti-immigrant League party has a cooperation agreement with United Russia, the main pro-Putin party, while the anti-establishment Five Star Movement has always been sympathetic to Moscow. Both ruling parties are also critical of EU sanctions against Russia for its annexation of Ukraine’s Crimea and armed support for rebel forces in the Ukrainian Donbas. Current Italian leaders repeat that EU penalties against Russia have damaged Italian exporters, even though economic numbers say otherwise (see EDM, April 10).

Despite the imposition of EU restrictions, which should be renewed next January, Rome has maintained relatively good political and economic relations with Moscow. The two countries have developed a strategic energy partnership, especially between Italy’s state-owned oil and natural gas producer ENI and Russia’s gas monopolist Gazprom. For instance, the Italian oil and gas services group Saipem started pipe-laying work for Nord Stream Two last July (Offshore Energy Today, July 25). The controversial project, which Gazprom intends to complete by 2019, is aimed at expanding a natural gas conduit that runs under the Baltic Sea and connects Russia to Germany. Furthermore, the Italian government considers Russia a stabilizing force in the Mediterranean area and the Middle East, and a potential partner in the battle against Islamist terrorists and human traffickers. In this regard, Conte invited Putin to participate in an international conference on Libya that Italy will host in mid-November.

All that said, it remains to be seen whether Russia has the financial muscles to help Italy and its “pro-Moscow” rulers. Italian debt stands at $2.6 trillion, over 130 percent of the country’s annual GDP. The Conte administration is desperate to finance the public deficit, particularly after the European Central Bank decided to phase out its bond-buying initiative to stimulate the eurozone economy.

Matteo Salvini, the Italian deputy prime minister and leader of the League, said during a trip to Russia on October 18 that Italy needed to sell billions of dollars in government bonds, suggesting the Russians might invest in new issuances (La Presse, October 18). One week later, after Conte’s meeting with Putin, Salvini denied that Italy was seeking external help for its sovereign debt. But the Italian government said in recent months that it was trying to persuade Chinese public and private investors to acquire its securities (Corriere della Sera, August 18).

The problem is that while the Chinese have the resources to purchase a good portion of the Italian debt, Russia is not in that position now. The Central Bank of Russia’s currency reserves have reached $460 billion, Putin said during his meeting with Conte, while the Russian National Welfare Fund has a capacity of about $77 billion (Minfin.ru, retrieved on October 29). However, as Italian media outlets reported, the Russians could buy at most only $7 billion worth of Italy’s government bonds at most; whereas, Italy is said to need some $114 billion to meet its debt requirements for 2019 (Corriere della Sera, October 25). It is doubtful that such limited Russian investments would move Italy in the Kremlin’s orbit. In contrast, China can offer more opportunities with its grandiose Belt and Road Initiative, which is designed to improve Eurasian connectivity.

In the end, Russia is unlikely try to invest in the Italian public bond market unless it can reap geopolitical dividends. Putin knows well that Moscow’s so-called friends in Europe (that is, Hungary and Greece) have so far done little or nothing to eliminate the EU’s sanctions regime (see EDM, June 6). And it is reasonable to believe that Italy will likewise continue to go along with the rest of Europe. Furthermore, in recent days, Conte gave the go-ahead for the construction of the Italian segment of the Trans-Adriatic Pipeline (TAP), which the Five Star Movement had previously blocked because of environmental concerns (The Italian Insider, October 29). TAP is the westernmost section of the Southern Gas Corridor, which will pipe Azerbaijani gas to Italy through Georgia, Turkey, Greece and Albania, and should allow Europe to reduce its dependence on Russian natural gas.

United States President Donald Trump has several times urged Italy to complete this energy project, which his administration sees as a tool to curb Russia’s influence in Europe (Il Giornale, October 28). The Italian populist government is now evidently going along with Washington’s request. Rome does not want to cut the country’s traditional links with Washington, meaning it is unlikely that it will veto the renewal of EU sanctions against Russia. Putin is almost certainly aware of this.