Continuing from the previous question, we now consider Russia’s external wealth position.

a. What is Russia’s external wealth W in year 0 and later? After a few years, the world interest rate rises to 12%. In this case, can Russia continue its original plan? What are the interest payments due on the debt if r^* = 12%? If, what can Russia do to meet those payments?

b. Suppose Russia decides to unilaterally default on its debt in this case. State the levels of CA, TB, NFIA, and FA in all subsequent years. What happens to Russia’s level of C in this case?

c. When the default occurs, what is the change in Russia’s external wealth W? What happens in the rest of the world’s (ROW’s) external wealth?

d. Suppose that foreign investors, wanting to prevent Russia’s default, offer to forgive some of its debt. How much debt would have to be forgiven to allow Russia to keep its consumption smooth at the level found in the previous question? Why might investors agree to do this?

e. How would you expect investors to react to Russia’s future attempts to secure financing for its investment projects? How is this related to the concept of risk premium?