Sorry, Putin.

Russias economy is
doomed

Object 1

A By Matt O'Brien December 15 at 6:30 PM

A funny thing happened on the way to Vladimir Putin running strategic laps around
the West. Russia's economy imploded.
The latest news is that Russia's central bank raised interest rates from 10.5 to 17
percent at an emergency 1 a.m. meeting in an attempt to stop the ruble, which is down
50 percent on the year against the dollar, from falling any further. It's a desperate
move to save Russia's currency that comes at the cost of sacrificing Russia's economy.
But even that wasn't enough. After a brief rally, the ruble resumed its cliff-diving ways
on Tuesday, falling another 14 percent to a low of 80 rubles per dollar. It was 60 rubles
per dollar just the day before. The problem is simple. Oil is still falling, and ordinary
Russians don't want to hold their money in rubles even if they get paid 17 percent
interest to do so. In other words, there's a well-justified panic. So now Russia is left
with the double whammy of a collapsing currency and exorbitant interest rates.
Checkmate.

It's a classic kind of emerging markets crisis. It's only a small simplification, you see, to
say that Russia doesn't so much have an economy as it has an oil exporting business
that subsidizes everything else. That's why the combination of more supply from the
United States, and less demand from Europe, China, and Japan has hit them
particularly hard. Cheaper oil means Russian companies have fewer dollars to turn
into rubles, which is just another way of saying that there's less demand for rublesso
its price is falling. It hasn't helped, of course, that sanctions over Russia's incursion
into Ukraine have already left Russia short on dollars.
Add it all up, and the ruble has fallen something like 22 percent against the dollar the
past month, with 11 percent of that coming on Monday alone. As you can see below,
the Russian ruble has fallen even further than the Ukrainian hryvnia or Brent oil has
this year. The only asset, and I use that word lightly, that's done worse than the ruble's
50 percent fall is Bitcoin, which is a fake currency that techno-utopians insist is the
future we don't know we want.

Source: Bloomberg
And this is only going to get worse. Russia, you see, is stuck in an economic catch-22.
Its economy needs lower interest rates to push up growth, but its companies need
higher interest rates to push up the ruble and make all the dollars they borrowed not
worth so much. So, to use a technical term, they're screwed no matter what they do. If
they had kept interest rates low, then the ruble would have continued to disintegrate,
inflation would have spiked, and big corporations would have defaultedbut at least
growth wouldn't have fallen quite so much.
Instead, Russia has opted for the financial shock-and-awe of raising rates from 10.5 to
17 percent in one fell swoop. Rates that high will send Russia's moribund economy into
a deep recessionits central bank already estimates its economy will contract 4.5 to
4.7 percent if oil stays at $60-a-barrelbut they haven't been enough to stop the
ruble's free fall. Russia might have to resort to capital controls to prop up the value of
the ruble now, and might even have to ask the IMF for a bailout, too.
Putin's Russia, like the USSR before it, is only as strong as the price of oil. In the 1970s,
we made the mistake of thinking that the USSR's invasion of Afghanistan meant we
were losing the Cold War, when the reality was that they had stumbled into their own
Vietnam and could only afford to feed their people as long as oil stayed sky-high. The
USSR's economic mirage, though, became apparent to everybodynone less than their
own people, who had to scrounge in empty supermarketsafter oil prices bottomed
out in the 1980s. That history is repeating itself now, just without the MarxismLeninism. Putin could afford to invade Georgia and Ukraine when oil prices were
comfortably in the triple digits, but not when they're half that. Russia can't afford
anything then.
Putin might be playing chess while we play checkers, but only if we lend him the
money for the set.

As the ruble plunges to new historic lows, ordinary Russians seem unfazed by the free

falling currency saying everything will be good in the end. (Reuters)

Matt O'Brien is a reporter for Wonkblog covering economic

affairs. He was previously a senior associate editor at The
Atlantic.
Posted by Thavam