Russia’s sinking economy is becoming a global threat

People in Moscow waited to exchange their currency Tuesday as signs advertised the exchange rates. The Russian ruble came under intense selling pressure, falling at one point a catastrophic 20 percent.
People in Moscow waited to exchange their currency Tuesday as signs advertised the exchange rates. The Russian ruble came under intense selling pressure, falling at one point a catastrophic 20 percent. The Associated Press

A free-falling Russian ruble Tuesday prompted fears that the nuclear-armed nation could be entering a deep economic recession with the potential for unrest as citizens and investors try to get their hands on cash amid crippling international sanctions and sinking oil prices.

The Russian central bank tried to right the ship with a surprisingly large interest rate increase, to 17 percent, before the nation’s financial markets opened Tuesday. But it was for naught as the already limping ruble fell an additional 20 percent against the U.S. dollar.

“What we’ve seen in the last few days is real financial panic,” said Anders Aslund, a Russia expert for the Peterson Institute for International Economics in Washington.

Problems in Russia circled the globe, with volatile trading in European financial markets and wild interday swings on Wall Street. Blue chips on the Dow Jones industrial average were up 155 points at midday before swinging to losses and closing down 111.97 to 17,068.87.

The jump in Russian rates was designed to keep investors there from fleeing the country, sweetening their returns. Instead, investors shrugged it off and proceeded to head for the exits.

Russia is being hit by a double blow: falling oil prices and international economic sanctions levied in the wake of Russia’s moves into Ukraine.

Even before the extraordinary action on the ruble, the central bank had warned that if oil prices stay where they are today, in the range of $60 a barrel, the economy will contract sharply. Higher interest rates now further raise the cost of borrowing for Russian businesses, deepening the expected contraction.

“Nothing they do with monetary policy can help. If you have something that is fundamentally wrong, you can’t fix it with monetary policy,” said Aslund, who said Russian President Vladimir Putin must find a face-saving way to back out of his foray into the Ukraine and lift the sanctions.

Adding to the pressure, White House spokesman Josh Earnest confirmed Tuesday that President Barack Obama will sign this week a bill that imposes further sanctions on the Russian economy. Ultimately, he said, “it will be up to President Putin to decide whether or not the economic costs are worth it to him and are worth it to the Russian people.”

Ordinary Russians are emptying out ATMs and standing in long lines to buy appliances and electronics, anything that might hold its value more than the sinking Russian currency. It’s led to a strange, albeit temporary, boom for Russian consumption.

“Not seeing bank runs and panic just yet. So far there’s actually been a mini consumption boom as Russians buy durable goods (and real estate) that hold value better than the ruble,” said Alexander Kliment, a Russia expert for political risk consultant Eurasia Group.

But it is easy to see how that could quickly shift as the falling ruble makes imports more expensive. Many Russians are accustomed to the hard times of the Soviet era, and the elites in Russia, who enjoy preferences, will now be more beholden to Putin than before as their fate is increasingly in his hands.

“That said, the economic situation will be tough next year. Recession and inflation. Putin’s increasingly in a corner, and that’s dangerous,” said Kliment, who does not expect a retreat from Ukraine. “Ukraine policy … is a key part of Putin’s political support now. To cave on that would be politically disastrous for him.”

For months after Russia moved into Ukraine, it was able to weather international sanctions thanks to its revenues from high oil prices. Now, however, oil prices have been roughly halved, giving more bite to U.S. and European sanctions that have sought to isolate Russian energy firms and banks.

Russia’s single-resource economy is even more reliant upon oil and gas than the numbers say, according to Indra Overland, a Russia expert at the Norwegian Institute of International Affairs in Oslo.

“Russia is a petrostate,” said Overland, adding that falling prices mean job losses throughout the large chain of energy suppliers. “As the oil prices fall, so does Russia.”

Unless Russia sharply curtails its public sector spending, which carries social costs, the other alternative is greater indebtedness, an equally difficult prospect amid an era of falling oil prices. Russia is spending money it doesn’t have, much as it did during the arms race that led to the collapse of the Soviet Union.

“The pain this time is self-inflicted,” said Kier Giles, director of London’s Conflict Studies Research Center. “It’s Kremlin paranoia, based on the obsessive belief that the West is coming to get them.”

Putin has largely been out of public view in recent days as the ruble tanked, but he is scheduled to address the nation in an end-of-the year news conference Thursday. By then, he’ll know whether the ruble stabilizes or whether he’ll be drawn into actions to slow the economic bleed.

Pulling the plug

Apple has halted online sales of its iPhones, iPads and other products in Russia amid financial turmoil triggered by the steep decline in the country’s currency. Apple said Tuesday that the ruble’s instability has made it too difficult to set its prices in Russia, prompting the closure of its online store there.

The Associated Press