Putin had plans for world domination, then the Russian economy imploded

Putin's Russia, like the USSR before it, is only as strong as the price of oil and that's bad news for the Kremlin

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The Independent Online

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 per cent at an emergency 1am 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. So even if it "works," things are about to get a lot worse.

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 rubles—so 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 per cent against the dollar the past month, with 11 per cent 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 per cent fall is Bitcoin, which is a fake currency that techno-utopians insist is the future we don't know we want.

 

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 defaulted—but 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 recession—its central bank already estimates its economy will contract 4.5 to 4.7 percent if oil stays at $60-a-barrel—but they might, just might, be enough to stop the ruble's free fall. We'll see.

If they're not, Russia will have to resort to capital controls to prop up the value of the ruble, and might even have to ask the IMF for a bailout.

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 everybody—none less than their own people, who had to scrounge in empty supermarkets—after oil prices bottomed out in the 1980s. That history is repeating itself now, just without the Marxism-Leninism.

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.

The Russian leader might be playing chess while we play checkers, but only if we lend him the money for the set.

©Washington Post-Bloomberg

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