It looks like vindication for the ancient Proverb that tells us pride comes before a fall. Russia’s President Putin has flaunted an arrogance of national power and personal vanity that captured the imagination of his subjects. Russians wildly supported Putin’s invasion and annexation of the Crimean peninsula. While Ukraine battled Russia’s military conquest to carve out another major swath of its sovereign territory, the rest of eastern Europe worried and wondered whether Putin’s ambitions would bring another war with the potential to put them back under the Russian domination that ended in 1989. All the while Putin’s stock soared with sky high popularity ratings at home.
The intervening months have seen dozens of reports of provocative Russian military actions, with fighter jets intruding into NATO airspace, menacing Japan, and Russian bombers testing the limits of air defense zones around the United States. All the while Putin swaggered on the world stage at every opportunity, and the Russian population loved it.
International economic sanctions were brought to bear by the West to ensure that Putin recognized that his adventures in eastern Europe wouldn’t go completely unchallenged. He scoffed and continued to flaunt his “devil may care” attitude. It is difficult to gauge the impact of those sanctions, but the recent and sudden 50% decline in the world’s oil price is taking a major toll on the Russian economy which is largely dependent upon oil exports.
When the ruble recently experienced an eleven percent plunge in a single day, Russian banks responded by raising interest rates to 17%. Surely that would be enough incentive for Russians to leave their money in the bank and let it grow. But in the case of the ruble, even the hike to 17% interest rates has been inadequate. News reports have Russian shoppers in a mad dash to use their rubles to acquire goods that have some intrinsic value, along with news of people forming long lines to get their money out of Russian banks. At the same time, every internet vendor has ceased taking orders from buyers with rubles.
Russian debt is currently rated “one notch above junk status,” and will get downgraded by the credit agencies in 2015, according to Alexi Kudrin, the country’s former finance minister. Kudrin reportedly resigned in 2011 over disagreement with Putin’s increased military spending. Now he expects lots of bankruptcies in Russia’s private sector over the next year, while banks will be bailed out with billions of rubles provided by the government.
External debt is calculated to be some $500 billion owed by Russian firms, with a quarter of that payable in 2015. With international credit unavailable, defaults look unavoidable. The Economist doesn’t expect a government default, as occurred in 1998, “This time a string of bank failures, corporate defaults and a deep recession look likelier. Even so the pain from these could spread abroad quickly, both to countries that rely on Russian trade (exports to Russia account for fully 5% of GDP in the Baltics and Belarus) and through financial ripple effects. Banks in both Austria and Sweden are exposed.”
No one expects oil prices to rebound immediately, in fact most observers see the price going lower in the near term. Putin’s popularity at home is bound to suffer profoundly as the people begin to pay a heavy price, exacted in part by western sanctions as punishment for military adventures into Ukraine. There is even quiet speculation that he might lose his grip on power as the Russian economy sinks deep into recession. Might he lash out with more military provocation as his subjects suffer the humiliation of desperate circumstances, or find a little humility and back off? Stay tuned.
