The Ruble as Rubble
On Monday the MICEX ruble-denominated Russian stock index took another massive hit, losing over 7% of its value and crashing through the 600-point psychological barrier. The Russian ruble continued its slide against the dollar, having lost nearly 2% of its value against the U.S. currency last week, more than 2% against the euro, the biggest one-week drop in more than three years, as the government squandered over $3.5 billion in FOREX money to keep it from entering freefall — but, quite possibly, you ain’t seen nuthin’ yet. Because of continuing downward pressure on oil prices that is expected next year, Russian investment bank Troika Dialogue predicts that the ruble will have to fall at least an additional 30% as Russia’s current account and FOREX surpluses otherwise risk total obliteration. Other analysts predicted a horrifying 50% drop in value. Remember, even with a stable ruble Russia already has double-digit consumer price inflation. Both stock exchanges, the MICEX and the RTS, are flirting with another horrifying freefall period as the price of Russia’s “Urals blend” crude oil traded below $50/barrel for four days running. The Kremlin needed $70 just to break even next year!
All around the world, developed nations are cutting interest rates to increase cash flow and revive their moribund economies. But not Russia. Vladimir Putin is raising interest rates dramatically, heedless of the obliteration of credit and economic growth (GDP contracted last month, with industrial growth starkly negative), in the vain hope of staunching massive capital outflows from the country. Nearly $200 billion, a really staggering sum, has been pulled out of Russia since the August financial crisis began. Yet, the soaring interest rates have not affected the ruble’s plunge.
Meanwhile, Putin’s government refuses to speak openly about the nature and extent of the crisis, preferring instead to hide basic facts from the voters and operate with classic Soviet-style deception. He knows he is between a rock and a hard place, risking the downfall of his regime. He cannot allow the ruble to collapse as he has staked his presidency on stability; yet he cannot allow the ruble to remain strong, or the country will experience a liquidity crisis that will make America’s look like a walk in the park. But he cannot split the difference like a silly child, either. Experts say that the Putin regime’s incrementalism will not work: “The process of step-by-step depreciation is counterproductive and cannot solve the problem of the weakening of fundamental support for the ruble,” said Vladimir Osakovsky, of UniCredit Aton, warning that the prospect of further currency depreciation would fuel capital flight.
The regime’s popularity rating is beginning to slide. A new poll shows a majority of Russians dissatisfied with Dima Medvedev’s pathetic “leadership” on economic issues. While 13% said the government was managing the economy well last month, only half that number say so today. Given this, it’s not surprising to see the Kremlin moving to increase the level of social repression and jigger the constitution so as to bring back Vladimir Putin and his personality cult as “president” for life.
But that approach didn’t work in Soviet times, and it won’t work in neo-Soviet Russia either. Russia’s emperor has no clothes, and it is only a matter of time before he drives the Russian state to the same fate as that met by the USSR, of which he is a proud relic.