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Putin’s Russia: A Cornered Bear
High energy prices have been a boon to Russia for years. Shrewdly, Vladimir Putin spent this mountain of cash solidifying his grip on power. He eliminated rivals, silenced critics, and propagated a cult of personality to create a millions-strong volunteer army of often violent devotees. In the minds of many Russians, l’etat c’est Vlad.
But with a massive oil glut from North America and OPEC, Russia’s economy is crashing. The ruble has been dropping for a week. To prop up the currency, the Russian central bank suddenly and surprisingly jacked up interest rates to no avail.
Scenes that Russians hoped had receded into the past reappeared on the streets. Currency exchange signs blinked ever-changing digits. Russians rushed to appliance stores to buy washing machines or televisions to unload rubles. Unsure of prices, car dealerships like Volvo in Russia halted business, while Apple stopped online sales in the country.
After a middle-of-the night interest rate hike, a sense of economic chaos settled over the Russian capital. The ruble was in free fall, dropping under 80 rubles to the dollar, after opening the day at 64 to the dollar.
“We are seeing an economic crisis,” Natalia V. Akindinova, a professor at the Higher School of Economics, said in a telephone interview. “We are seeing a sharp devaluation of the ruble at a time when the central bank doesn’t have the reserves to influence the market, as it did in the past crises.”
The Russian economy is getting battered by the painful combination of Western sanctions and low oil prices. The country is expected to fall into a recession next year.
Many Western commentators view the awful news for Putin as an overdue comeuppance to the pec-flexing tiger-hunter. Surely Vlad will stop wasting money on military expansion or nervous Moscow oligarchs will take him down. While it’s fine to celebrate Putin’s increasing misfortunes, remember that a cornered bear tends to lash out.
NATO has announced more than 400 airspace violations by Russia in the past year. Saber-rattling has reached a new high, especially for the Baltic states and Poland. Ukraine is still in a desperate fight to maintain independence from Moscow. Putin has responded to their fears by calling the region Novorossiya, or New Russia.
An economic collapse could damage Putin’s political future, but it could well improve it. Failing markets didn’t hurt the Castro or Chavez regimes. The Kim dynasty’s grip on impoverished North Koreans (and Sony Pictures) has only tightened. And the fastest way for leaders to quash internal dissent is to blame it all on an shadowy foreign enemy.
Putin has been demonizing the West for years, so additional scapegoating should meet with public acclaim. He has proven again and again that he will brutally destroy dissenters, whether rich or poor. Putin not only has the military at his disposal but a vast army of hackers who could wreak havoc on financial and governmental interests around the globe.
While we all hope Putin’s troubles will force him to change his belligerent ways or be peacefully ousted by Moscow billionaires, that outcome is unlikely. If history is any guide, Russia is more dangerous now than it has been in decades.
Published in General
Russian anecdote …
Cartier (the jewelers) reports that its Moscow store will close early today to make changes. What changes? They are raising prices 40 – 50%. If nothing else does, THAT will surely get the attention of the Putin cronies.
More generally, in Ruble terms, the cost of repaying Russian external debt has doubled in the past year. At what point does the Putin crowd decide they are better off reneging on the debt than enduring the pain of paying it back ? Call it the LTCM solution. That is, export lots of that economic pain to the West.
If I was Putin, I would offer to leave Ukraine and Crimea, in exchange for massive loan guarantees. Take the money, then renege on both the offer and the debt.
But to do it even more completely, couple it with Gazprom turning off/on the supplies to Europe, and more saber rattling.
How many incursions will there be in the coming year if Russia can no longer afford to pay pilots’ salaries or refuel their (prop-driven) bombers?
Hi Misthiocracy
Russia can afford to pay anybody any amount forever … In Rubles. And fuel….They have plenty.
Paying in Rubles is easy. That’s a game they know well. The Russian people used to joke … As long as the bosses pretend to pay us, we’ll pretend to work.
Paying the external debt … That’s another matter. Have to pay that in hard currency. And they have already burned though about 25% of their foreign currency reserves. At some point it might be less troublesome to just say ‘To hell with it’ and default on that foreign debt. And what, then, becomes of the Western lenders?
And fuel….They have plenty.
For how long? They’ve reached the point they need foreign technology to extract the oil. The West easily can withhold the tech. Putin is cutting a deal with the PRC, but the PRC is demanding a heavy price–the deal with the Devil.
…default on that foreign debt. And what, then, becomes of the Western lenders?
Ehh. Russia has $120B coming due in 2015. Its total foreign debt is some $650B. That’s spread across a number of countries. A Russian default will sting, but it won’t do any serious damage to the West. It will, though, seriously curtail Russia’s access to foreign currency, currency it needs to do things like hire foreign hydrocarbon extraction companies, or pay the PRC, or….
Eric Hines
If I was Putin, I would offer to leave Ukraine and Crimea, in exchange for massive loan guarantees. Take the money, then renege on both the offer and the debt.
If I were Obama, or Merkel, or Juncker, I’d look real hard at taking that deal, requiring Putin to be out of Ukraine before any money flows (which guarantees are not; they only facilitate flow). Russia would be out of Ukraine (I’ll elide the redundancy), and even if Putin then reneged on the loans, he’d still be out of Ukraine. And I could cancel the guarantees and stop any further draws on the loan lines.
Eric Hines
Hi Eric Hines.
“Default will sting”. Spoken like someone with no Russian exposure.
650B is a big number. Depends how diffuse it is … No? In the right concentration, to quote Mercutio … “’tis not so deep as a well, nor so wide as a church door; but ’tis enough, ’twill serve”
That…makes no sense. Oil production in the US is at historical highs.
Just the facts.
So you have zero response, and instead post a link from 2012, all in the cheap attempt to score political points in a thread that has nothing to do with political points.
You’d have been better off not responding.
Is this for real? You want the US to…escalate?
Thanks. I’d rather not have a crazy person in charge.
Hmm. The fact that the real world is not a video game?
I’m not sure there’s always so much “fantasizing” about war whenever Russia comes up. Seriously people, this isn’t a Tom Clancy novel.
To paraphrase, spoken like someone with little investment experience. Considering that the US GDP is in the 10s of trillions of dollars, Germany, France, Italy, Spain, and UK all have multi-trillion-dollar GDPs, the PRC has a 10s of trillions of dollars GDP (are there any other major lenders to Russia?), even the current Russian GDP is some two trillions of dollars, yeah, $650B isn’t such a big number.
Eric Hines
So you have zero response, and instead post a link from 2012, all in the cheap attempt to score political points in a thread that has nothing to do with political points.
Spoken like a Progressive. You’re unable to form a coherent response, so you ridicule the man. And, spoken with hypocrisy reminiscent of a Progressive–in a cheap attempt to score cute sound bite points.
There’s little point in engaging further with you.
Eric Hines
Let’s lighten up on the personal attacks. Play the ball, not the person.
Thanks.
This is what happens when you bring the Russians into the conversation, Jon.
Great.
So I guess when you can’t argue the facts, just call someone a “Progressive” and be done with it.
I’m “unable to form a coherent response”? The response being, the dozen or so US military deployments into Eastern Europe in the last few months. But this isn’t “coherent” enough, apparently.
Got it.
See, what scares me more than Obama, is the people who are willing to burn everything down just out of spite.
The US is a bit more than “the president”. There’s a few other agencies involved, last time I checked. And despite Obama’s ineptitude, the US response (see what I did there…the US…it’s a country. It’s not a man)…was actually quite forceful, and we’re seeing the effects of that on Russia now. A collapsed economy, an inability to deal with financial markets etc.
But for people…like many here…whose only purpose is to score cheap political points against the opposite party, rejoicing in the US’s success is an impossibility. Everything has to be “bad”, because the other party is in charge of the executive.
Hence, we get people...like many here…who are complaining that “Obama” isn’t taking us to war fast enough! He isn’t escalating things more!
Should I be scared of Vladimir Putin, or of “conservatives” like these?
I think you should evaluate whether you’re trying to provide a solid argument or a spiteful one. You have no idea what is going on over there, any more than the rest of us do. A Russia in decline is a dangerous one. (That’s where the reference to history comes into play.)
When a man like Putin, ex KGB, is trapped in a corner, he lashes out and does whatever he can to shore up the walls and push away his foes. He’s in a critical position that provides very few avenues. Economics is one conversation and Power is another. That distinction is what this conversation was originally about.
The same goes for those who want to argue against US policy out of spite for the current president.
US policy in this matter has actually been quite good. War is not in the horizon. That is an absurdity. Hence calls for “escalation” and for “war” are equally absurd.
Once some people here are left with no arguments about US posturing…which is clear and evident given the large deployments of US troops into Eastern Europe over the last few months, the crushing sanctions on Russia, and the coordinated effort to limit their income from oil…then the only avenue for engaging in “spite” is to claim that “Obama” is “weak” because he hasn’t…escalated things enough?
This implies that some people here aren’t interested in “solid arguments”, but are interested in burning down the barn out of spite.
My argument is quite “solid”. The US (not Obama…the US. The US is a country. It’s not a president) has taken a clear stance here, and has backed it up. This has caused Russia’s economy to collapse. This was the intent.
History has shown quite the opposite, in fact.
A Russia in decline was one of Lenin, Gorbachev and Yeltsin. All periods when Russia’s trouble-making was in decline.
A “strong” Russia was one of Stalin, Khrushchev and Putin. All periods when Russia’s aggressiveness was highest
What allowed Putin to be so aggressive wasn’t a ‘Russia in decline”. It was a Russia flush on cash (thanks in no small part to the blundering of the US in the ME, which send oil prices soaring).
To quote Mercutio … “’tis not so deep as a well, nor so wide as a church door; but ’tis enough, ’twill serve”
Hi Eric Hines
Re 650B.
Don’t think in terms of the size of the economies involved. Most of the 650B is private debt issued by Russian banks and corporations and held by private investors in the West. Who owns how much? I don’t know. But that is the real question.
If each major investment house in the West owned a few billion then you’re right. A default would sting. But not a real problem. But that’s not usually the case.
The thing that makes a market work is differing opinions. So some shops will not own much if any, others will own more. And you can ALWAYS count on there being at least one someone out there with ‘more balls than brains’ who owns a boatload! Who is that / are they?
The American banks are in pretty decent shape. So if its one of them that’s probably not too bad. But if they are European? Lots of the European banks are not in very good shape and some are… Let’s say …. Highly combustible. And those kinds of institutions are exactly the kind of ‘more balls than brains’ shops that might own a boatload of Russian debt. A history of having ‘more balls than brains’ is how they got to be highly combustible in the first place.
Remember this is completely speculative. But if there were widespread Russian defaults, and if the creditors were the right institutions….things could get very hairy.
Google “Long Term Capital Management”
Of course we think of this in terms of the size of the economies involved–the players are members of those economies, and the larger the economy, the better able its players are to survive failed risks or black swans. Regarding the Russian debt, it’s actually closer to half private, half government, but that’s a quibble; your point remains valid. The creditors, though, know the risks, and they knew the risks when they entered into the loans–it’s why they got the interest rate premium they did, and why the Russian government spiked its benchmark rate at the start of the latest round of their crisis.
Yet: that’s the beauty of a free market. The foolish get punished by their fellow players, including consumers, rather than by governments. Or they don’t get punished, and get away with their risk-taking, an option not available from government. See, for instance, the CFPB of the travesty of Dodd-Frank.
It’s not government’s job to eschew punishing, for instance, a severely misbehaving Russia, because some companies might get hurt. Those companies knew the risks when they ran them. And letting a Russia get away with these kinds of misbehaviors simply puts those players at deeper risk over the longer run. Even the widows and orphans who hold government debt–but not much of any Russian bonds.
It remains the fact that some in the West will get stung by the economic moves proposed, but the potential gains are well worth it.
if there were widespread Russian defaults, and if the creditors were the right institutions….things could get very hairy.
Only if there’s a repeat of the foolishness of the bailouts of the Panic of 2008.
A not completely irrelevant aside: in an article about a different subject, there was this comment by a Kurdish accountant, Kurdo Amin Agha:
Imagine if America didn’t exist. Without America, the world would be run by China or Iran.
Eric Hines
“It remains the fact that some in the West will get stung by the economic moves proposed, but the potential gains are well worth it.”
Never tried to argue about the potential gains. Just trying to keep people from being PollyAnna about the potential risks. No high profit opportunity is free of high risk of loss. It is unwise not to carefully calculate BOTH.
History has shown that Stalin invaded Poland and the Baltic states to bolster his war chest. Kruschev had in his sights to spread Communism around the globe and Gorby was a huge mistake according to Russian history.The same could be said for Hitler in Germany and also the U.S. in WWII. You’re arguing apples and dump trucks my friend. History is full of examples of war being the answer to economic woes.
It sure leaves the impression that they are much more comfortable with their own instability than we are.