Juliet Johnson is associate professor of Political Science at McGill University. She is the author of A Fistful of Rubles: The Rise and Fall of the Russian Banking System (Cornell 2000) and the forthcoming book Priests of Prosperity: The Transnational Central Banking Community and Postcommunist Transformation.
The Russian ruble has plummeted in value this week. A desperation central bank rate hike on Monday evening ensured future recession but failed to stem the ruble’s rout. Western leaders can be forgiven for experiencing schadenfreude as their Russian nemesis, President Vladimir Putin, faces the prospect of his country’s imminent economic collapse. Yet true financial meltdowns have far-reaching, unpredictable, and often nasty consequences. Rather than celebrating or encouraging the current market panic in Russia, the West should try to stop it.
The ruble steadily declined since July, as falling world oil prices and Western sanctions took their toll. The central bank’s decision to float the ruble with only occasional interventions, a policy planned before the Crimean annexation, facilitated the slide. When the oil price dropped below $56 a barrel this month from a midsummer peak of more than $100, Russia’s oil-dependent budget was hammered. Sanctions chipped away at the economy by making it harder for Russian companies to access Western financial markets, a significant problem given their substantial foreign-currency debts. In late November, Russian Finance Minister Anton Siluanov estimated the cost of lost oil revenue at $90-billion to $100-billion and the cost of sanctions at $40-billion. In short, the Russian economy was under significant pressure before the current crisis.
The crisis catalyst appears to have been an implicit central bank bailout of Rosneft last Friday, after the state-owned oil giant faced difficulties servicing its foreign currency debt. Once the initial ruble selloff began on Monday morning, however, market panic set in. As the ruble fell further and faster, Russians flocked to banks to withdraw or exchange currency, sales of durable goods shot up, and businesses began pricing goods in “conditional units.” The interbank market seized, Russian bond yields rose, and the stock market took a nosedive.
Russia will have trouble stemming the panic on its own, as the central bank’s futile rate hike demonstrated. It has only three economic options, all bad: spend down its foreign exchange reserves to defend the ruble; hike interest rates further; or introduce capital controls. Mr. Putin could also reshuffle his leadership team. However, such efforts are apt to fail just as they did during Russia’s 1998 financial crisis. The Russian government does not have enough credibility to restore equilibrium. Russia now faces the specter of an economic meltdown.
But although Russia cannot stop the panic, the West can. If Western countries temporarily lifted their financial-sector sanctions – and only those sanctions – the move might restore enough market confidence to stabilize the ruble.
Why should the West lend a helping hand to Russia, just when its sanctions seem to be having devastating effects? Because financial market panics in major world economies are not in anyone’s interest. Financial panics tend to spread. Emerging market currencies and stocks have already fallen in the wake of Russia’s woes. The crisis could hit other oil-dependent emerging market economies as well as the countries closest to Russia – including Western allies Ukraine, Moldova, and Georgia. With the Ukrainian economy already a shambles, the last thing the West wants is to damage it further through contagion from a sanctions-abetted Russian crisis. Moreover, a sustained crisis would hit ordinary Russians hard, devastating savings, drying up household credit, and driving up poverty. This would not only be terrible from a humanitarian standpoint, but many Russians would blame the West rather than Putin. Under these circumstances Putin’s hold on power could actually be reinforced. Even if by chance the regime did topple, it is highly unlikely that a more liberal leader would emerge triumphant. It is worth remembering that the fallout from the 1998 crisis encouraged President Boris Yeltsin to hand over power to the as-yet unknown Vladimir Putin.
Mr. Putin’s economic system has reached a dead end. Even if the ruble crisis subsides, Russia faces recession, high inflation, and capital flight in the coming year. Oil prices will remain low as rising supplies meet weak international demand. With an economy incapable of modernization, dependent on resource revenues, and suffused with corruption, Mr. Putin may have difficulty maintaining his carefully constructed power network for many more years. By stepping in now to forestall a full-blown financial meltdown, Western leaders would not be helping Vladimir Putin – they would be helping themselves.Report Typo/Error
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