Economic sanctions and falling oil prices are threatening Russia's currency and overall economy.
With Russia Crumbling, the West Must Tread Softly
Russia’s economy under President Vladimir Putin is in a veritable free fall as Western-imposed sanctions, falling oil prices and shrinking confidence from foreign investors batter America’s former Cold War foe.
[READ: Russia Tensions Move Closer to Home]
The rest of the world's economy probably won’t be hurt more than Russia itself. With a depression looming in the near future, it’s now up to the Bear of the East to see if it can thaw yet another stalemate.
The ruble plunged almost 20 percent to a record low against the U.S. dollar on Tuesday, despite the Russian central bank’s emergency interest rate hike this week to 17 percent from 10.5 percent – a drastic attempt to shore up the ruble’s value. It now takes 68 rubles to buy one U.S. dollar; for most of the year before October, it took about 35.
Russia, which relies on oil and gas exports for more than half of its budget revenue, has been adversely impacted by falling oil prices amid a global surplus in crude oil production, particularly in the U.S. The global price of crude oil fell below $60 for the first time in five years Tuesday, and the tumbling price of oil means officials will have to dramatically rethink the way they do business.
"With the collapse in oil prices, their one resource that was holding up the country is gone. Putin has already undermined the rule of law in Russia,” says Adolfo Laurenti, managing director and chief international economist at Mesirow Financial.
“Of course you’re not going to see foreign direct investment flowing to Russia. Of course you do not see global investors looking at Russia and thinking at the current prices it's a good investment,” he says. “We have learned again and again that investing in Russia is a losing proposition.”
While officials have said falling oil prices are a boon for the world economy, for Russia, it’s a different story. Oil exporters – which also include Saudi Arabia and Kuwait – are taking a big hit, Christine Lagarde, managing director of the International Monetary Fund, said at a Wall Street Journal conference earlier this month.
“There will be winners and losers. But on a net basis, it is good news for the global economy,” Lagarde said. “Essentially if we have a 30 percent decline – and we have had a bit more than that – it’s likely to be an additional 0.8 percent for most advanced economies because all of them are importers of oil.”
Paul Sullivan, an economics professor at the National Defense University, calls tumbling gas prices the biggest economic challenge Putin’s had to face, also noting that the Russian president assumed power in 2000 when the country was riding a wave of rising oil prices.
[ALSO: Ruble Rallies on Central Bank Rate Hike]
“One of the major effects of this will be in a negative way that many oil exporting countries define their national budgets based on an estimated oil price, and often that price is way off from what it really ends up to be,” Sullivan says.
In fact, the only exporter that’s prepared for lower prices is Kuwait, Sullivan says, which is budgeting for about $51 a barrel. Just about everyone else is budgeting over $100, he adds, which could be a potentially big budgetary headache.
But that seems to matter little to Putin – still popular at home– and his nostalgic ambitions.
"What he has brought back is terrible economics of the old Soviet Union in a way. The Soviet Union was a fourth world economy with nuclear weapons,” Sullivan says. “The Russian economy is completely uneven. It has almost no industry to speak of other than making vodka and putting cars together and weapons. When the price of oil goes down, it really hits them."
And thus goes the elaborate dance between East and West. The powers that emerged from the Cold War prioritized efforts in the 1990s and early 2000s to link economies across former battle lines. Europe now leans heavily on Russia for energy. The U.S. relies exclusively on Russia to get its astronauts into space, and for supplying almost all of the gas for its war in Afghanistan.
