by Dish Staff
Russia’s central bank raised interest rates from 10.5 to 17 percent at an emergency 1 a.m. meeting in an attempt to stop the ruble, which is down 50 percent on the year against the dollar, from falling any further. It’s a desperate move to save Russia’s currency that comes at the cost of sacrificing Russia’s economy.
But even that wasn’t enough. After a brief rally, the ruble resumed its cliff-diving ways on Tuesday, falling another 14 percent to a low of 80 rubles per dollar. It was 60 rubles per dollar just the day before. The problem is simple. Oil is still falling, and ordinary Russians don’t want to hold their money in rubles even if they get paid 17 percent interest to do so. In other words, there’s a well-justified panic. So now Russia is left with the double whammy of a collapsing currency and exorbitant interest rates. Checkmate.
Neil Irwin elaborates, pointing out that even the central bank’s attempt to stanch the bleeding is a big risk:
Perhaps the higher interest rates will make those moving money out of Russia think twice, and a resulting reversal in currency markets will lead speculators to conclude that betting against the ruble is no longer a sure thing. But the move shows how Russian policy makers are stuck with no good options. Already the central bank has reportedly been intervening to try to short-circuit the sell-off, buying rubles to try to arrest the declines.
The problem is that if you try to defend your currency and lose, you are essentially throwing your money at currency traders for nothing. As Russia has deployed its reserves to (so far unsuccessfully) stop the currency collapse, it has made traders betting against the ruble richer while leaving the Russian government poorer. Poorer by $80 billion, to be precise.
“Putin’s policy choices in this matter,” Yglesias adds, “have important implications for the distribution of wealth in Russia”:
The collapse in the value of the ruble is a disaster for Russians who have debts denominated in foreign currencies, but it’s not necessarily the worst thing in the world for those who don’t. Indeed, Russians working in tourism (which, admittedly, isn’t that many people since Russia is mostly cold and empty) or in the country’s handful of export industries that aren’t oil and gas actually benefit from a cheap currency. Conversely, much higher interest rates will be devastating to the fortunes of Russians who need to roll over ruble-denominated loans or who depend on rate-sensitive sectors like construction for their employment.
Bershidsky suggests that Moscow’s next step might be to impose capital controls like Malaysia did in 1997. But the really troubling question is what the political implications are. Noah Millman wonders whether a currency crash will be Putin’s downfall, and if so, what happens next:
If an economic meltdown leads to widespread popular discontent, the regime will have to respond in some way. The most appealing way – because the least risky for the regime – would be to stage-manage a change in leadership that promises change while changing very little. But who is Putin’s Putin? Once upon a time, the obvious answer would have been Dmitri Medvedev. But in the wake of his administration, and his agreement to hand the Presidency back to Putin after one term, I’d argue Medvedev is too closely-identified with Putin to be a plausible replacement for the regime in the event of any real discontent. …
If the regime cannot stage a satisfactory bit of theater, then the remaining options are uglier. Putin could deliberately try to provoke the West in the hopes of blaming Russia’s economic troubles on foreigners. Or he could turn force inward against internal “enemies” of Russia. Or the regime could hand Putin’s head to the mob without a clear plan for succession, leading to a period without clear leadership at the top until someone emerges from the internal struggle for power. Least likely of all would be a genuinely revolutionary situation such as obtained in 1991. None of Russia’s organs of power are willing to take that kind of risk again.
Keating fears that the crisis will inspire even more belligerent behavior from the Kremlin:
Putin can’t do much of anything about oil prices and any steps to cooperate with NATO to secure sanctions relief will make him look weak. There’s a fair chance, then, that he may actually escalate tensions to get back the rally-round-the-flag effect that has sustained his popularity through the Ukraine crisis. Russian jets continue to buzz the airspace of NATO countries, and the military recently carried out snap drills in Russia’s westernmost region, Kaliningrad. This doesn’t look like a leader on the verge of de-escalating.