Ruble Trouble, Ctd

The beleaguered currency bounced back a bit today from its epic freefall, as the Russian government took further steps to try and stabilize it:

The Finance Ministry said it was selling foreign exchange currency from its leftover stocks, of which it has around $7 billion, according to Reuters. The ministry did add in a statement that it considered the ruble “extremely undervalued,” however. … The announcement of the intervention immediately sent the ruble higher against the dollar, and after a volatile trading day was up 10 percent versus the greenback. Head of emerging markets research at Standard Bank, Timothy Ash, called the move “totally weird.

Cassidy doubts that any of Moscow’s recent hail-Mary passes will do the trick:

Once the markets lose confidence in a currency, interest rates are no longer an effective policy tool, and foreign-exchange reserves can be depleted at an alarming rate. The reason is found in simple arithmetic. Even if the Russian Central Bank were to raise rates to a hundred per cent, which is obviously out of the question, the weekly return on ruble-denominated assets would be less than two per cent.

In the midst of a panic like the one we are seeing now, a currency can plummet by five or ten per cent in a single day, thus erasing even ultra-high interest-rate yields and leaving holders of the currency with a big loss. Foreign-exchange traders know this all too well, and that’s why they still refuse to buy ruble-denominated assets.

Matt O’Brien calls Russia’s current situation a catch-22:

Russia has gone from not having an economy and 10.5 percent interest rates to not having an economy and 17 percent interest rates. That should be enough to turn its recession into a full-on depression — and make all of this self-defeating. Think about it this way: Russia’s central banks already says its economy will shrink 4.5 to 4.7 percent next year — about as much as the U.S. did in 2008 — if oil stays at $60-a-barrel. But now that interest rates are sky-high, nobody’s going to want to borrow, either. The economy, in other words, is going to crater as households hunker down and just try to survive the double-digit inflation that the crashing ruble will bring.

Anna Nemtsova solicits the opinion of a Russian expert, who predicts an awful year to come for consumers:

[O]n Tuesday afternoon, after the ruble had fallen again to a stunning 80 to the dollar, the head of the central bank, Elvira Nabiullina, made a statement: “We have to learn to live in a new zone and count more on our own sources of finance,” she said. What? Ordinary Russians should read Nabiullina’s statement as, “Get used to being at least twice as poor next year as you were before the annexation of Crimea,” says Vladimir Ryzhkov, a prominent Russian politician and professor at the National Research University Higher School of Economy. “Now Russia does not have enough dollars to pay back billions of corporate bank debts; the payment is due before the new year. In the coming year, prices will continue to grow: Most medicine, which is mostly imported, will grow twice as expensive, as well as all electronic equipment—fridges, iPhones, computers and so on,” Ryzhkov told The Daily Beast.

And so it seems that Putin has finally met an enemy he can’t bully or buy off, Daniel Gross observes:

Putin’s successful statecraft has alternately consisted of bullying and defiance (Western Europe, the U.S.), invading neighbors (Ukraine, Georgia), depriving others of energy resources (Ukraine again, Eastern Europe), winning prestigious events through the promise of large investments (the 2014 Winter Olympics, the 2018 World Cup), forging relationships by offering sweetheart resource deals (China), or currying favor by allowing oligarchs to funnel huge quantities of money into real estate and banks (England, Turkey, Greece.) The currency markets can’t be bought off though. They are faceless, merciless, and swift. Every day, they are in effect passing judgment on regimes around the world.

Still, Max Fisher expects him to try:

As the economy sinks, Putin will only become more reliant on these sorts of shenanigans he’s used previously to stay in power. He’s not just worried about his popularity, after all, but his very legitimacy as the head of state; the 2012 election showed him that Russians could turn against him. Putin has little choice, then, but to seek legitimacy by stirring up more crises abroad, positioning himself as a nationalist hero leading the brave Russian state in a hostile world. But the only way he can maintain that image at home is if his soft conflict with the West continues. Putin can’t deescalate tensions in Ukraine and more broadly in Europe because those tensions are just about all he has left.

More broadly, the obvious move here is for Putin is to blame his country’s falling economy on American and European imperialism. By playing up the role of outside hostility in Russia’s economic crisis, Putin would shift the blame and, just as important, promote the idea that Russians have to come together and endure the downturn as a matter of national mission against a foreign enemy.

Walter Russell Mead imagines some of the crazy foreign policy decisions Putin might try:

There is one other alternative that the Dark Genius of the Kremlin may be turning over in his mind: Is there some way Russian foreign policy could create a Middle East crisis that would drive oil prices back up into the stratosphere? The most obvious way would be to bring about some kind of situation involving the Iranian nuclear talks—perhaps by offering quiet support to Iranian hardliners, increasing the chances that the talks fail. Any kind of serious war scare in the Persian Gulf would be good for Russia’s financial situation; Russian foreign policy experts are presumably thinking through their options.

So how should the West respond? Well, Bershidsky recommends that we make hay while the sun shines and rob Putin of the talking point that Western economic warfare is to blame for the crisis:

[T]he best thing the West could do now would be to lift the sanctions unconditionally. A Western leader, perhaps German Chancellor Angela Merkel or even U.S. President Barack Obama, could go on TV to say, “We stand with the Russian people in its hour of need. We support Russia, we want it to be strong and prosperous, and we have no intention to push it around.” That would leave Putin naked, faced with a weakening economy that rejects his management methods and a population increasingly wondering why it needs Putin and what he stands for anymore.

That, however, is another fairy tale. Obama will soon sign legislation calling for tougher sanctions, giving Putin more ammunition in his intensifying fight for power, and also feeding more radical nationalist elements that consider even Putin too weak in defending Russian interests. Western leaders lack the imagination to deal with the Putin problem creatively, and they are loath to admit mistakes. They will keep adding stones to the soup.

Larison likewise scolds Obama for agreeing to sign the new sanctions legislation, which Congress passed last Friday:

Obama is making a mistake by signing this bill. In addition to creating a pretext for more aggressive moves by Russia, signing this legislation will exacerbate Russia’s growing economic problems, and that will adversely affect the economies of Europe even more to the detriment of the U.S. and our allies. This could hardly come at a worse time when it appears that there is a good chance of having a genuine cease-fire in the Ukraine conflict. Piling on additional punitive and hostile measures now risks jeopardizing that fragile truce. It certainly isn’t going to make Moscow more accommodating or inclined to compromise. On the contrary, this is sure to make Russia more combative.

“So,” the Bloomberg View editors suggest, “why not cut a deal on Ukraine?”

The sanctions that the U.S. and European Union imposed earlier this year to dissuade Putin from further aggression made it hard for Russian companies to borrow on international capital markets; triggered large-scale capital flight (an estimated $130 billion this year); and shriveled inflows of foreign investment. Since then, they have acted as a multiplier on falling oil prices. The mere promise of lifting sanctions would begin to change sentiment in the currency markets.

Once that happens, Russia’s central bank would be in a better position to intervene by buying up rubles — going with the tide instead of against it. Putin would, without question, come under attack from nationalists for betraying the rebel cause in Ukraine. Yet the authorities in Kiev are under even more economic duress. The U.S. and EU should use their leverage to get Ukraine to a deal that secures the country’s independence while meeting some of Russia’s demands.