Russia Update: Screwed, Glued and Tatooed

Things keep looking worse and worse for the economy of Russia, and for the country’s recently fearsome would-be continental hegemon, Vladimir Putin. Here’s the latest, with some analysis, from WaPo’s Matt O’Brien:

The latest news is that 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….

And this is only going to get worse. Russia, you see, is stuck in an economic catch-22. Its economy needs lower interest rates to push up growth, but its companies need higher interest rates to push up the ruble and make all the dollars they borrowed not worth so much. So, to use a technical term, they’re screwed no matter what they do. If they had kept interest rates low, then the ruble would have continued to disintegrate, inflation would have spiked, and big corporations would have defaulted—but at least growth wouldn’t have fallen quite so much.

Instead, Russia has opted for the financial shock-and-awe of raising rates from 10.5 to 17 percent in one fell swoop. Rates that high will send Russia’s moribund economy into a deep recession—its central bank already estimates its economy will contract 4.5 to 4.7 percent if oil stays at $60-a-barrel—but they haven’t been enough to stop the ruble’s free fall. Russia might have to resort to capital controls to prop up the value of the ruble now, and might even have to ask the IMF for a bailout, too.

And then you’ve got the Western sanctions, which make every problem a lot worse. So the rest of the world may have to worry about Russia’s stability, but otherwise Putin is not going to be in much of a position to throw his weight around.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.