It’s probably not a happy Christmas Eve for Russian President Vladimir Putin, whose country’s collapsed currency and stalled economy suffered another series of painful blows over the past week. (I know, I know. If Putin celebrates Christmas, it’s probably not until January 7, on the Russian Orthodox calendar. Just go with it.)
The combination of dramatically falling oil prices and international sanctions applied to the Russian economy after Putin’s invasion of part of Ukraine this year have put the country’s economy on dangerous ground. This week, Putin was handed a number of new things to worry about.
WHY THIS MATTERS
Russia’s economic condition is getting increasingly desperate, a description that may apply equally to its president, Vladimir Putin. A complete collapse of the Russian economy would be a major blow to economic recovery in Europe, but should an increasingly aggressive Putin choose to lash out militarily, the result could be even more destabilizing.
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Russian banks: The plunging value of the ruble has been a destabilizing force for Russian banks. Ordinary Russians, watching as the purchasing power of their savings has been halved over the past few months, have been pulling their money out of banks in order to invest in things that they believe will hold their value. Luxury cars, electronics, furniture and appliances are all on Russians’ collective shopping list.
With so many people demanding their money in cash, and Russian banks too worried to lend to each other, they are facing a liquidity crisis. On Monday, the Russian central bank announced a $531 million infusion of cash was necessary to bail out Moscow-based Trust Bank. Experts believe this is likely just the first of many banks that will need to be propped up by the government in order to remain solvent.
On Friday, Russian legislators pushed a bill through parliament authorizing the use of 1 trillion rubles to create a fund aimed at capitalizing the country’s banks.
More capital flight: The Russian economy has already had to endure the loss of well over $100 billion in capital that fled the country after the Western sanctions began. The flow may have slowed, if only because it has become more difficult to find investors willing to buy rubles and ruble-denominated assets at anything above fire-sale prices.
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However, people and companies still want to unload their rubles for hard assets or reliable benchmark currencies like the U.S. dollar or the euro.
Putin needs to reverse that trend, but it’s not likely he’ll find a lot of volunteers ready to convert their non-ruble holdings back into Russian currency. So, the Kremlin, despite promises that it would not, has taken the first step toward implementing capital controls. These are measures designed to prevent individuals and companies doing business in Russia from converting their profits to non-ruble holdings.
On Tuesday, according to the Financial Times, the Russian government directed five large state-owned companies to sell off their foreign currency reserves with the goal of reducing them by the end of the first quarter of 2015 to the level the companies held at the end of September.
A NATO-aligned Ukraine: Finally, on Tuesday, the Ukrainian parliament voted to repudiate its former status as a “non-aligned” nation with regard to international treaties. The vote has little immediate effect, but it opens the way to an effort by the government in Kiev — expressed explicitly as a goal by lawmakers — to gain membership in the North Atlantic Treaty Organization. NATO, a group of countries that have signed a mutual defense treaty that compels every member to assist another should it come under attack, is a historic geopolitical foe of Russia’s.
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It is unclear that NATO is interested in having Ukraine as a member, and in any case, it would take the country years to meet the minimum requirements for membership. However, that does nothing to mitigate the fact that the vote was, all by itself, a slap in the face to the Kremlin.
Ukraine’s non-aligned status had, for years, been a means of assuring Russia that its former satellite posed no military or diplomatic threat. The Russian invasion of the Crimean Peninsula in the spring was driven in large part by Putin’s concern that Ukraine would turn toward NATO after a rebellion ousted Kiev’s Russia-friendly President Viktor Yanukovych.
Now that the parliament has made that reorientation a matter of law, the question is what’s next for Putin. The Russian leader has been so adamant about the impossibility of Ukraine joining NATO that the vote seems likely to compel a response. But with his economy on the ropes and the financial might of the Kremlin undermined by weak oil prices and sanctions, it’s unclear what his options are.
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