Putin Gambles on a Weak Ruble
The Russian government is taking a risky political gamble by allowing the ruble to fall along with the price of oil. The Russian currency dropped to a record low for a third day, continuing its most severe decline since 1998, when the country defaulted on its internal debt. The freefall will soon affect consumption, and even the less affluent citizens who form President Vladimir Putin's support base could become restless.
At first glance, the ruble's recent depreciation follows the trajectory of oil prices, which dropped sharply after the Organization of Petroleum Exporting Countries declined to cut output last week. Other oil-producer currencies have suffered, too. Yet the ruble's slump is deepest of all. Here is the ruble's trajectory compared with the Nigerian naira:
Unlike Nigeria, which has defended its currency, Russia has barely intervened. There were reports of central bank activity during today's trading session, and the ruble rebounded slightly after dropping more than 9 percent in the morning, but it's still down almost 6 percent for the day.
Putin has explained the government's strategy this way: The national budget is denominated in rubles, not dollars, and as Russia's main export, oil, loses dollar value, the currency devaluation offsets the loss. This allows the government to keep its promises for social programs, in nominal terms. As imports drop, the theory goes, domestic producers will pick up the slack, and most Russians aren't going to feel much of a pinch unless they travel outside the country or buy a lot of imported clothes, electronics and fancy foods. In any case, the people who do such things aren't Putin's biggest supporters. He relies on the poorer, older, more nostalgic and less educated electorate, which wouldn't be hurt by the devaluation.
The problem with these expectations, of course, is that Russia imports a lot of the most basic products. Here are the official statistics in volume terms, not affected by exchange rate volatility:
Even lower middle class Russians will notice when they can no longer afford shoes, cosmetics, medicine or cheap electronics. Last week, German retailer Media Markt held a sale of Apple gadgets and Samsung television sets at predevaluation prices to lure customers to a new store in Moscow. The store was mobbed, lines stretched for miles, fights broke out, and while some people bought many TV sets, others left empty-handed after hours of waiting in line.
Finance Minister Anton Siluanov estimated that Russia would lose about $100 billion in revenue next year because of falling oil prices. The economist Konstantin Sonin says consumption will take a direct hit, regardless of the devaluation's nominal balancing effect:
It means minus $100 billion worth of industrial machinery, food, etc. -- physical losses for this country and its people. Very roughly, divide $100 billion by 100 million people, then again by two, because some money goes toward investment and other things, and you get 20,000-30,000 rubles in consumption losses per person. The poor will lose a smaller amount, but a higher share of their total income, because most of their income is channeled into consumption. These losses are probably no smaller than in 2008-2009.
Sonin's estimates portend political uncertainty. The economist Vyacheslav Inozemtsev compared Russia's situation to that of Iran under sanctions. In Iran's case, Western pressure didn't topple the regime and the economy kept growing as local producers compensated for the loss of exports, but Russia would be rash to count on a similar outcome, Inozemtsev wrote on Snob.ru:
No matter how popular Putin is, he is no ayatolla, and he is not backed up by an ideology as powerful as the one that moves the adherents of the Islamic State. Russians are no fanatics, and they value what it took them a lot of work to achieve in recent years. If they are already used to trading freedom for well-being, few will be prepared to trade well-being for demagoguery.
So far, polls are proving Putin right and Inozemtsev wrong. According to a mid-November survey by the Levada Center, 80 percent of Russians agree that Russia faces a period of high inflation and a substantial decline in living standards. Still, another Levada poll, taken in late November, shows Putin's approval rating at 85 percent, down just 3 percentage points compared with the month before. If Putin faced a presidential election now, he'd win hands down.
Still, it might be too early to write off Inozemtsev's prophecies of upheaval. Putin is betting Russians will weather worsening conditions, if only because the cost of revolt is so high. Interior Minister Vladimir Kolokoltsev warned last week that Russia wouldn't allow the kind of riots that occurred in Ukraine, which he called "an injection of American-style democracy." "This is a warning to anyone who thinks differently," Kolokoltsev said, adding that his ministry's troops were standing by just in case.
Russians have always been slow to rise up and have been willing to put up with a lot of hardship. Putin, however, will need oil prices to go up sometime next year for his regime to be safe. Once their patience runs out, Russians can be a terrifying force, as the Soviet government found out in 1991, during another major oil slump.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Leonid Bershidsky at firstname.lastname@example.org
To contact the editor on this story:
Max Berley at email@example.com