December 17, 2014

Will Putin Lose His Shirt Again?

Russia’s currency is in a nosedive, destabilizing the Great Bear.

The stores in Russia were jammed Tuesday with people snatching TVs, cooking equipment and appliances. Lines of shoppers piled up and shelves were stripped bare. While the pictures resembled Black Friday in America, Russians rushed to the stores on Black Tuesday not to snag holiday deals but to convert their savings into something more stable than rubles.

Russia’s currency started its nosedive Monday. The Russian central bank tried to entice investors to keep the ruble. In a 1 a.m. meeting, it cranked the interest rate from 10.5% to 17% to encourage people to keep using the currency. But the Russian government faced a lose-lose situation. Increasing interest rates to save the ruble hurts the everyday Russian family by hobbling the Great Bear’s economy. But doing what was best for the average Russian would doom the country’s large industries, which make money in rubles but owe debts in dollars. The ruble lost 17% against the dollar Monday and Tuesday (and 50% since June), and it continued fluctuating wildly Wednesday.

The U.S. is largely responsible for Russia’s misfortune, as our fracking revolution sent oil prices plummeting below $60 a barrel. It’s great for America’s economy, its national security and your wallet, but disastrous for Russia. As Matt O'Brian writes, “It’s only a small simplification, you see, to say that Russia doesn’t so much have an economy as it has an oil exporting business that subsidizes everything else.”

On top of this, America is poised to hit Russia with a third round of economic sanctions this week. The first round came after Russia plucked Crimea from Ukraine in March, and the second round hit Russia after its missiles were used in July to shoot down civilian flight MH17.

The White House sees Russia’s imploding economy as a sign that its strategy is working – that “history is against them,” to borrow Barack Obama’s formulation. Jason Furman, who chairs the president’s Council of Economic Advisers, said, “I think they are facing a very serious economic situation, and it’s a serious economic situation that is largely of their own making and largely reflects the consequences of not following a set of international rules.”

The remaining question is how Russian President Vladimir Putin, who has been playing Eastern Europe like a chess board, will respond now that his queen has been captured.

Ed Morrissey at Hot Air wonders if the ruble’s collapse could turn Russia’s oligarchs – its oil tycoon mafia types – against Putin, possibly paving the way for his removal. But other pundits fear Putin will only be more dangerous. “There is nothing more dangerous than a wounded animal,” writes Jake Novak at CNBC. “Vladimir Putin is wounded – and he’s not known for holding back. His entire adventure in Ukraine this year is example of just how destructive and unpredictable Putin can be, and that all happened when oil was still trading at $100 a barrel.”

For rulers like Putin, the number one priority is to keep power, period. For Putin and his Machiavellian tactics, that includes smothering freedom of speech, bullying neighboring countries and offing a few political enemies via the KGB. But as Niccolo Machiavelli himself argued in “The Prince,” any ruler must nurture the favor of the people. “I shall conclude only that for a price it is necessary to have his people as a friend, otherwise, in adversities, he has no remedy,” Machiavelli wrote. The Prince of Despots also noted rulers keep power based on the loyalty of the governors underneath him. In Putin’s case, those are Russia’s oligarchs.

Even the Clintons know the way to keep the subjects happy is to keep the economy humming. For what it’s worth, Russians just named Putin man of the year for the 15th time in a row, showing how “popular” he is. But how long will his popularity last, as Russian army veterans worry if the government will stop paying out pensions and inflation threatens to climb into double digits? Russia imports much of its food. And winter is coming.

Putin could always divert from the economic issues to the war in Ukraine or a chilly conflict with the West. He’s framed Russia’s involvement in the past as concern over native Russians in Ukraine yearning to join the motherland. It’s not a stretch to imagine Putin whipping up the drums of war to distract from the lack of bread.

But this is not the first time Russia’s economy suddenly fell. Yegor Gaidar, who was Russia’s acting prime minister, minister of economy and first deputy prime minister between 1991 and 1994, recalled in a speech to the American Enterprise Institute, “In 1985 the idea that the Soviet Union would begin bargaining for money in exchange for political concessions would have sounded absolutely preposterous to the Soviet leadership. In 1989 it became a reality, and Gorbachev understood the need for at least $100 billion from the West to prop up the oil-dependent Soviet economy.”

Last time oil prices and sanctions crippled Russia’s economy, a totalitarian government fell. The chance for the next generation is coming.

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