The Russian Riddle: An Alternative View on the Collapse of the Rouble
Winston Churchill is famously quoted as saying that: “Russia is a riddle wrapped in a mystery inside an enigma.” The past twelve months have surely proved how right he was.
The past couple of weeks have certainly not been easy for Russian President Vladimir Putin. A tumultuous year is coming to an end climaxing at the finishing line. The Ukraine crisis, economic sanctions, a rapid decline in oil prices and a slowdown in economic growth capped by the collapse of the Rouble have brought back memories of Russia’s demise in 1998.
The downturn started to take effect in February this year when Russia decided to annex Crimea under the pretext that it was historically Russian and it was already dominated by Russian military under treaty. Essentially Russia has over the centuries viewed Ukraine as a buffer to foreign threats from the West and felt that Ukraine’s tilt towards this direction could potentially pose a threat sometime in the future. The solution was to create internal strife and eventually intervene and take what it felt was already its own.
On the other side of is the West particularly the United States that has been conditioned for over a century to prevent, at all costs, hegemony in Europe or Russia that could assert itself over its neighbours and pose a threat to US interests in the region. The events in Ukraine triggered a backlash from the West which moved decisively to impose economic sanctions setting off a chain of events to bring Russia on its feet.
Russia is a state that has over the centuries faced tremendous difficulties. Overcoming insurmountable challenges are part of the fabric of its people. Economic challenges and financial distress is the norm for Russia while prosperity such as what Russia has experienced in the past decade is likely the exception.
Russians went through tremendous difficulty during the reign of Boris Yeltsin in the 90’s and also previous governments. In actual fact this type of economic destitution goes back a couple centuries. Despite all the troubles Russia has managed to fight and win wars, develop technology and innovate albeit at a slow pace. The people have managed to scrape by and also develop a highly educated and capable population overall. The general view is that Russians are able to endure hardship that other Western nations cannot which might also explain why Putin is showing no signs of capitulating on Ukraine but rather strengthening his resolve.
Overall until early this week the Kremlin appeared calm about the Ruble’s decline when the Russian Central Bank increased interest rates to 17% in a knee jerk reaction to halt the decline. This decision helped the Rouble for a few hours before going into a free fall losing 20% of its value at one point and hitting lows at 80 Roubles to the dollar.
The question now is what all this means for Russia and how do events unfold going forward. How can Russia get itself out of the mend it got itself into without losing face? Putin is not one to give up easily and any back peddling even at this stage is unlikely. The US announcement of additional sanctions after the eventful collapse of the Ruble suggest a tone of shadenfreude and is unlikely to go down with the Russian people and even less so with the Kremlin.
While the belief that Russia and Putin is in a corner and out of options this is not necessarily the case. Some of the pain that has been brought on to Russia by the events after the Ukraine crisis can still be brought onto the West in the case that Russia defaults or even starts to play around with the idea of default on non-Rouble denominated debt.
Foreign lenders are exposed to Russia to the tune of US$670bn. This is not a small amount and the events of the past week certainly are starting to resemble 1998. The possibility of a Russian default and the financial catastrophe from such event is unfathomable.
Many Russian corporates including state owned companies such as Rosneft and Sberbank have sizable US$ denominated debt which they are currently having problems refinancing due to sanctions hence needing financing from the Central Bank of Russia. The Central Bank itself is being squeezed as a result of its interventions in the open market to support the Rouble. With all this coming to head it is a matter of time before something gives.
As the United States continues to taunt Putin and back him further into the corner the one and only remaining option might be to use the default card. The threat of doing so could easily send markets in a tailspin and the actuality of doing so could see the global financial system implode at a magnitude exponentially larger to that of the 2008 crisis. The embedded, hidden risks of the Rouble collapse and potential contagion to the global economy is tremendous and not to be taken lightly.
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