The Collapse of Putin's Economic System


The foundations on which Vladimir Putin built his 15 years in charge of Russia are giving way.

The meltdown of the ruble, which weakened to a record low this week, is endangering the mantra of stability around which Putin has based his rule. While his approval rating is near an all-time high on the back of his stance over Ukraine, the currency crisis risks eroding it and undermining his authority, Moscow-based analysts said.

The president took over from an ailing Boris Yeltsin in 1999 with pledges to banish the chaos that characterized his nation’s post-communist transition, including the government’s 1998 devaluation and default. While he oversaw economic growth and wage increases in all but one of his years as leader, the collapse in oil prices coupled with U.S. and European sanctions present him with the biggest challenge of his presidency.

“People thought: ‘he’s a strong leader who brought order and helped improve our living standards,” said Dmitry Oreshkin, an independent political analyst in Moscow. “And now it’s the same Putin, he’s still got all the power, but everything is collapsing.”

New Era

In a surprise move early yesterday, the Russian central bank raised interest rates by the most in 16 years, taking its benchmark to 17 percent. That failed to keep the ruble from plummeting as low as 80.1 per dollar from about 34 in June as the price of oil, the country’s biggest export, dropped by almost half to below $60 a barrel. The currency surged 12 percent to 60.1 a dollar today as the government sold foreign currency and the central bank took steps to supported banks.

The ruble meltdown and accompanying economic slump marks the collapse of Putin’s oil-fueled economic system of the past 15 years, said an executive at one of Russia’s three biggest banks, who was talking in a personal capacity. He asked not to be identified because of the sensitivity of the issue.

The higher interest rate will crush lending to households and businesses and deepen Russia’s looming recession, according to Neil Shearing, chief emerging-markets economist at London-based Capital Economics Ltd.


Gross domestic product will shrink 0.8 percent next year under the Economy Ministry’s latest projection. With oil at $60, it may drop 4.7 percent, the central bank said last week.

“How many bankruptcies await us in January?” opposition lawmaker Dmitry Gudkov said on Twitter. “People will be out of work, out of money. The nightmare is only just beginning.”

Near Critical

Vladimir Gutenev, a lawmaker from the ruling United Russia party, also fretted about the central bank’s actions, calling the scale of the rate increase “unacceptable.”

“The situation concerning the financing of industry from bank credits is getting ever closer to critical,” Gutenev, who’s also first deputy president of the Machinery Construction Union, said by e-mail.

The threats to economic stability have arisen with Putin’s popularity at 85 percent after Russians lauded his approach to Ukraine following ally Viktor Yanukovych’s ouster. In particular, they cheered his annexation of Crimea, part of Russia until 1954, and shrugged off the ensuing U.S. and European sanctions that target the finance and oil industries.

While the unfolding ruble crisis may lead to a gradual erosion of Putin’s support, any protests that occur will mainly be against lower-level officials rather than Putin, said Igor Bunin, head of Moscow’s Center for Political Technologies.

“Putin is the symbol of Russia and the state for ordinary Russians,” according to Bunin, who said some members of the government may be fired as a result of the ruble chaos. “People see him as a lucky star who’ll save them. So they’re afraid to lose him as a symbol.”

Government ‘Incompetent’

Tatiana Barusheva, a 63-year-old pensioner who lives in the Gelendzhik resort city in the southern Krasnodar region, blames Putin’s underlings for the current bout of uncertainty.

“We can’t go far with this government, it’s incompetent,” she said yesterday on Moscow’s Red Square. “It doesn’t matter how hard Putin tries, but his helpers are good for nothing.”

Putin is capable of leading the country out of the current difficulties like he did during the global financial crisis in 2008, his spokesman Dmitry Peskov said.

“In 2008, as you remember, Putin came out and said: ‘It’s a crisis, and I take responsibility and everything will be fine!’” Peskov said in an interview with Rossiya 24 state television today. “Did everything turn out ok? Yes it did.”

Tougher Bind

The global financial crisis that erupted in 2008 wiped out 7.8 percent of Russia’s GDP the following year amid a similar tumble in oil prices. On that occasion, the ruble sank by about a third. The economy has grown each year since.

Even so, the sanctions mean Putin’s in a tougher bind this time round, according to Olga Kryshtanovskaya, a sociologist studying the elite at the Russian Academy of Sciences. Measures to ease the situation, such as imposing capital controls or softening Russia’s position on Ukraine, both carry additional risks, she said.

What’s happening now is worse than five years ago, according to Kirill Rogov, a senior research fellow at the Gaidar Institute for Economic Policy in Moscow. Putin risks losing his image as a leader who’s in control and can steer the country through turmoil, he said.

“After 2009, there was a quick recovery,” Rogov said. “Now we’re facing an uncontrollable shock. This undermines trust in Putin’s whole economic model.”

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