Hayes, Nicholas

Johnston, Louis D

English

College of Saint Benedict and Saint John’s University: DigitalCommons@CSB/SJU

College of Saint Benedict and Saint John's University DigitalCommons@CSB/SJU University Chair in Critical Thinking Publications University Chair in Critical Thinking 12-22-2014 As the ruble tumbles, Putin stumbles — and upheaval looms in Russia Nicholas Hayes College of Saint Benedict/Saint John's University, nhayes@csbsju.edu Louis D. Johnston College of Saint Benedict/Saint John's University, ljohnston@csbsju.edu Follow this and additional works at: https://digitalcommons.csbsju.edu/ucct_pubs  Part of the History Commons, and the International Relations Commons Recommended Citation Hayes, Nicholas and Johnston, Louis. 2014. "As the ruble tumbles, Putin stumbles — and upheaval looms in Russia" MinnPost, December 22, 2014. https://www.minnpost.com/macro-micro-minnesota/2014/12/ruble-tumbles-putin-stumbles-and-upheaval-looms-russia. This News Article is brought to you for free and open access by DigitalCommons@CSB/SJU. It has been accepted for inclusion in University Chair in Critical Thinking Publications by an authorized administrator of DigitalCommons@CSB/SJU. For more information, please contact digitalcommons@csbsju.edu. REUTERS/Maxim ZmeyevIn his annual end-of-the-year news conference, Vladimir Putin placed the blame for the ruble crisis on “outside factors” (read theUnited States and Western Europe).By Nick Hayes and Louis D. Johnston | 12/22/14The ruble tumbles. The western media gloats in Russia’s problems. There’s some back-slapping in theObama White House. Meanwhile, back in Moscow, President Vladimir Putin is putting his spin on thecrisis.  On Dec. 17, Prime Minister Dmitry Medvedev (whom President Obama once called “my friendDmitry” and treated to burgers at Obama’s favorite D.C. eatery) gave the leaders of Russian finance,banking and export industries a very public dressing down before the cameras and reporters ofRussia’s main media.Medvedev delivered his talking points with a “now, now, gentlemen get a grip on yourselves” tone.First of all, he reminded them and the Russian audience that the ruble crisis stemmed from twofactors outside the Russian government’s control —  the global decline of oil and gas prices and theU.S.-led sanctions which had cut off Russia’s access to western capital markets. Secondly, with aAs the ruble tumbles, Putin stumbles — and upheaval looms in Russia | ... https://www.minnpost.com/macro-micro-minnesota/2014/12/ruble-tumbl...1 of 5 9/12/2017, 10:08 AMperfectly straight face, Medvedev disingenuously stated that Russia had enough foreign currencyreserves to stop the freefall of the ruble. Third, and most important, Medvedev put the primary blamefor speculation and manipulation of the ruble on a “play on emotions.”In plain speech, Medvedev’s message is: blame theproblem on foreign meddling, including his friendObama; we still have plenty of money; and shape up.Really?Medvedev is technically correct about the proximatecauses of the ruble’s fall. Russia is experiencing afinancial crisis because declining oil prices combinedwith Western sanctions are making it difficult forRussian companies to pay their debts. But let’s lookmore carefully at the connections among oil exports,sanctions, exchange rates and debt so that you can see how this all works.The key fact to keep in mind is that Russia’s international debt is denominated in dollars (and, to alesser extent, in euros). This means that the Russian government can’t print rubles to pay off this debtbut must accumulate dollars by exporting goods and services and receiving dollars in return. And overthe past nine months, Russia has seen the amount of dollars it earns per unit of exports falldramatically due to sanctions and falling oil prices.Lower oil prices encourage buyers to purchase a larger quantity of oil, but the demand for oil is suchthat the 40 percent decline in oil prices will not generate a more-than-40-percent increase in barrelssold. As a result, Russia’s oil revenues are certain to fall and directly reduce the resources available toservice foreign debt.Sanctions imposed by the European Union and the United States in response to Russia’s annexationof Crimea and its support of Ukrainian rebels made things worse by reducing the demand for otherRussian exports. This depressed export prices of goods other than oil so that a given quantity ofRussian exports earned a smaller amount of dollars than it did before sanctions were imposed.Further, sanctions cut off some exports entirely and eliminated any dollars gained from those sales.The result: Russia earns fewer dollars that can be used to service its debt.Now, here comes the financial crisis. Currency traders know about falling export prices, that Russiandebt will be harder to service, and that the Russian economy will start to slow down. So they startselling rubles and drive its value down in terms of dollars. This makes it even harder for the Russiangovernment and Russian companies to service their debt because it makes the rubles they earn asAs the ruble tumbles, Putin stumbles — and upheaval looms in Russia | ... https://www.minnpost.com/macro-micro-minnesota/2014/12/ruble-tumbl...2 of 5 9/12/2017, 10:08 AMdomestic (within Russia) income less valuable in dollar terms.More generally, there is a flight from ruble-denominated assets in Russia itself.  That is, stockholders,bondholders and property owners whose assets are denominated in rubles will try to sell these assetsin exchange for dollar-denominated assets (or just dollars themselves). This both drives down thevalue of the ruble further (since the supply of rubles being offered for dollars grows) and decreases thevalue of stocks, bonds and propertyAdd this all up and you have a full-blown financial crisis with the ruble plunging in value andinvestors trying to pull their capital out of Russia.As if things couldn’t get worse, currency traders are betting that the Russian central bank can’tprevent the ruble’s decline for long because it does not have infinite dollar reserves to stabilize theruble’s value. So currency traders are selling their rubles as fast as they can, forcing the Russiangovernment to use up its reserves of both dollars and, potentially, gold.The standard solution to this kind of crisis is to ask for a loan from a big country such as the UnitedStates, a group of countries such as the EU or an international institution such as the IMF. This solvesthe problem of the central bank having sufficient reserves to stabilize the currency.Russia is not going to do this.Putin’s responseLast week, Putin re-enforced Medvedev’s theme. In his annual end-of-the-year news conference,Putin placed the blame for the ruble crisis on “outside factors” (read the United States and WesternEurope). He also reminded Russians that under his watch Russia’s currency reserves had grown to$419 billion as of Dec. 4. When Putin came to power in 1999 in the wake of the 1998 Russian defaulton its debt, Russia’s currency reserves were $13 billion and its obligations included a $133 billiondebt. Putin is claiming some bragging rights on the issue of the nation’s currency reserves. Finally,Putin called for the nation to brace itself for rough times ahead and to know that the situation willstabilize in a year or two.What Putin did not do is to hint at a change in the basic direction of his economic and foreign policy.You can infer that a few heads in the Kremlin will probably roll. Putin demands absolute loyaltywithin his ranks. The demise of an oligarch or two or a few economic ministers would be a warning toany within the Kremlin who might contemplate jumping ship or questioning his overall handling ofthe economy. Although Putin referred in his remarks to the need to diversify the Russian economyand reduce its dependence on oil and gas exports, watch for him to build on last year’s oil and gasagreement with China and expand its role in the Asian markets.What he will not do is change the direction of his foreign policy. His annexation of the Crimea,interference in the eastern Ukraine, anti-American rhetoric and a  cocky swagger in world affairs haveAs the ruble tumbles, Putin stumbles — and upheaval looms in Russia | ... https://www.minnpost.com/macro-micro-minnesota/2014/12/ruble-tumbl...3 of 5 9/12/2017, 10:08 AMboosted his approval ratings in Russia to 80 percent and higher.  What is more, it has gained for him the enthusiastic support of the Russian nationalist right, whichpreviously opposed him and now provides him with a new political base replacing what he has lostamong the urban liberals and elites. Take the case of the increasingly popular and right-wing politicalphilosopher Aleksandr Dugin.  Prior to the annexation of the Crimea, Dugin dismissed Putin as a lackey of the West. Now an adviserto the Russian president, he lauds Putin as a national hero who has inaugurated a “Russian spring”that will re-unite the territories lost to Moscow from the Ukraine to the Caucasus and has dared todefy all aspects of Western culture — from its concept of democracy to its support of the gays. Notcoincidentally, Dugin calls for Russia’s economic self-sufficiency and its withdrawal from economicinter-dependence with the West.The Kremlin has started leaking stories to the Western media with an upbeat spin to the crisis. Ourfavorite is the news that the Sochi Olympic hotel, resort and spa complex is now over-booked withhappy tourists who are eager to take advantage of the lower prices.Perhaps this is the time for you to take that Russian vacation you’ve been promising your family. Orperhaps we would all do better to reflect on the coincidence of the ruble crisis with the thirdanniversary of the mass protests that rocked the streets of Moscow and take seriously the very realthreat of instability and upheaval in Russia’s near future.As the ruble tumbles, Putin stumbles — and upheaval looms in Russia | ... https://www.minnpost.com/macro-micro-minnesota/2014/12/ruble-tumbl...4 of 5 9/12/2017, 10:08 AMNick HayesNick Hayes is a professor of history who holds the university chair in critical thinkingat Saint John's University in Collegeville, Minn.Louis D. JohnstonLouis Johnston writes Macro, Micro, Minnesota for MinnPost, reporting oneconomic developments in the news and what those developments mean toMinnesota. He is Joseph P. Farry professor in the Eugene J. McCarthy Center forPublic Policy and Civic Engagement at Saint John’s University. He is also a professorof economics at the university.MinnPost | 900 6th Avenue SE | Minneapolis, MN 55414 | 612.455.6950MinnPost is a nonprofit, nonpartisan media organization whose mission is to provide high-quality journalism for people who care about Minnesota.

As the ruble tumbles, Putin stumbles — and upheaval looms in Russia

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As the ruble tumbles, Putin stumbles — and upheaval looms in Russia

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