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It's the Economy Stupid
Putin's Achilles Heel

Give Putin some credit: He has put together an impressive spectacle in Sochi. But while the world’s attention is focused on Kiev and the billion-dollar show in the Caucasus, Russia’s economy as a whole is slowly falling apart. Capital flight is accelerating, and the ruble has fallen by 8.1 percent this year and 1.7 percent in the past week alone. Only the Argentinian peso is doing worse.

Russia was also forced to cancel three debt auctions in four weeks due to weak demand and high yields. The markets have cast a skeptical eye on Putin’s policies, particularly his decision to pledge $15 billion in aid to Ukraine so soon after dropping nearly three times that amount on Sochi. As one analyst told Bloomberg:

“The meddling with Ukraine certainly hurts Russia’s image as an investment destination,” David Hauner, a fixed-income and currency strategist at Bank of America Corp., said in a telephone interview from London. “It is not going to bankrupt Russia, but $15 billion can turn out to be $50 billion, and Russia will have to plug the holes for a couple years.”

Another analyst noted that the trouble in Ukraine was hurting Russia’s image in the markets:

“From a psychological standpoint, Ukraine’s problems affect foreign investors’ perception of Russia,” Vladimir Bragin, head of research at Alfa Capital in Moscow, said in a telephone interview. “In their eyes, the first reaction is to sell Russia, cut risks. It’s in Russia’s interests that the situation stabilizes” in Ukraine.

Putin’s foreign policy successes will be hard to replicate in the economic sphere, where he can’t count on Western fecklessness or incompetence to bail him out. Russia’s economic troubles are the consequence of his failure to lead an effective economic transformation over the past two decades.

Imagine if Putin had been able to develop a track record like the Chinese Communists over the past 20 years. Russia would be in far better shape than it is today and would likely have the money to devote to both Sochi and Ukraine without spooking the markets. But he hasn’t, and he doesn’t appear likely to do so in the future.

Russia’s failure is not about democracy, transparency, or corruption. China has galloping corruption and little democracy or transparency, but it has still managed to pursue a successful development path. Putin’s Russia hasn’t, and now it’s paying the price.

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  • rheddles

    You’re never as good as you look when you’re winning and you’re never as bad as you look when you’re losing.

  • Jacksonian_Libertarian

    “Imagine if Putin had been able to develop a track record like the Chinese Communists over the past 20 years.”

    Why are you comparing these two, without first getting the real numbers for capital flight from China, or how foreign companies came in and build all those now aging factories for China (they didn’t do it themselves) in order to take advantage of China’s no longer cheap labor? The fact is neither of these two countries can advance much beyond where they are now, without Democracy, the Rule of Law, and Free Markets to create wealth. In both of these countries the wealthiest people set up fall back positions in foreign countries and move their wealth and families if not themselves to these safer places (planned escape routes and spookers filled with cash, travel documents, and valuables are common practice). The number of wealthy Russians, Chinese, and the Politicians with foreign bank accounts approaches 100%.

  • mesocyclone

    Russia and China are different countries with different forms of corruption. Russia’s failure is in fact mostly due to corruption. It’s the details that matter: Russia’s corruption pretty much crushed capital formation, while China’s merely weakened it. China had/has vast numbers of people willing to work hard for nearly nothing, while Russia has a population that used to think of itself as middle class.

  • Bruce

    Russia never experienced a complete and total defeat as nations like Japan and Germany. Hence they never had a complete and total reset imposed on them when “Communism fell.” They’ve been half Communism, half capitalism and all cronyism and that makes for lawlessness. When the leader of your country is former KGB and still adheres to that philosophy, you have little hope of a good long term outcome.

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