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.