For two days, as the ruble’s value plummeted, panicked shoppers bought up goods, and his political allies threatened each other, Vladimir Putin remained silent. Then today, in his annual press conference, he largely shrugged at the currency crisis. Yes, perhaps the Central Bank had been a little tardy in reacting, he conceded, but it is taking the right measures. In the worst case, he said, hard times would last two years, after which recovery would be “inevitable”: The price of oil, on which Russia relies heavily, would either rebound, thus spurring growth, and if it didn’t, the economy would be forced to diversify, also spurring growth. In the meantime, Russia could rely on its $419 billion in reserves to get by. Whichever cards the world economy turns up, Putin told the country, we’re holding a winning hand.
It’s hard to know if he believes this or if he’s bluffing, but either way, striking this tone is a huge gamble for Russia and for Putin personally. He is betting that by not acknowledging there is a crisis, he can persevere the impression of normalcy and strong, competent leadership that has marked Russia during his rule and distinguished it from Russia in the 1990s. This impression is the foundation of Putin’s status as the unassailable national leader and of the country’s political system. In the coming months, should the ruble recover, prices stabilize, and elites avoid open conflict, Putin can reclaim his status as such a leader. Should it become clear, though, that his sanguine demeanor and talk of inevitable growth failed to inspire confidence in Russia’s currency, markets, and economic policymaking, the country will have a diminished, vulnerable President and a new political reality.
The past week’s crisis offered a glimpse of what this new reality could look like. After months of limiting money supply, Russia’s Central Bank last week approved a scheme that allowed state-owned oil company Rosneft, whose CEO, Igor Sechin, is one of Putin’s closest associates, to raise money cheaply. Under this scheme, the bank would accept Rosneft bonds as collateral at a liquidity auction, thereby effectively letting the company raise $10.8 billion at interest rates lower than those faced by other institutions. Rosneft badly needed funds to repay foreign creditors after Western sanctions cut it off from international refinancing, so many assumed it would convert the money raised to buy dollars and pay debts, thereby further driving down the ruble. Another Putin associate, Former Finance Minister Alexei Kudrin, tweeted that markets had reacted badly to Rosneft’s “nontransparent” and “very untimely” deal. Then, as the currency lost value, the Central Bank raised interest rates from 10.5 percent to 17 percent in the middle of the night on Tuesday, but the ruble only continued to plummet. Sechin emerged to deny that the Rosneft bond-sale contributed to the ruble’s decline, and spoke menacingly of Kudrin, saying that such “provocateurs” needed to be exposed and “dealt with.”
Whether the Rosneft deal was actually responsible for the ruble’s slide is unclear, and its deal with the Central Bank was in fact very similar to successful steps taken by the Russian government in 2008 to combat that year’s crisis. As with the current Rosneft deal, the government then, in effect, funneled liquidity through favored institutions. Indeed, Putin said in his press conference that he was undertaking the same measures he had in 2008. The difference now is that instead of a well-considered measure, this deal looked rushed, contradictory to existing policy and intended solely to benefit a company close to Putin rather than to stimulate the economy. The Central Bank’s quick approval of Rosneft bonds as collateral, its dead-of-the-night interest-rate hike, the scenes of exchange rates racing ever higher over the course of a day, consumers’ rushing to buy things before their money became worthless, and the elite infighting looked less like the Russia of 2008 and more like that of 1998. Indeed, the ruble’s losses were the worst since that year. The question is, over the next year, will Russians feel like they’re living in Yeltsin’s 1990s or Putin’s 2000s? Putin has staked his reputation on the promise that he will not let Russia go back to those bad old days. Failure to deliver would be a serious blow.
The energetic Putin, of course, is a far cry from Boris Yeltsin, whose erratic behavior and absences through illness did much to compromise the effectiveness of Russia’s government. There are indications, though, that Putin in his third term as President has done much to undermine policymaking by greatly limiting the number of people involved. In 2008, when Putin was Prime Minister and Dmitry Medvedev was President, a wide group of officials with contrasting interests and perspectives were involved in formulating policy. Now, it appears, Putin is relying on a small group of advisers, largely from the security services, to make important decisions on issues such as Ukraine policy. The government’s reaction to the ruble crisis suggests that economic policymaking may be suffering from a similar lack of wider input.
Many will now look for mass protests in Russia as an indication of Putin’s diminishing power and possible ouster. However, as the failed protest movement of 2011 and 2012 has shown, mobilizing popular opposition against Putin is very difficult when the financial and government elite, especially the security services, stand behind him.
Should members of this elite, however, conclude that Putin is incapable of meeting theirs and their country’s needs, he would be greatly weakened. For this reason, incidents such as the spat between Sechin and Kudrin are interesting. More like them would suggest Putin’s ability to prevent public discord between influential interest groups, one of the hallmarks of his time in power, is diminished.
The other indicator to watch is Russia’s foreign currency reserves. They were instrumental in allowing the government to weather the 2008 downturn and they currently stand at levels similar to where they were before that crisis. Should those reserves begin to run out, the Kremlin would find it much harder to stave off serious economic hardship. As Kudrin, who was instrumental in building up those funds, put it, “For Putin, the reserves that Russia has accumulated over the past 14 years equal political power.”
In any event it is likely that Putin will remain in power at least until the next presidential elections in 2018. He remains popular and has been so successful in marginalizing or co-opting the opposition that it would probably take a truly catastrophic event for public and elite dissatisfaction sufficient for his ouster to emerge. The questions we should consider are: Will Putin become a much weaker leader, what would this mean for Russia before 2018, and what would this mean for the 2018 elections?