Boom or Bust
High-Riding Ruble Pulls Putin’s Chestnuts out of Fire

In what has become almost an annual ritual since 2001, Vladimir Putin took to the airwaves to participate in a lengthy call-in show, fielding vetted questions from citizens and prominent figures for several hours on national television. The questions were far-ranging—some concerning Russia’s sending troops to Ukraine (he denied it), others asking about the sale of S-300 rockets to Iran (he defended it). Most, however, focused on the economy, which has been hit hard by a combination of plummeting oil prices and Western sanctions.

Luckily for Putin, he had a talking point ready: the Russian ruble has been on a tear lately, having gained as much as 22 percent on the dollar in the past year. It has been buoyed by stabilizing oil prices and perhaps by investors’ belief that tensions are easing between Brussels and Moscow over Ukraine. Putin claimed that the ruble showed that the Russian economy is fundamentally sound, and that the current recession would be over in less than two years.

The FT notes that Putin’s former Finance Minister Alexei Kudrin was allowed to ask a question, and that the exchange got testy:

Mr Kudrin noted that Russia’s gross domestic product had grown 7 per cent a year in Mr Putin’s first term, from 2000-04, when the oil price was $30 a barrel. Yet it was now expected to grow by no more than 1.5 per cent, even though oil was now $60 a barrel.

The Russian central bank expects the economy to contract by 3.5 to 4 per cent this year and by 1-1.6 per cent in 2016.

“The old growth model has become obsolete and there is no sign of a new one,” Mr Kudrin said. Russia was in danger of lagging far behind the rest of the world, he said, and its decline would ultimately affect its defence capability.

Mr Putin retorted that Mr Kudrin had been one of the authors of Russian economic policy, and if something had gone wrong then it was partly his fault.

Many analysts are in agreement with Kudrin and are calling the ruble rally an overshoot, predicting that Russia’s weak fundamentals will bring the ruble down again in as little as six months. Nevertheless, the Russian central bank is likely to try to take advantage of the boom by cutting interest rates by as much as 100 basis points at the end of April to try to juice the economy.

What many people miss about the Putin regime is how sensitive it actually is to public opinion, despite its authoritarian tendencies. Getting the economy on a more even keel and improving living conditions for the silent majority is high on the list of priorities for the Kremlin. Whether and how they pull it off is one of the more important stories to watch in the coming year. It certainly won’t be easy, given how reliant Russia still is on the energy sector, and given how low prices are likely to be for the foreseeable future.

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