THE CURRENCY CRISIS IN RUSSIA: TURNING INTO A 'REGIME CRISIS'?

"The next four or five years will be very difficult if not critical for Russia, and the Russians, in Putin’s view, absolutely must meet the challenges and win. The alternative, although he did not say it, of course, is dire. Putin’s address was directed first and foremost at the Russian people. It has often been assumed that Russians are at their best when things are worst for them, and certainly the economic situation today is very precarious. Putin has decided “not to waste a good crisis,” and wants to use the challenge of Western sanctions and the low oil price as leverage for the country's economic revival. For years, the Russian government only talked about “getting off the oil needle,” but it is only now that it has run out of easier options and has to start doing something about it. Will it be able to do perform that feat? Vladimir Putin’s most serious and glaring weakness in his 15 years in power has been his failure to come up with a realistic strategy of economic development. He—and Russia—were instead helped by high and rising oil prices, which of course did not create a momentum for reform. Now, the relatively low and falling prices appear to create such a momentum, as Putin’s pro-business initiatives indicate. However, these initiatives will be devalued if not backed up by genuine political will to make the legal system produce justice for all, and by a sustained effort to severely reduce institutionalized corruption. Government transparency and accountability is another indispensable condition."

Dmitri Trenin, "Putin’s Urbi et Orbi". Carnegie Moscow Center. 5 December 2014, in www.carnegie.ru

"Belatedly, financial markets have realised that July 16 was Russia’s Lehman moment. On that day, the US imposed sectoral sanctions on Russia because of its military aggression in eastern Ukraine. Two weeks later the EU introduced similar sanctions. However, it was only in December that the markets recognised the severity and tenacity of the financial sanctions. Since July, Russia has received no significant international financing — not even from Chinese state banks — because everybody is afraid of the US financial regulators. Like most of the world after the bankruptcy of Lehman Brothers investment bank on September 15, 2008, Russia suffers from a liquidity freeze. It will not end until the US financial sanctions are lifted.... The current financial meltdown is bound to cause major damage to the Russian economy. On December 15, the CBR forecast a GDP decline of 4.5-4.7 per cent in 2015 if oil prices remain at $60 per barrel. Since the root cause is the western financial sanctions, the only realistic cure is to have these sanctions lifted. The Kremlin can accomplish that by fully and credibly evacuating its troops and armaments from eastern Ukraine. No other action is likely to have a significant economic effect".

Anders Aslund, "The only cure for what plagues Russia". The Financial Times. 17 December 2014, in www.ft.com.

The currency crisis in Russia in the past three weeks has grown into a full-scale economic crisis. As Aslund Anders notes, the Russian Central Bank is predicting that unless the price of oil increases to something more than sixty to sixty-five dollars a barrel in the very near future, the Russian economy will decline almost five percent of GDP. Unless and until American & European economic sanctions are lifted, there is every possibility of a major solvency crisis occurring in Russia within twelve to eighteen months time. With major bankruptcies looming for every large Russian multi-national which has accumulated dollar or euro debts. As the Economist notes, while Russia has a foreign exchange reserve of almost Four-Hundred Billion dollars, the total amount of Russian external debt in dollars is more than Six-Hundred Billion 1. In short, in the absence of a concerted turn to (for lack of a better expression) 'neo-Stalinism', the Putin regime is will soon be in the throes of a major regime crisis following from the soon to be major economic crisis 2. The real conundrum at present is if the Russian President will be willing to climb-down by withdrawing Russian forces and armaments from eastern Ukraine or not? A withdrawal at this point in time, would be a major diplomatic defeat for the regime and for Putin personally. On the other hand, it is quite doubtful that the inner circles who assist Putin in running the country, are as enamored of the Putin's va banque policy, now that state bankruptcy is staring them in the face. In that respect, former Premier Kasyanov's statement to-day that: "Russia is going into decline...2015 is a year in which Putin must make a 'principle' decision", may signal the beginnings of a change in elite opinion 3. To-morrow Putin will make his annual Presidential speech. It will be interesting to see what he says and if a hint at climbing down from his anti-Western policies is announced. I for one, predict (unfortunately for Russia's poor people), that Putin will stubbornly refuse to change course and thus look for a full-scale regime crisis by the middle of 2015. As Timothy Ash a leading 'Emerging Market' analyst at Standard Bank cogently notes:

"Putin Inc. needs a new and different model. But over his 15 years in power, the regime has appeared unwilling or unable to tolerate the kind of radical reforms now needed, because they likely challenge the very underpinnings of the regime itself 4."

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1. "Russia’s rouble crisis: Going over the edge". The Economist. 20th of December 2014, in www.economist.com.

2. Kathrine Hille, "Rouble crisis opens up Vladimir Putin to attack". The Financial Times. 17 December 2014, in www.ft.com.

3. Timothy Heritage, "Opponent calls for Putin's exit as Russia slides into crisis". Reuters. 17 December 2014, in www.reuters.com.

4. Timothy Ash, "Beyondbrics: Hello 2015: having failed in Ukraine, Russia will turn inwards". The Financial Times. 17 December 2014, in www.ft.com.