Putin’s Bubble Bursts.
If you’re the type who finds macho posturing impressive, Vladimir Putin is your kind of guy. Sure enough, many American conservatives seem to have an embarrassing crush on the swaggering strongman. “That is what you call a leader,” enthused Rudy Giuliani, the former New York mayor, after Mr. Putin invaded Ukraine without debate or deliberation.
But Mr. Putin never had the resources to back his swagger. Russia has an economy roughly the same size as Brazil’s. And, as we’re now seeing, it’s highly vulnerable to financial crisis — a vulnerability that has a lot to do with the nature of the Putin regime.
For those who haven’t been keeping track: The ruble has been sliding gradually since August, when Mr. Putin openly committed Russian troops to the conflict in Ukraine. A few weeks ago, however, the slide turned into a plunge. Extreme measures, including a huge rise in interest rates and pressure on private companies to stop holding dollars, have done no more than stabilize the ruble far below its previous level. And all indications are that the Russian economy is heading for a nasty recession.
The proximate cause of Russia’s difficulties is, of course, the global plunge in oil prices, which, in turn, reflects factors — growing production from shale, weakening demand from China and other economies — that have nothing to do with Mr. Putin. And this was bound to inflict serious damage on an economy that, as I said, doesn’t have much besides oil that the rest of the world wants; the sanctions imposed on Russia over the Ukraine conflict have added to the damage.
But Russia’s difficulties are disproportionate to the size of the shock: While oil has indeed plunged, the ruble has plunged even more, and the damage to the Russian economy reaches far beyond the oil sector. Why?
Actually, it’s not a puzzle — and this is, in fact, a movie currency-crisis aficionados like yours truly have seen many times before: Argentina 2002, Indonesia 1998, Mexico 1995, Chile 1982, the list goes on. The kind of crisis Russia now faces is what you get when bad things happen to an economy made vulnerable by large-scale borrowing from abroad — specifically, large-scale borrowing by the private sector, with the debts denominated in foreign currency, not the currency of the debtor country.
In that situation, an adverse shock like a fall in exports can start a vicious downward spiral. When the nation’s currency falls, the balance sheets of local businesses — which have assets in rubles (or pesos or rupiah) but debts in dollars or euros — implode. This, in turn, inflicts severe damage on the domestic economy, undermining confidence and depressing the currency even more. And Russia fits the standard playbook.
Except for one thing. Usually, the way a country ends up with a lot of foreign debt is by running trade deficits, using borrowed funds to pay for imports. But Russia hasn’t run trade deficits. On the contrary, it has consistently run large trade surpluses, thanks to high oil prices. So why did it borrow so much money, and where did the money go?
Well, you can answer the second question by walking around Mayfair in London, or (to a lesser extent) Manhattan’s Upper East Side, especially in the evening, and observing the long rows of luxury residences with no lights on — residences owned, as the line goes, by Chinese princelings, Middle Eastern sheikhs, and Russian oligarchs. Basically, Russia’s elite has been accumulating assets outside the country — luxury real estate is only the most visible example — and the flip side of that accumulation has been rising debt at home.