Unraveling

Vladimir Putin is much like another national leader we might know. Under duress, he turns even more pig-headed.

Or rather, he rolls up like an armadillo. He pulls in like a turtle into its shell, hoping the threat will soon pass. Then he begins to delude himself.

Last Thursday, Putin indulged in what has become an annual event: a marathon press conference where the Russian president does most of the talking and even most of the asking. He took this as an opportunity to reassure his people that everything was fine even as the ruble lost nearly half its value in the few days before.

For the most part, Putin retreated to the familiar refrain: the economic difficulty Russia now faces was inflicted by the West. Like that other national leader we might know, he took no responsibility for the mess. He offered no comprehensive economic revolution that might allow his people more opportunities and liberate Russia from being a basic raw materials exporter dependent on global pricing for its commodities.

He insisted on portraying the predicament of the Russian economy as nothing more than a cyclical process. In three years or less, he boldly predicted without basis in economic fact, the Russian economy shall have fully recovered from the present critical phase.

That three-year estimate is likely based on the thinking of international energy analysts that the downturn in oil pricing will likely reverse in three years. What that does suggest is that Putin sees the future of the Russian economy as nothing more than a replica of the present: an economy dependent on raw material exports without an innovative core capable of propelling itself.

The three-year estimate for an upturn in oil pricing is, in turn, based on the projection of an across-the-board global economic recovery. That is a rather fluffy assumption.

The main economies considered the potential engines of global growth are not retooling fast enough. China’s growth has little headroom left, given the limits on what it might export and the slow pace of growth in domestic consumption. Japan, although the yen has depreciated significantly, has difficulty fighting off recession. Overbuilt and under-populated, Western Europe appears trapped in low growth.

In a word, Russia’s capacity to climb out of the economic hole it now finds itself in is still dependent on how the other economies perform. It is an economy without its own dynamism.

About 60% of consumer goods Russians buy are imported. It is an economy unable to produce for its own people, reliant on revenues from oil and gas.

For all the contrived machismo Putin exudes, he is unable to imagine a more pro-active role for the government he leads. He will not admit it, but the man is at a complete loss about what to do with his country’s predicament.

His country’s economy and the regime he leads are, in the last analysis, equally passive. 

Yesterday, Putin was scheduled to convene the country’s main businessmen —  the oligarchs who accumulated fabulous wealth during Putin’s 15 years in power. They are all Putin’s friends, helping him build up his estimated $40 billion personal worth. Those who are not Putin’s friends were either forced to exile or landed in jail for one reason or another.

During this meeting, Putin is expected to strong-arm the oligarchs into bringing their salted money back to Mother Russia. That money is substantial. Recall that when the Cypriot banking system collapsed a few years ago, billions of dollars in money placements by Russian oligarchs was trapped.

That effort will likely be futile. If the oligarchs have converted their wealth into stable currencies during placid times, why would they now want to convert to depreciated rubles? In the last week alone, after the ruble collapsed dramatically, the small group of Putin oligarchs lost an estimated $60 billion in their personal wealth. They will not be inclined to lose more.

 If Putin comes down hard on his oligarchic friends, they might just decide to pack up and go to enjoy their accumulated wealth in better climes. The abandonment of their enterprises will bring Russia even more devastation.

When the ruble suddenly fell to half its former worth, the knee-jerk response was to nearly double the interest rate. The interest rate response monetarily steadied the ruble, but a high-interest rate regime will stifle the real economy.

Russian monetary authorities are in a real quandary. If they loosen up on interest rates, the ruble will continue its fall. If they tighten rates, the economy will die.

Meanwhile, trust in the ruble erodes. Ordinary Russian citizens are reported to be hurrying to emigrate or frantically trying to exchange their money for something else.

Putin’s priority, understandably, is to rebuild trust in his rule. The real task, however, is to rebuild trust in the ruble.

The two tasks are probably irreconcilable. Distrust in the economic management of Russia stems from the perception the whole country has fallen under the grip of a kleptocracy.

Putin personifies a regime that enriched the few and impoverished the many, all the while stirring the nationalist pot as a cynical means to win public support. Until the string of events that led to the present currency crisis, Putin did enjoy tremendous popularity. He skillfully duped his own people into believing nationalism was important and he was nationalism’s voice.

If the economy unravels at the pace it threatens to, can Putin remain in command? Will chaos ensue? Will the fissures in Russian society, masked by nationalist demagoguery, break out?

These are the key questions.