Free fall

What seemed a happy development just a few days ago now morphs into a terrifying specter facing the global economy.

When oil prices began falling, the development was expected to put pressure on the Russian economy. Russia has been constrained by sanctions imposed by the West for its actions in Ukraine.

The trade sanctions, which the US threatens to escalate, pushed Russia’s economy into a recession. With Russia’s heavy reliance on oil and gas exports, the dramatic drop in the prices of both commodities threatens to push Russia deeper into depression.

The currency market has seen enough. Traders began speculating against the Russian ruble. In just two days, the value of the currency was halved even as Moscow jacked up its interest rates to 17% to shore up its money. As this piece is being written, financial analysts are describing the ruble as being in a “free fall.”

The situation has become so uncertain that companies like Apple, which only sells its products online in Russia, suspended sales. All other conglomerates doing business in the Russian market are frantically re-pricing. European stock markets began pricing down stocks of companies selling to the Russian market, causing stock exchanges to recede across the board.

The only means Russia has to prop up its currency is oil. The price of oil products, however, nearly halved the past few weeks. That leaves the Russian economy without a leg to stand on.

 With no other source of revenue to break the ruble’s fall, analysts are now expecting Russia to sell large quantities of gold bullion from its stock in a mad effort to stabilize the currency. In response, across the global markets, the price of gold decline sharply. If Russia sells it gold, she can do it only cheaply. The more it sells, the cheaper gold becomes.

The only thing Russia has left to sell is its land, pretty much as it was when the Tsar sold off Alaska to the US for a mere $20 million to raise money for his army. In the annals of royal shortsightedness, the Alaskan sale will have to take the cake. In oil deposits alone, the value of the territory is nearly immeasurable.

Moscow selling off its land would be such an irony. The reason Putin’s government has been subjected to sanction in the first place was its effort to grab land from its neighbors, beginning with Crimea.

It is unlikely, of course, that Moscow would sell off land. The depth of Russian nationalism is unfathomable. The strong domestic support for Vladimir Putin draws from his strong nationalist positioning. He has wisely tapped the wells of Russian nationalism to build his eccentric regime. Present economic difficulties will dry those wells.

Moscow, therefore, has no other recourse but to sell as much oil and gas as it can — at any price. Doing so, however, will serve to further depress commodity prices across the globe.

The time lag between the drastic fall of the ruble and the drastic fall in the quality of life of ordinary Russians will be short. This, in turn, will have tremendous repercussions on political stability. 

From a menacing military power, Russia has now become a different sort of threat to the rest of the world. It threatens to become a large black hole capable of sucking in the rest of the global economy; or, perhaps, a large toilet bowl into which so much created wealth might be flushed.

Whichever analogy or metaphor is appropriate, it is certain Russia’s present predicament has become the biggest destabilizing factor in the global market.

Putin might have fooled all the Russians all of the time. There is no way, however, that he can dupe market forces. One of the most insightful analysis I came across the past few days concludes: the fate of the ruble is the global market’s appraisal of the quality of regime that now rules Russia.

The regime Putin personifies is an archaic one. It is an echo of Tsarist rule: autocratic at the top, centralization at all levels and political conformism all throughout. This explains the abundance of inefficiency and repression.

It is the sort of regime Russia nursed through the rule of the Tsars and through the traumatic violence of Stalinism.  It is a regime that still tries to recreate the rest of society after its own image, thereby subordinating all development and constraining all innovation.

This sort of regime, under Putin, borders on political narcissism. To boost his own self-image, Putin bullied smaller nations on it borders. First Georgia, and then Ukraine.

Simply by being boorish, he hoped to bend the rest of the world to his unbounded will. He saw western leaders as weak and indecisive. On that impression, he thought he could intimidate them, force them to accept his annexations without confrontation.

He was wrong. It was not Obama or Cameron or that flimsy French leader Hollande he was facing. It was, in the end, the global market, with its mass of independent decision-makers, he must deal with. He could not understand that.

Now the market, with its many strings of unintended consequences, that strikes back at Putin: devaluing his currency, deflating the price of oil and throwing the curse of recession upon his domain.

To fight back, he cannot use his nuclear arsenal. He must rely on the weapons of economic management: interest rates, revenues from trade and fiscal stimulus measures.

In the hands of an autocrat like Putin, those new weapons are weak. Russia in crisis must not just reinvent its economy. It must reinvent its state.