Russia is falling apart, Putin deflects blame

The Russian rouble crashed to unprecedented lows on Tuesday under the pressure of sanctions from the West.

THE Russian economy is in serious trouble as a result of a plummeting oil price and economic sanctions. Far from mission accomplished, it could actually be bad news for everyone.

Here's the gist of what's happening.

The value of the rouble is practically in free fall as the global oil price continues to crash. Oil has gone from a high of more than $100 a barrel in June to around $60 this week.

That has wreaked havoc on Russian government revenue, around half of which comes from the sale of oil and gas.

Russian President Vladimir Putin is under increasing pressure as the country's economic crisis deepens. Picture: Saurabh Das

At the same time, economic sanctions imposed by the West as a result of Russia's incursions into Ukraine and Crimea have prevented Russian companies refinancing their dollar and euro debts in Western capital markets.

Their foreign currency debts are quickly becoming unsustainable as the rouble falls. So they're selling off roubles, to buy dollars and euros, to pay off those debts. That's driving the currency down even further, as is the wave of ordinary Russians rushing to swap out their roubles for less volatile assets.

Pedestrians walk past a sign displaying the currency exchange rates on a street in Moscow, 12 December 2014. The Russian rouble is in near-free fall. Picture: Yuri Kochetkov Source: AP

Russia's Central Bank launched a desperate attempt on Monday to stop the sell-off, with an emergency interest rate hike from 10.5 per cent to 17 per cent — that's 650 basis points.

Higher interest rates in theory make the currency a more attractive investment, and therefore discourage selling.

It didn't work. The move failed to put the brakes on the slide, with the rouble hitting an unprecedented low of 80 to the US dollar — down a catastrophic 24 per cent — before making a modest improvement to trade at 72 to the dollar by late Tuesday afternoon.

"The situation is critical," deputy Central Bank chairman Sergei Shvetsov was quoted by Russian news agencies as saying. "We could not have imagined what is happening in our worst dreams."

PUTIN'S PROBLEM

Vladimir Putin, who has enjoyed huge levels of popular support through more than 15 years of oil-fuelled prosperity, is trying to deflect blame, accusing the West of inflicting economic pain on Russia in an attempt to force a regime change.

The real question is, how long will the Russian people believe him? As living standards fall through loss of savings, the flight of capital, rising unemployment and rising inflation, people could lose confidence in the government, leading to political instability.

Dr Leonid Petrov, an expert in strategic intelligence and visiting fellow at the ANU School of Asia and the Pacific, has warned that the Russian economic crisis may quickly develop into a global strategic crisis on par with, or worse than, the Cold War.

"Russia needs to maintain the slow-motion crisis in Eastern Ukraine, first to deflect attention from domestic economic issues and second to support Putin's approval rating," he said. "But pretty soon people are going to start asking questions."

Residents of Moscow have been buying up imported products in fear of price increases due to the depreciation of the rouble. Picture: Yuri Kochetkov Source: AP

If the instability continues, Moscow will pump more and more money into its military industrial complex — first, to shore up popular support by maintaining an artificially high level of employment through unproductive jobs; second, to prepare for further confrontation.

"The military build-up benefits the Putin regime both politically and economically," Dr Petrov said. "Already we have gone back to before where we were in 1991."

It's a feedback loop with potentially deadly implications: if the instability continues, Russia's oil-rich regions may decide they're better off going it alone. And as the domestic economic situation worsens, Russia may ratchet up external conflicts to distract attention.

US President Barack Obama committed to further sanctions on Tuesday, sparking fears of a retaliation. Ian Bremmer, president of the Eurasia Group, a political risk and consulting firm, told AP one potential global risk comes from Russia seeking to retaliate against the sanctions by stepping-up cyberattacks against US targets and asserting itself more aggressively in Ukraine and other nearby countries.

Writing in the Financial Times, Sergei Guriev, a former rector of the New Economic School in Moscow and professor of economics at Sciences Po in Paris, says it is now clear that the government and Central Bank have neither the strategy or a clear understanding of how to deal with the situation.

"The markets see a gathering storm but no captain," he writes. "In recent weeks, Russia's worst fears have become reality: the oil price has fallen; Asian markets have declined to bail out the nation's banks and companies; hopes for lifting sanctions have become even more illusory."

People walk past a shop window of the Central Department Store, decorated for Christmas, in Moscow, 16 December 2014. Picture: Pavel Golovkin Source: AP

RUSSIANS REACT

The rouble's collapse spurred Russians to rush out and buy imported cars, refrigerators, washing machines, TV sets and other major appliances in a bid to spend their roubles before stores put on new higher price tags.

"Now is the exact time to make all the purchases you've been putting off, because tomorrow there may already be another price," said Alexei Malakhov, a 27-year old IT worker who bought a Google phone for 18,000 roubles ($US250) at a Moscow electronics store.

Malakhov said he bought a washing machine two weeks ago, and its price has swelled by 25 per cent since then.

"We haven't bought everything we need, but there's no money left," he lamented.

Dmitry Rayenko, who works in sports marketing, bought a stove and a coffee maker.

"You have to be philosophical about it — buy what you need now," the 45-year-old said. "We're in an economic war, so it's unlikely it will get better in the near term."

Meanwhile on Tuesday, Apple announced it was stopping online sales of iPhones, iPads and other products, saying the rouble's instability had made it too difficult to set prices in Russia.

GALLOWS HUMOUR

The Russian people have greeted the situation with jokes.

Dark times call for dark humour, especially in Russia, where wags are saying the rouble has now fallen below the psychologically important threshold of "I no longer give a damn".

New jokes popped up on social media, as Russians again fell back on gallows-humour to ride out yet another economic storm.

An electronic information panel displays the latest currency exchange rates outside a shopping centre in Moscow, 16 December 2014. Picture: Maxim Shipenkov Source: AP

"Two roubles ago I brewed my tea and it is still warm," quipped one Russian on Twitter.

"While I typed this tweet, the dollar went up by 3 roubles," quipped another.

Predictably, many in war-torn Ukraine, where the hryvnia has lost half its value this year, could not but gloat.

"A man runs into a currency exchange booth in Moscow," goes a joke posted by Kiev-based Aleksey Solntsev on Twitter. "Do you have any dollars or euros? No! So what do you have? Hryvnia. That will do!"

Some poked fun at Russia's tightly-controlled political system, with many officials expected to pin the blame for the economic turmoil on external enemies.

"The LED display boards of Moscow exchange booths are erroneously showing the euro rate according to Fahrenheit and not Celsius," joked MID Roissi, a satirical Twitter account that parodies the Russian foreign ministry feed. "The Investigative Committee is now probing the malfunction."

"When the dollar is worth 666 roubles, it will be possible to chalk it all up to Satan's schemes," went another tweet.

Some of the humour cut rather close to the bone.

"When oil and gas run out soon, roubles can be used to heat people's homes."

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