Well, it looks like Russia is in for a long, cold, and economically devastating winter.
With its currency stuck in a disastrous freefall thanks to Western sanctions and plunging oil prices, the country’s central bank announced around 1 a.m. last night that it would jack up its key interest rate from 10.5 percent to 17 percent. This was a desperate decision. The country was already hurtling toward a recession, and the rate hike—the biggest since 1998, when a financial crisis eventually forced it into default on its debt—was sure to make the pain far worse. But the hope was that, with higher interest rates, investors would finally stop pulling their money out of the country—that, as the New York Times's Neil Irwin put it, keeping money at a Russian bank would simply be “too good an offer to refuse.”
It wasn’t. Today, the currency plunge has continued, with the ruble at one point falling 35 percent, at 80 to a dollar. It has rallied a bit since then. A dollar is now worth about 70 rubles, which only looks good compared to the absolute crisis earlier in the day.
A crashing currency is a problem for a number of reasons. For one, it makes imports more expensive and stokes inflation. This is especially a problem for everyday Russians, since their country depends on imports for an outsized percentage of its food. At the same time, it's becoming harder for Russian businesses and financial institutions that borrowed in dollars to pay off their debts, which are getting ever more expensive, and dangerous, as the ruble slides.
But at this point, it’s not clear that Russia has any good options left at its disposal to stop the ruble from tumbling. It could start unloading its own foreign currency reserves to stanch the bleeding, but as Jennifer Rankin of the Guardian argues, those could drain away fast. And such a move wouldn't fix any of the underlying problems that have pushed Russia to the breaking point. The ruble is collapsing, in part, because oil prices are in the pits. Cheap crude is bad for Russia’s economy. It’s terrible for its government, which gets half its tax revenue from oil and gas. And it's terrible for the ruble, specifically, because as the value of a country’s exports plunge, so too does the value of its money. At the same time, Western sanctions have largely cut off Russia’s banks and oil companies from the credit markets by preventing financial institutions from lending to them for more than one month at a time. In other words, Russia’s economy is basically radioactive. Increasing interest rates further won’t cure it and bring the money back.
What will? Perhaps nothing. But some, like Bloomberg View’s Leonid Bershidsky, say that it may be time for capital controls, which are basically rules meant to at least keep money from fleeing the country. There’s some precedent for this; Malaysia used them to save its economy from a meltdown during the emerging markets currency crisis of the late 1990s. But currency controls are also tricky, because the second anybody starts seriously talking about them, there’s a risk that investors will start trying to get their money out the door before it slams shut. Plus, the sorts of billionaire oligarchs who dominate Russia don’t like being told where they can and can’t send their money.
Also, they just might not work. “The Russians are more skillful at escaping capital controls than anybody else in the world,” Anders Aslund, a senior fellow at the Peterson Institute for International Economics, told me. I asked Aslund what Russia could do at this point to save itself. “The only thing Russia can do is to have the sanctions ended,” which would restore some normalcy to the financial system, he said. “I don’t see any other options.”
Of course, that would require giving in to the West’s demands regarding Ukraine, which seems unlikely, to say the least.