Wussonomics: Russian Petro-Tyrant in Hard Times

♠ Posted by Emmanuel in at 2/10/2009 10:16:00 AM
It wasn't too long ago that Russian President-cum-Premier Vladimir Putin bestrode the globe like a colossus-in-waiting. His country's future--and I do mean his country--looked assured given strong global growth and seemingly boundless demand for the country's energy exports. There he was going on a shirtless fishing expedition after meeting up with Prince Albert II of Monaco in August 2007. At the end of that year, he was named TIME's Person of the Year. Before handing power to his handpicked successor--ol' what's his name--Dmitri Medvedev, Putin was definitely a man in control of his country's destiny with much discretion over what went on in the rest of the world.

Then, of course, came the fall. The dramatic turnaround in oil prices as the world entered a period of significant slowdown has affected Russia quite badly. What had looked like a significant foreign exchange reserve stash of well over half a trillion dollars now looks quite puny. Like Venezuela's Hugo Chavez, Vladimir Putin appears to be little more than a petro-tyrant reliant on high oil prices to stay afloat. For all their bluster, they have ignored the very first thing they teach you in business school--portfolio diversification. With next to all of their export revenues coming from oil, you know how the story goes. At the rate Russia is now burning foreign exchange reserves--think disco inferno circa 2009--perhaps Putin had better find alternative employment as a Men's Health cover model. As you can see from the chart above, $200 billion spent in the last three months to prop up the ruble's value hasn't done much to shore it up. This activity is clearly unsustainable lest Russia go begging at the IMF like it did in 1998, which is precisely the sort of humiliation Putin wants to avoid at all costs.

From the Financial Times:
It is 10 years ago that Russia returned to economic growth after the collapse of the 1990s. It is also 10 years since Vladimir Putin, Russia’s premier, ascended to the pinnacle of power. His popularity has rested in large part on the good fortune of high oil prices. As Russia enters its first recession on his watch, his government cannot afford any serious mistakes in its most consequential economic decisions yet.

Exchange rate policy presents the most urgent challenge. As declining oil prices have dragged the rouble down, the central bank has tried to brake its fall. This effort has not come cheaply: about $200bn, a third of the central bank’s foreign exchange reserves, flowed out of its vaults in the past three months. The authorities found the price worth paying to prevent a repeat of 1998 when the rouble precipitously lost three-quarters of its value, the government defaulted on its debts and many Russians were ruined.

Still, the bleeding of reserves must stop, or it will haemorrhage until nothing is left. Much of the drained reserves benefited banks that borrowed roubles from the central bank itself in order to speculate against it. By committing to the current rouble floor, the central bank is setting itself up as a target for speculative attack. Hoping that oil prices will recover is no option; waiting will just make the losses larger and the eventual adjustment more painful. Russia should let the rouble float, stabilise its reserves and focus on fighting the recession and softening the impact on Russians of the rouble’s fall.