Russian Rublette

Is the demise of the ruble, together with falling crude oil prices, comeuppance for President Vladimir Putin’s expansionist dreams? That’s certainly the storyline of those holding faith in economic sanctions. In their eyes, he foolishly land grabbed eastern Ukraine and Crimea, and in exchange got back a cratered Russian economy, with a debased currency and little access to Western financial markets. Heck of a job, Vlad.

The victors, presumably, are the sanction wizards of Washington and London who stared down the barrels of Putin’s tanks and fifth columnists. Under the theory that the Russian economy is a kleptocracy that sustains Putin in power, the sanctions were targeted at presidential cronies and their “sectoral” holdings, such as those in the oil business (the rallying cry should have been “Don't fire until you see the whites of their proxy statements”).

Amazingly, even the dysfunctional US Congress found time in its lame-duck session to vote additional sanctions against the Russian oil sector, although hidden in the fine print of the midnight legislation were goodie bags for Washington lobbyists, who are in line for a $60 million windfall to, as the New York Times reported, “promote democracy, independent news media, uncensored Internet access and anticorruption efforts in Russia.”

For the moment, despite the free fall of his currency, President Putin remains defiant. Tired of getting finger-waggled for the benefit of western TV audiences, he ghosted from the G-20 summit in Brisbane. Heading early to the airport, Putin must have made a mental note to repay his Western confessors, someday, with the same currency that they fetched from Russian coffers.

The irony of the allied attacks on the ruble, Russia, and President Putin is that the biggest losers may end up being the high-minded Western countries that would consign Russia and her Kremlin leadership to the dustbin of history.

The Russian ruble—or should I say the new ruble—was reissued after the 1998 credit collapse in Russia. The previous currency was holdover Soviet bitcoin, issued on the full faith and credit of defunct tractor communes, and convertible, at best, into assets that the oligarchs had already claimed for themselves.

In free fall as I write, the ruble is best understood as an oil junk bond, for which par is about $117 a barrel (the break-even point for Russia’s budget). Below that price, the ruble falls; above it, the currency strengthens. The reason it remains tied to oil is because the Russian economy has yet to stimulate a large enough middle class to free its markets from petroleum dependence.

Sadly, Russia’s economy is like that of a Gulf state: it has oil revenues and anointed princes who share in the state’s wealth. Everyone else is a variation on guest workers from the Philippines.

Despite the structural imbalance of Russia’s economy, the nation’s fundamentals are stronger than you might think. Its foreign currency reserves are $418 billion, placing it sixth in world rankings, way ahead of the US with $132 billion and even ahead of South Korea, which has $364 billion.

Nor has Russia engaged in the same reckless deficit spending that defined the United States during the feel-good years. Despite the chimes of death, the projected budget deficit for Russia in 2014 is still only about 389 billion rubles (roughly $7 billion, depending on the ruble-dollar exchange rate), while the deficit for the US could reach $500 billion.

Gross government debt, as a percentage of gross domestic product (GDP), in Russia remains a relatively healthy 10 percent, unlike that of the United States, which has maxed out its borrowings at more than 100 percent of GDP.

Russia’s external or foreign debt is a manageable $715 billion compared to that of the U.S., which is on the hook for $17 trillion. It might not have a CVS drugstore on every corner or iPhones in every hand, but since emerging from communism in the early 1990s it has, reasonably, lived within its means.

Even in the most solvent nations, circulating national currencies are best understood as company scrip; bonds drawn on faceless central banks that allow citizens to transact their daily business. As storehouses of wealth, national currencies make about as much sense as holding baseball cards or those Raleigh coupons that used to be included with packs of cigarettes.

Not for a long time has any world currency been convertible to gold, silver, or any other commodity. At best they are unsecured loans undertaken by citizens in favor of their central banks. All that backs them is political confidence, something ebbing right now in Russia.

Fortunately for the Russians, their economy is better able to withstand economic isolation than many others. The country can be self-sufficient in food and energy, and one of the few advantages learned in the hothouse years of Soviet communism is how to live apart from Western markets and malls.

One reason the West decided to fight Russian expansion with sanctions as opposed to bayonets is that the encroachments into Ukraine came at a time of oversupply in Western energy markets.

By turning down the taps of Russian oil companies — or by at least limiting their access to Western financial markets — the Obama administration was throwing a subsidy bone to domestic energy producers, which were already choking on glutted markets and depressed stocks.

Nor do the Western allies fear much from Russian retaliation. Moscow laughably imposed travel bans on Obama administration and congressional figures, to keep them from vacationing in Omsk, but it has left open the pipelines that supply Western Europe with natural gas.

In the same vein, while it may have been aggressive in protecting the rights of Russians living in Ukraine, it refrained from imposing its own sanctions when the US launched similar wars of national liberation in Afghanistan, Iraq, Libya, Serbia, and Somalia.

The unspoken risk in the great game of economic sanctions and currency strangulation is that the United States has a lot more to lose should, say, China join Russia someday in playing pin-the-tail-on-the-dollar, or if Russia decides to lash back at the Americans by, for example, stirring the cauldron in the Middle East.

Already Putin’s push-back in favor of Syria’s president Assad turned a civil uprising into a regional war. Russia might also decide to damn the $60 million in press-release torpedoes and take more, if not all, of Ukraine.

Watching the takedown of another country’s currency — I am assuming that the West is gloating over Putin’s misfortunes — has the air of harmless fun. The assumption is that only a few banks, rogue states, or crony capitalists will suffer.

Worth further consideration, however, is that currency collapses and hyperinflation have often ushered in civil war and continental instability. Rarely have the effects been contained to the country of origin and its discontents.

The dissolution of its legal tender, Assignats, in part turned the French Revolution away from the rights of man and into a counting house for disembodied heads. Weimar’s wheelbarrow currencies had disastrous effects beyond Germany’s market squares.

The last Russian tsar abdicated in 1917, at a moment when his currency had collapsed, and the West lived with the consequences of what followed for almost a century.

Matthew Stevenson, a contributing editor of Harper’s Magazine, is the author, most recently, of Remembering the Twentieth Century Limited, a collection of historical travel essays, and Whistle-Stopping America. His next book, Reading the Rails, will be published in 2015. He lives in Switzerland.

Flickr photo by James Malone. The "old" ruble: Russian note for 100 Rubles; 1993.