Does economic turbulence hurt Putin’s power? – Part 2

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    And for more, I'm joined by Angela Stent of Georgetown University. She served in the State Department and at the National Intelligence Council. And Eswar Prasad is an international economist at Cornell University and the Brookings Institution.

    Eswar Prasad, this extraordinary move, middle of the night, what were they trying — what was the Central Bank trying to do?

  • ESWAR PRASAD, Cornell University:

    I think they were trying to signal, but I think, in fact, it's come across as some degree of desperation.

    The objective of raising interest rates is to try to keep Russian money in and try to bring investors from abroad attracted by higher interest rates. The problem is that the economy is tanking, and with oil at less than $60 to the barrel, it is going to be very difficult to make the economic numbers add up.


    And the currency is going down because all that money is flowing out?


    That's exactly right, because Russians are taking money out and foreign investors who put money into China are also taking money out.

    And the objective of raising interest rates is to try and stem the panic. But with about a quarter of the economy's GDP reliant on oil and natural gas and about half of budget revenue is also accounted for by the energy sector, again, the numbers just don't add up for Russia.


    Well, Angela Stent, when you look at those causes, oil prices and the sanctions, how do you weigh each one and how vulnerable is Russia turning out to be?

  • ANGELA STENT, Georgetown University:

    Well, I think Russia is quite vulnerable.

    So, the Russian economy wasn't doing well even before the Ukraine crisis. The government hadn't undertaken the kind of structural reforms, the modernization program that they should have been doing for years. Then, of course, you had the sanctions, the first round of sanctions, the second round of sanctions, and that's really hit the financial sector and it's hit the energy sector, too.

    Then you, of course, had the totally unexpected tanking in oil prices, which, you know, when the West imposed the sanction, they really — nobody anticipated that, and so you really have this perfect storm. Plus, I would say — and I'm not an economist — but markets obviously react to psychological factors, too.

    And the fact that President Putin and the Kremlin have been so unwilling to make a compromise, to admit what's happening in Ukraine, and are making their neighbors very nervous, and you have these incidents now where you again had a Swedish civilian airliner that nearly crashed into a Russian military plane that hadn't — that had turned off its transponder, all of these kind of aggressive acts, really, I think that's fueled some of the lack of confidence in the Russian economy and in the ruble.


    Well, Eswar Prasad, you are an economist, so how much does psychology play into something like this? And how much is a currency crisis, in fact, an economic crisis?


    What we have seen in the last day or two is probably panic-driven, but it's driven largely by fundamentals at one level, because the Russian economy has not been doing too well. It's barely growing.

    The Russian Central Bank itself has indicated that if oil remains at under $60 to the barrel, it expects the economy to shrink by about 5 percent next year. There is no room to maneuver in terms of the government policy. So, ultimately, the currency crisis is a very important indicator of lack of confidence in the Russian economy, because the only way to get out of this mess at some level is to print more money, which means more inflation. The value of the ruble will be driven down even further, so there's a lot of pain ahead for Russia.


    Well, so, Angela Stent, when you look at the implications, the impact so far and going forward, start with the impact on Vladimir Putin. He's been very aggressive in recent years. He's been asserting Russia's power. Does this somehow weaken his position?


    In the longer run, it might, but right at the moment, I mean, he's still — the state media is still blaming the United States and the West for Russia's economic troubles.

    The line that people are getting from their media, from TV is that the U.S. is out to destroy Russia, to break it up. President Putin is about to give another mammoth press conference in two days' time. We may hear something different from him.

    But so far, he sounds quite defiant. Now, having said that, his foreign minister, for instance, Mr. Lavrov, a couple of days ago made more conciliatory remarks about the possibility of a settlement in Ukraine, about the outlines for this settlement. The cease-fire is doing a little better in southeastern Ukraine. So there are small glimmers that something might work out there.

    And, obviously, if there were to be an agreement and a cease-fire that holds, then some of these sanctions might be removed. But we have not heard those words from the president himself, and I have to say, his popularity is still pretty high. It may not be 85 percent. It may be slightly under 80 percent, but so far he has not run into popular response to this, popular opposition to this.

    But I think you can see in what's happening in the major cities like Moscow, with the panic buying, with people sending all their money abroad if they can, that, in those crucial areas, in those cities, people are scratching their heads.

    And the former finance minister, Alexei Kudrin, who is very well-respected in the West, he himself has said today they really have to come to grips with their own domestic economic problems if they're to come out of this.


    Is there, Eswar Prasad, a kind of warning here for other countries? I'm thinking specifically of the oil price factor, that other countries that are big importer — exporters of oil, that this might trigger implications for other countries?


    There are many countries that are vulnerable, many of them Middle Eastern economies, Venezuela in particular in Latin America, Nigeria.

    All of these are economies that are very dependent on export revenues from oil in particular, and they're all counting at oil prices remaining well above $60 to the barrel. Some of these countries have also borrowed from abroad in dollars. And with their currencies plunging, as oil prices plunge, the value of those debt on their domestic currencies rises.

    So, there is trouble ahead. There are some economies, like the U.S. and India, that might do better, but there are many emerging market economies that are going to hurt.


    Just very briefly, so the implications of Russia's economic troubles are more for the rest of the world in terms of oil prices, rather than its economy going weak?


    That's exactly right.

    Russia's connection to the rest of the world is somewhat limited. What's important is that it signals that some things can go very badly wrong if oil prices stay so low. And Russia is just an extreme example of that.


    All right.

    Eswar Prasad, Angela Stent, thank you both very much.


    Thank you.

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