The Russian economy looks to be in serious trouble and there can be no doubting the size of the smiles in Washington. On Monday, the Russian Central Bank raised interest rates by 17 percent as it sought to stop the rouble's collapse. The move, coming on top of a completely ineffectual but more conventional one percent hike last week, is designed to restore some sort of confidence to the markets. This in turn will supposedly stop the flight of foreign currency overseas, as institutions, as well as the super-rich, seek to stash their wealth away from increasingly desperate Russian financial authorities. The satisfaction among the Americans and Europeans is that Russia's collapsing finances are not being helped by the sanctions imposed since the seizure of Crimea and the continuing interference in Ukraine. For want of a robust military option, the West turned off the money taps. Russian banks and corporations can no longer borrow, can no longer roll over outstanding debts or raise foreign capital. The window for technology and management exchange has been closed. Many projects that are important for the Russian economy have collapsed, not least in key Arctic oil and gas exploration. Russia is already in recession this year with Moscow analysts predicting that the economy will contract by at least five percent next year. That is far more than a recession. That is a slump. But if the West chooses to maintain that it is punitive financial sanctions that have brought Moscow to this crisis point, the West is wrong. For sure the sanctions have not helped but they are not at the core of President Vladimir Putin's problems. Russia is in trouble because it is a largely undiversified economy, heavily dependent on the price of oil. The crucial link is clear. Since June, the oil price has halved and so too has the value of the rouble against the US dollar. It can be argued that the Russian currency would be collapsing, even if Western economic sanctions were not in place. The rouble could very well be falling now despite the intervention of friendly central banks across the globe. The problem is not flighty markets. It is structural. The immediate cause of the currency's weakness is of course the plunging oil income. But the deeper underlying weakness is the failure to build a healthy corporate sector working within a strong civil legal code, that is not subject to the whims of politicians and state-owned behemoths such as Gazprom. Putin's enduring popularity with ordinary Russians rests on his strong-man persona. Having long promised to reverse the humiliations of the Yeltsin years, Putin finally delivered by producing a nationalistic victory with the seizure of Crimea and his open military and political support for ethnic Russians in eastern Ukraine. Will the Kremlin now be undermined by profound economic troubles as Washington and Brussels clearly hope? Perhaps not. There is an irony here. The economic incompetence of the Putin years with an overreliance on the oil price is the real cause of the current financial woes. But Putin can sidestep responsibility by very plausibly blaming rising financial hardship among citizens on the evil sanctions of Western powers. Indeed, his calculation may be that his political position will actually be strengthened. He has an economic alibi if he can argue that outside forces are responsible for inflation already passing 10 percent and rising.
