Making Putin Blink

The West’s financial weapons against Russia were meant to hit President Vladimir Putin’s foundation of power — the men and companies close to him — with surgical precision. Instead, Western sanctions, falling oil prices, and Moscow’s clumsy attempts to stem the damage have helped push the Russian economy closer to a meltdown.

With the stakes rising, the United States is doubling down on hurting Moscow. Despite earlier administration misgivings, White House spokesman Josh Earnest said on Tuesday that President Barack Obama will sign a bill Congress passed Saturday that authorizes additional sanctions on Russian energy and defense firms. Meanwhile, Secretary of State John Kerry reiterated his calls for Russia to reverse course on its occupation of parts of Ukraine.

The slow-motion agony of the Russian economy went into overdrive this week with a currency collapse sparked by Moscow’s own ham-fisted efforts at damage control. The ruble, which has been sinking all year, shed 10 percent on Monday, driving Russians and anyone stuck with rubles to scrounge for dollars.

Early Tuesday, the Central Bank of Russia hiked interest rates from 10.5 percent to a whopping 17 percent in a futile bid to make rubles more appealing. It didn’t work; the ruble on Tuesday nose-dived another 10 percent. Despite spending $80 billion to prop up the currency, the central bank has seen the ruble fall 50 percent against the dollar this year, making it the world’s worst-performing major currency. The ruble is so unstable that even big firms such as Apple had to suspend online sales in Russia because of the difficulty of posting current prices.

“The most incredible currency collapse I think I have ever seen in the 17 years in the market, and 26 years covering Russia,” said Tim Ash, head of emerging-markets research at Standard Bank.

To be sure, Western sanctions alone aren’t imploding Russia’s economy. Scads of pre-existing conditions, from corruption and cronyism to overreliance on the oil and gas sectors, and the 50 percent plunge in crude oil prices since this summer, have poleaxed an economy reliant on sales of black gold for revenue.

But like the high-pressure chemical cocktail that U.S. oil companies use to split open shale rock, which has fueled the oil boom that has crippled Russia’s earnings, Western sanctions have blasted open the existing fault lines in corporate Russia, leading to a series of nasty knock-on effects with potentially catastrophic consequences.

In particular, sanctions targeting state-owned oil giant Rosneft, one of the largest oil companies in the world and also one of the most indebted, are at the heart of the current crisis. Rosneft’s boss, Igor Sechin, is a longtime Putin ally. He and the firm are sanctioned and Rosneft is locked out of international capital markets.

Facing huge debts that have to be paid back later this month in dollars, Rosneft has been begging for a bailout from Russia’s roughly $80 billion rainy-day fund. Instead, the central bank arranged a backdoor, sweetheart deal allowing the company to borrow money from local banks at a better rate than the government itself can borrow. The move seems to have spooked investors, who are now worried that Putin’s cronyism may extend to essentially printing money to back state-owned companies run by his wealthy friends.

The implications are troubling both now and for later. The government could be on the hook for billions of dollars in corporate debt due next year. And if executives use their bailout funds to buy dollars, they will further drive down the ruble’s value. Rosneft, which has until Dec. 21 to repay $7 billion in loans, insisted it would not use its windfall to buy dollars, but convinced few. All in all, Russia’s actions amount to a self-inflicted wound.

“This will impart huge short-term damage to Russia. There is now a huge credibility gap for Russian policymakers in the eyes of the market,” Ash said. He predicted that ratings firms would soon downgrade Russian bonds to “junk” status.

Russia’s own economic miseries put the next round of potential U.S.-led sanctions in a different light. By signing the sanctions bill on his desk, Obama can further signal his intention to ratchet up diplomatic pressure on Russia, said Elizabeth Rosenberg, a former Treasury official now at the Center for a New American Security.

“But from a technical, economic perspective, what Russia has already done to itself is more significant than what the new legislation would do,” she said.

The question now for Washington and for European policymakers is how far to keep pushing Russia to reverse course on Ukraine. Kerry, speaking at a press conference in London on Tuesday, said that the United States isn’t targeting the Russian people with the sanctions but is trying to convince Putin to give back the Crimean peninsula to Ukraine and stop Russian incursions into eastern Ukraine.

“It goes without saying that the purpose of the European-U.S.-et al effort with respect to sanctions was to make it clear to Russia, to President Putin, that there are costs attached to the unilateral annexation of Crimea and the continued support for separatists within Ukraine and the violation of Ukraine’s territorial sovereignty and integrity,” Kerry said.

“Now, these sanctions could have been lifted months ago. These sanctions could be lifted in a matter of weeks or days, depending on the choices that President Putin takes,” he added.

But Russia’s economic chaos could give pause to European leaders more dependent on bilateral trade with Russia who have been worried all along about the economic fallout from a tottering Moscow.

Mujtaba Rahman, head analyst for Europe at risk consultancy Eurasia Group, said European leaders won’t roll back sanctions without a concession from Putin. However, the economic turmoil makes foot-dragging easier for those countries that were reluctant to escalate sanctions.

“On the Europe side this resolves a lot of internal political pressure to do more,” Rahman said.

IVAN SEKRETAREV/AFP/Getty Images

This article has been updated.