EU-DIGEST: Russia:The Ruble Crash And Putin's Choices

12/16/14

Russia:The Ruble Crash And Putin's Choices - by Armin Rosen

Russian Ruble Free fall

This week's plunge in the value of the ruble adds another layer of uncertainty to the ongoing faceoff between Russia and the West.

The currency crisis, precipitated by US and EU sanctions against Moscow and a global decline in oil prices, threatens to crater the country's lucrative state-owned enterprises and send the economy into a nosedive.

The question is how an ever-unpredictable Vladimir Putin will respond.

Putin's nationalistic and often-aggressive policies have appealed to Russians' post-Cold War sense of grievance and won him soaring approval ratings at a time when the Russian president is loathed in most western capitals.

But the ruble dive threatens to radically shift the conditions that have allowed Putin to maintain his internal popularity in spite of the western powers' opposition to him.

As New York University professor and Russia expert Mark Galeotti explained to Business Insider, Putin's rule is predicated on a "social contract" that most Russians have found acceptable: "You stay out of politics.

You show enthusiasm but don't think you actually get a meaningful say in government. In return for that your life will improve and continue to improve."

Under Putin, Russia achieved perhaps the highest standard of living in the country's history while the government was able to replenish its coffers after periods of actual bankruptcy under Boris Yeltsin in the 1990s. Weaknesses remained:

The new prosperity was largely distributed through Putin's hand-picked former KGB colleagues and much of the country's wealth depended upon robust oil prices and access to European markets. Record military spending also threatens to sap resources and hamstring any government response to a future economic crisis.

The recent decline in oil prices, along with the economic consequences of international sanctions, could bring Putin's arrangement crashing down around him. "This social contract is being torn up," says Galeotti. "But Putin could tear it up more quickly and more assiduously if he's still determined to maintain his aggressive geopolitical stance. It really is one of those guns or butter moments."