The Washington PostDemocracy Dies in Darkness

Checkmate, Putin. Russia’s economy is stuck in a catch-22.

I might be playing chess while you play checkers, but I just got checkmated. (AP Photo/RIA Novosti, Alexei Nikolsky, Presidential Press Service)

Well, that escalated quickly.

It didn't take long for Russia to go from having a reasonable facsimile of an economy to having none at all. Not when oil prices have fallen 50 percent the past few months. That's because Russia never so much had an economy as an oil-exporting business that subsidized everything else. So now that Russian companies don't have petrodollars to turn into rubles, there's less demand for rubles overall — and its price is falling. A lot.

The problem is Russia's already-weak economy needs lower interest rates to push up growth, but Russia's companies need higher interest rates to push up the ruble. Those big corporations, you see, borrowed a lot of money in dollars, so the plummeting ruble makes their debts harder to pay off. That's why Russia's central bank jacked up interest rates from 10.5 to 17 percent at an emergency 1 a.m. meeting Monday night. Higher interest rates should, in theory, make Russian households and businesses more likely to hold their money in rubles that will pay them a lot than in, say, dollars that won't.

That failed. After a brief rally, the ruble resumed its free falling ways on Tuesday, reaching a low of 80 rubles per dollars, before finishing at around 68. In all, the ruble was down around 4 percent on the day despite the financial shock-and-awe from the big rate hike. The real story here is oil: it fell, so the ruble did too.

The even worse news, though, is that Russia has gone from not having an economy and 10.5 percent interest rates to not having an economy and 17 percent interest rates. That should be enough to turn its recession into a full-on depression — and make all of this self-defeating.

Think about it this way: Russia's central banks already says its economy will shrink 4.5 to 4.7 percent next year — about as much as the U.S. did in 2008 — if oil stays at $60-a-barrel. But now that interest rates are sky-high, nobody's going to want to borrow, either. The economy, in other words, is going to crater as households hunker down and just try to survive the double-digit inflation that the crashing ruble will bring.

That brings us to the economic catch-22. Remember, the point of raising rates was to prop up the ruble so Russian companies wouldn't default on their dollar debts. But sacrificing the Russian economy to try to save the Russian currency means that those companies will lose their customers, and default anyways. This cycle of doom means even fewer dollars will come into Russia, and there'll be even less demand for rubles — and its price will start falling again. So it doesn't matter whether Russia raises rates to defend the ruble or not. It will keep declining, and the economy will keep collapsing.

This is typically where someone says the word "checkmate."

What, as a certain Russian leader said, is to be done? Well, if Russia were any other emerging market country, it'd be begging banks for an emergency loan to inject dollars into its economy, and, hopefully, restore confidence. Failing that, it'd go the IMF for a bailout. Russia, though, isn't any other emerging market country. It's an international pariah. Western sanctions over its incursion into Ukraine mean that Russia can't get money from overseas banks. And even if it's not persona non grata with the IMF, Vladimir Putin probably isn't willing to put up with whatever conditions — like not invading his neighbors — they would put on any aid.

There's one way, and only one way, that this ends: with capital controls. Or, in plain English, by making it illegal for people or companies to turn their rubles into foreign currency. That would get rid of the selling pressure, and let the ruble settle at a new, lower equilibrium. Putin, though, is loath to use capital controls, because his political base—the oligarchs—wants to move their money abroad, whether that's to their London or New York hideouts.

But Putin might not have a choice before long. Russia, you see, can't afford to worry about its crashing economy making it go broke. It has to worry about the crashing price of oil making it go broke right away. Or, even worse, the crashing confidence in the ruble making all of this moot. Money, after all, only has value as long as we think it does. If ordinary people decide that they'd rather turn all their rubles that are rapidly losing value into things that won't—like cars, Ikea furniture, and Apple products—then the ruble will die even faster. It's a bank run on the currency. And that's exactly what's happening: Russians are using any rubles they can't turn into dollars to go on shopping sprees. That, along with the ruble's rapid collapse, is why Apple has suspended online sales in Russia for now.

At this rate, Putin will be riding around shirtless, because he can't afford one anymore.