It turns out that having your economy entirely based on oil is a bad idea.
All it takes, as Russia is finding out, is for oil prices to unexpectedly drop, and you're left with an economic crisis that turns into a currency crisis that morphs into a financial crisis — which, of course, only makes the economic crisis even worse. It's a cycle of doom that's hard to stop, no matter how vehemently you insist that your "bear" won't let itself become a "stuffed animal" by having its "fangs and claws" torn out. (That was how Vladimir Putin put it during his annual press-conference-as-performance-art on Thursday).
The latest news is that Russia's banks are about to get bailed out to the tune of $16.5 billion. That became inevitable once the interest rate they charge each other on short-term loans—which shows how much they believe in each other's solvency—shot up to 28.3 percent on Thursday, higher than it was even during the 2008 crisis. And, to give you an idea how big the black hole in Russian bank balance sheets must be, this is all happening despite the fact that the central bank just said that banks could pretend that they don't have losses. Okay, it didn't exactly say that, but close enough. Specifically, Russian banks can stop marking their losses to market, and use the old exchange rate to calculate the "value" of the assets on their books. Potemkin balance sheets, though, aren't enough to fool the bankers themselves. They know how broke their banks are, so they don't trust any others. The Russian government hopes that injecting this $16.5 billion into the banks will be enough to end this credit crunch. We'll see.
That's money that Russia is going to start running out of. It spent $97 billion unsuccessfully defending the ruble this year, and although it has over $400 billion left, only half of that may really be useable. Now, it has managed, at least for now, to stabilize the ruble at around 61 per dollar by spending a little bit more of its war chest of dollars. But that doesn't change the reality that the fundamentals of its economy are weak—and are only going to get worse.
It's all about oil and foreign currency debt. As I've said before, it's only a small simplification to say that Russia doesn't so much have an economy as an oil exporting business that subsidizes everything else. So now that the price of oil has halved the past few months, Russian companies don't have as many petrodollars to turn into rubles. That means there's less demand for rubles overall, so its price has fallen. But wait: it gets worse. Not only do Russian companies have fewer dollars coming in, but they also have to pay back the dollar loans they took out. And they can't roll those over, because Western sanctions over Russia's incursion into Ukraine have cut them off from international credit markets. The only way they can pay back what they owe is by selling more things to people in Russia. But the rubles they get from that don't buy as many dollars as they used to, so those debts are harder to pay off.
But wait: it gets even worse than that. The Russian central bank just jacked up interest rates from 10.5 to 17 percent to try to convince people to hold their money in rubles that will pay them a lot instead of dollars that won't. The hope was that this would end the bank run on the currency, and prop the ruble up. Ordinary Russians, you see, have been besieging banks to turn their rubles that have been rapidly losing value into dollars or euros that won't. And they've been using any rubles they're stuck with to buy up stuff—like luxury cars and Apple products—before prices go up even more. It's gotten so bad that Ikea has had to suspend sales in Russia, because they can't meet all the demand and need time to figure out how much they should increase prices.
For now, all this panic buying will maintain Russia's illusion of an economy. But once people run out of rubles to burn, Russia is going to be left with no economy and 17 percent interest rates instead of no economy and 10.5 percent interest rates. Borrowing costs that high mean nobody will want to. Russia's recession, in other words, will turn into a full-on depression. And all those Russian businesses that worried their rubles wouldn't be enough to pay back their dollar debts won't even have rubles in the first place.
And who loaned Russian businesses all this money? Russian banks, in large part. That's why they're, to use a technical term, screwed. Their balance sheets are filled with dollar loans that won't get paid back and ruble assets that won't be worth as much as they thought. So the banks will hunker down and stop offering loans to anyone other than Putin's cronies, which, on top of the sky-high interest rates, means there will be a severe credit crunch. That will make the economy even worse, and, as long as oil prices stay low, push down the ruble even more.
The Russian government needs more dollars, and the easiest way to get them is to stop Russian people and companies from getting them. What economists call capital controls. Putin swears he won't do this, but that's a lie. He's already starting to. The Russian government, you see, has started monitoring when big exporters sell any foreign currency they earn, and, according to one official, will "instruct" them when to sell dollars. Putin can call that whatever he wants—I'm sure there's a bear analogy in there somewhere—but those are soft capital controls.
If Russia ever decides to diversify its economy, maybe it should start making stuffed animals. Kids love teddy bears.