The Washington PostDemocracy Dies in Darkness

Uh oh, Putin: Nobody seems to trust your currency

(AP Photo/Alexander Zemlianichenko)

Russia has fallen victim to two of the classic blunders. The most famous is never get involved in a land war in Asia—oops—but only slightly less well-known is this: never think an oil-exporting business can substitute for having an actual economy.

Double oops.

The latest news is that Russia's ruble is free-falling again. It's dropped 12 percent since the start of the year, and as much as 5 percent on Thursday alone, before rallying a bit up to 83 per dollar. It climbed further Friday as oil had a good day. Even then, though, it's still lower than it was a little over a year ago when a run on the ruble forced the government to jack up interest rates to prevent people from losing all faith in the currency. In other words, yesterday's panic-driven fear has become today's grim reality.

The simple story, as I've mentioned, is that Russia doesn't have much of an economy other than its oil-exporting business, which is to say that it doesn't have much of an economy at all anymore. China's slowdown means that there isn't as much demand for the black stuff, but, more importantly, there's just a glut of it. Between the shale revolution, Saudi Arabia's refusal to turn off any of its taps, and Iran's nuclear sanctions being lifted, the International Energy Agency estimates that the oil market is oversupplied by 1.5 million barrels-a-day. The result, at least for now, has been a 75 percent drop in the price of oil the last 18 months, down to $30-a-barrel. That's so low that some shale producers should start going out of business, at which point supply should come down and prices go up— well, except for two problems. The first is that so many shale drillers borrowed so much money that they can't afford to stop drilling, and the second is that, even if they do, it's pretty easy for them to turn their wells off or on as needed. That means that, at worst, they'll be forced into hibernation and come out of it as soon as prices bounce back up to, say, $60-a-barrel, setting a ceiling there.

So even if things get better, they'll still be bad for Russia. Consider this: its economy shrank 3.7 percent in 2015, and the International Monetary Fund expects it to contract another 1 percent this year based on the now-generous assumption that oil will average $42-a-barrel. And its budget doesn't look any better. Oil revenues, after all, make up half of the government's revenues. So even its just-announced 10 percent cut in spending might not be enough since that was based on the hope that oil will rebound to $50-a-barrel. It doesn't help, of course, that the state-controlled bank VEB might need as big as an $18 billion bailout. How can you tell things are getting serious? Well, other than the fact that Russian oligarchs aren't buying nearly as much high-end art in London anymore? Try this: Russia's top officials have said it might be forced to cut its oil production to try to prop up the price, conceding defeat—and market share—in its cold war with Saudi Arabia.

Or you could just look at the ruble instead. It's as close as there is to an economic scoreboard for Russia. And right now, it says that the country is getting crushed. Indeed, the ruble is down almost 60 percent the past two years.

Again, it's all about oil. Lower prices at the pump mean that Russian companies don't have as many dollars to turn into rubles, which is just another way of saying that there's less demand for rubles—so its price falls too. And the more it does, the more ordinary Russians might decide that even earning 11 percent interest on their rubles isn't worth it when they could be holding their money in dollars that aren't losing value. That's what happened at the end of 2014, at least until the banks ran out of dollars. Then people rushed to turn their rubles into anything—cars, Ikea furniture, Apple products—that looked like it would actually maintain its value.

That is Moscow's red line. It's okay with the ruble dropping, but not with the ruble dropping straight down. That's because currencies can't work without trust, and that kind of collapse would destroy whatever was left of it in the ruble. That, in turn, would leave Russian companies with dollar debts that would become a lot harder to pay back now that they themselves were getting paid in rubles that were barely worth anything It would be national bankruptcy by another name.

The good news is that's not happening now. But the bad news is that the ruble is falling so fast that it looks like it could. Now, that doesn't mean Russia is wrong to let the ruble drop. It's not. It really can't afford to waste its war chest of reserves on trying to defy economic gravity—keeping what went up with oil prices from coming down with them—or to make its economy even worse with higher interest rates. And besides, a cheaper currency does make the non-oil exporting parts of its economy, such as they are, more competitive. But it wants this to happen in an orderly fashion, which means it might have to try to slow the selling down by doing what I just said it shouldn't: spending some of its reserves and even taxing people who move their money out of the country. This actually makes more sense than it sounds. The idea is that Russia should save its reserves for a rainy day and not just a cloudy one.

The upshot is that the ruble is going to keep falling as long as oil does. Now, if it feels like you've seen that movie before, well, it's because you have. Whether it's 1986 or 1998 or 2016, Russia's economy is only as strong as the price of a barrel of crude—so not very much.

Indeed, ordinary Russians have seen their inflation-adjusted incomes fall 9 percent in the last year alone. That's not a good sign for Putin.