Earlier today, Russia’s central bank announced that the country’s currency, the ruble, was fully liquid. Normally, central banks do not need to reassure currency holders this way. We take it for granted that we can access our savings in the bank, use our credit cards and get cash from the ATM.
But these are not normal times in Russia. Having launched an invasion of Ukraine just a few days ago, Russia faces some of the strongest financial sanctions that any country has faced in modern history.
Russia is about to plunge into financial turmoil
Many of Russia’s central bank assets are currently unusable because of E.U. and U.S. actions. Additionally, many of Russia’s major banks will soon no longer be able to use SWIFT to settle payments. Meanwhile, the ruble’s value is collapsing in local markets. Although markets are not open at the moment, reports indicate that its value has declined from roughly 70 to the dollar to 150 to the dollar in after-hours trading.
All of this is making the financial system look shaky to Russian citizens. They responded today by withdrawing hard currency from ATMs across the country. Because it is Sunday, banks aren’t even open for regular service, so we won’t know until Monday exactly how seriously Russians will react to the financial turmoil.
Indonesia offers some lessons about what might happen
What happens when a regime like Vladimir Putin’s in Russia faces bank runs and currency collapse?
Political scientists have studied the political consequences of financial crises. In my 2009 book on the Asian financial crisis, I wrote about what happened to Indonesian dictator Suharto when it became clear that Indonesia’s banks were insolvent and the currency was in free-fall. Suharto’s struggles in 1998 suggest that Putin may face real economic difficulties in the coming days.
Like Putin, Suharto bolstered his dictatorial regime through close ties to an elite group of wealthy elites (known in Indonesian as “konglomerat”). Like Putin’s oligarchs, these superwealthy elites oversaw highly diversified business empires that blurred the lines between public and private authority. And they, too, owed their wealth to Suharto’s patronage and favoritism.
Also like Putin in 2022, Suharto in 1998 was viewed by many Indonesians and foreign observers as erratic. He was prone to quick decisions and quick reversals, and seemingly blind to the consequences of his actions, such as reneging on an IMF bailout to protect his youngest son’s monopoly on cloves.
Of course, Indonesia had not invaded any neighboring countries in recent years, so the specific drivers of Indonesia’s crisis in 1998 were different from Russia’s emerging crisis in 2022. But the financial fallout may be quite similar.
Putin’s big financial challenge is to convince people that there is no reason to worry about their money — they will be able to access it when they need it. That confidence will forestall the risk of runs on Russian banks. But just talking about financial stability can make people nervous. If everyone wants access to their savings by withdrawing money from ATMs, banks may not be able to cope. People’s individual strategies to keep themselves safe can bring about a banking crisis in which everyone suffers.
Putin doesn’t have many options
Putin’s options for how to address this problem are limited, as were Suharto’s. His choices boil down to the following: print lots of money on demand to cover all withdrawals; raise interest rates really high; or implement currency controls of some sort.
The first option generates inflation. It also does not really help to address the core problem: High inflation will give people with rubles an incentive to convert those rubles into dollars, gold or something else with a more stable value. That would push the value of the ruble even lower.
The second option seeks to keep money in banks (and rubles in Russia) by offering much more attractive returns for people holding ruble savings. But this is unattractive for many other reasons. With luck, it may eliminate inflation, but it may also put a sharp halt on spending and investment within Russia. It may avoid financial crisis, at the cost of a full-blown recession.
The third option would seem to be the most attractive. Indeed, this is an option that Prime Minister Mahathir Mohamad followed during Malaysia’s economic crisis in 1998. But it was very unpopular among Malaysia’s most wealthy elites, who were no longer able to move their savings and investments across borders. Moreover, in Russia today, such controls would have to be paired with controls on bank withdrawals to shore up the domestic financial system itself. Russia’s central bank is proclaiming that its financial system is liquid precisely to avoid having to do this.
I argue in my 2009 book that Indonesia’s oligarchs stymied Suharto when he attempted to implement the same solution in early 1998. They only supported Suharto as long as they could move their money abroad if needed — a powerful check on Suharto’s power to behave in ways they didn’t like. When the political situation turned sour in Indonesia, the oligarchs left with their money almost overnight.
Foreign sanctions may mean that Putin doesn’t have to worry as much about oligarchs fleeing abroad with their cash. Tough sanctions on his closest oligarch supporters mean that they can’t spend their money abroad anyway. Even so, currency controls and withdrawal bans would probably cause a full-blown financial crisis overnight.
It is hard to see how Russia’s domestic financial turmoil will end. The next 24 hours will be some of the most grimly interesting financial politics that Russia has seen since its two most recent financial crises, one of which (in 1998) ultimately paved the way for Putin’s rise to power.
In the meantime, however, Ukraine’s supporters in the international community may be thinking about how to leverage the threat of Russia’s financial collapse to their benefit. Giving oligarchs an exit option might provide the leverage they want to restrain Putin’s aggressive and destructive international behavior, by showing him its domestic consequences.
Thomas Pepinsky is the Walter F. LaFeber professor of government and public policy and director of the Southeast Asia program at Cornell University, and nonresident senior fellow at the Brookings Institution.