Russia’s government is in the midst of a full-scale war to preserve the value of the ruble as a plummeting oil price has led to billions flooding away from the country. The ruble fell 11 percent against the dollar on Monday alone.
To try to stanch the bleeding, on Monday evening (the middle of the night Moscow time), the Central Bank of Russia announced a stunning interest rate increase. Its main deposit rate is now 17 percent, up from 10.5 percent when Russian banks closed for business Monday.
It may go without saying, but an emergency interest rate increase of 6.5 percentage points announced in the middle of the night is not a sign of strength. Rather, it is the kind of thing you see only in an old-school emerging markets currency crisis. And that is very much what Mr. Putin’s Russia is now experiencing.

Wait, it can’t have been that bad, can it? Oh, turns out it can:

In dollar terms, Russia’s Micex equity benchmark has fallen more than 26 per cent so far in December — on track to be the biggest monthly drop since October 2008.
In bond markets, the yield of the government’s international dollar-denominated bond leapt up more than half a percentage point to 7.22 per cent — above the equivalent yields for Rwanda, the Ivory Coast and Peru.
Dubbing it “Red Monday”, Timothy Ash, emerging markets strategist at Standard Bank in London, said the rout was a demonstration of investors’ lack of confidence in the Russian economy. “It is not just about oil, it is about sanctions, geopolitical risk and . . . the lack of policy action by the Russian authorities,” he said.
The Russian ruble has been hauled off its lows to trade more steadily at about 73 per US dollar – still down a whopping 12.2 per cent today but comfortably off the nadir of 80 against the greenback touched earlier this afternoon….
[R]uble watchers are now expecting that Russia will be forced to introduce capital controls to stem the slide in the currency and take steps to bolster local companies hurt by the worsening credit conditions.

As my Washington Post colleague Matt O’Brien explains, this is not a temporary problem. Russia’s economy is doomed:

[T]his is only going to get worse. Russia, you see, is stuck in an economic catch-22. Its economy needs lower interest rates to push up growth, but its companies need higher interest rates to push up the ruble and make all the dollars they borrowed not worth so much. So, to use a technical term, they’re screwed no matter what they do. If they had kept interest rates low, then the ruble would have continued to disintegrate, inflation would have spiked, and big corporations would have defaulted—but at least growth wouldn’t have fallen quite so much.
Instead, Russia has opted for the financial shock-and-awe of raising rates from 10.5 to 17 percent in one fell swoop. Rates that high will send Russia’s moribund economy into a deep recession—its central bank already estimates its economy will contract 4.5 to 4.7 percent if oil stays at $60-a-barrel—but they might, just might, be enough to stop the ruble’s free fall.

Now as someone who’s had to put up with the “Putin is a geopolitical genius!” crowd for 18 months going, you’d think that this little comeuppance would make me happy. But then the geopolitical folk who have been well aware of Russia’s structural weaknesses had to go and ruin it for me by worrying. Some in tweet form…

…and

:

For one thing, it doesn’t make Russian concessions on Ukraine any more likely: the worse the economic pressure, the more the Kremlin’s propaganda will drum home the message that it is the Evil West, denying Russia its holy Crimean birthright, that is to blame. Opinion polls suggest that the vast majority of Russians still accept this version of events….
Moreover, since over 80% of retail deposits are now held in rubles, devaluation means that the savings that Putin’s voters have accumulated as they came to trust their own currency over the last 14 years will be devastated. Already Monday, the yield on the 10-year bonds of a government that hasn’t run a deficit in 14 years hit 13%–anything but an expression of trust.
This is a recipe for social instability far greater than the tame, middle-class, metropolitan protests at Putin’s tainted election victory in 2012.
But what does an authoritarian leader do in such a situation? Back down or crack down? There is no evidence from this year to suggest Putin has suddenly become the backing-down kind. Repression seems the likelier option. If that doesn’t work, then doubling-down with another foreign policy adventure to distract from domestic problems hardly seems fanciful any more: in the summer, Putin cast doubt on the statehood of neighboring Kazakhstan, which doesn’t have the NATO guarantee that the Baltic States enjoy.

Actually, this sounds similar to my warning from two months ago:

The trouble with Russia is that despite report after report after report that Russia’s incursion into Ukraine has been an economic disaster, this will not deter continued Russian aggression. Vladimir Putin’s cost-benefit analysis calculations look very different from everyone else’s. Indeed, as Russia’s economy goes south and the Great Chinese Hopefails to materialize, Putin is likely to lash out even further. The West had better get prepared now for that eventuality.

So, at the risk of contradicting the smart money now and something I said as recently as two months ago… is it possible that Putin decides to adopt a more conciliatory attitude because of his economic woes? Is lashing out a certainty?

Part of Putin’s problem is that any lashing out makes Russia’s economic situation even worse. Russian bellicosity will lead to more sanctions and depress European economies. The former will continue to hurt Russia and the latter will continue to keep oil prices down. So even if Putin sustains his rally-round-the-flag with more nationalist posturing, he’s just digging a deeper economic hole for himself. So as much as I understand the logic for Putin lashing out, I don’t think the political benefits will be enough at this point for him.

What about acquiescence? More brutal leaders than Putin, when faced with economic circumstances this dire, have chosen accommodation. As Meghan O’Sullivan chronicled in Shrewd Sanctions, Saddam Hussein varied his cooperation with the United Nations depending on how much domestic pressure he faced from food shortages and the like. Putin is an authoritarian bully who has a different preference ordering than Americans or Europeans, but he’s a rational actor. He’ll cut a deal if it improves his political position.

What Putin really needs, however, is rising oil prices. And there are only two ways that can happen: increased demand or restricted supply. Putin has some control over the demand side — if tensions were to deescalate in Ukraine, that might offer a lift to Europe’s economy, which would help Russia. But Ukraine is Putin’s single most important geopolitical objective, and the effects on European demand are a bit murky. It’s an uncertain payoff for a politically disastrous move.

On the other hand, a quid pro quo with Saudi Arabia to get that country to restrict its output would offer more promise. Ukraine is really, really important to Putin. Syria is… less so. And as Bill Powell noted in Newsweek:

In Riyadh, the Saudis publicly say that the price of oil is a simple matter of economics and insist that there is no political agenda being pursued. But they don’t believe that in Moscow—and neither should anyone else. The Saudis are inflicting significant pain on two countries in particular: Iran, its mortal enemy in the Gulf and the world’s fifth largest oil producer, and Russia, Iran’s ally and a steadfast supporter (along with Tehran) of Syria’s Bashar Assad, whom the Saudis loathe and wish to be gone.
The price Moscow is paying is evident in the economic pain now mounting throughout the country, and that pain is likely to get worse.

If all it took for the Saudis to ratchet down production was acquiescence on Syria, then I have to wonder whether Putin would take that deal. Obviously, it’s not a great deal for him, but it’s better than conceding on Ukraine. If it put a halt to the current financial onslaught, it would allow Putin to again look like a “master strategist” while making a concession that wouldn’t really perturb any of his domestic audiences.

So if I had to predict where Putin would compromise if he chooses to do so, I’d pick Syria. That said, I’m not convinced that the Saudis would accept this bargain. For them, low oil prices also put pressure on Iran and U.S. shale oil producers. For Riyadh, those two actors pose a much greater existential threat than Moscow.

So my prediction for the geopolitical fallout from Russia’s economic disaster is that Putin will likely hunker down, cut Russia even further off from the global economy, and ride out the pain.  But at this point, I would simply suggest that there’s as much of a chance that Putin tries to be more conciliatory in the Middle East as there is that he tries to be more belligerent in Ukraine.