Magazine article Foreign Policy

The Almighty Ruble: Vladimir Putin Is Just the Latest in a Long Line of National Leaders with a Sentimental, Ill-Fated Attachment to Their Countries' Currencies

Magazine article Foreign Policy

The Almighty Ruble: Vladimir Putin Is Just the Latest in a Long Line of National Leaders with a Sentimental, Ill-Fated Attachment to Their Countries' Currencies

Article excerpt

One can almost excuse Vladimir Putin for trying so hard. This is a man, after all, who famously built his public image in part on feats of derring-do: riding shirtless across Siberia, hang-gliding with migrating birds, and releasing a caged leopard into a natural reserve. So perhaps it isn't surprising that the Russian president would leap with similar brashness into his country's economic crisis, precipitated by tumbling global oil prices and Western sanctions. Why not use sheer financial force to wrestle the depreciating ruble back to safety?

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At 1 a.m. Moscow time on Dec. 16, Russia's central bank announced a massive hike in the country's interest rate, from 10.5 to 17 percent. Early indicators of the government's move were mildly positive, with the ruble opening the next morning up 10 percent against the dollar. Within hours, though, the weight of the foreign exchange market reasserted itself, hammering the ruble to less than half its starting value in 2014 and raising the dual specters of inflation and recession. Over the following weeks, Putin and his lieutenants proved almost wholly incapable of controlling the two economic forces that mattered most to them: As of mid-January, spot prices for Brent European crude oil hovered near the historically low level of $46 a barrel, and the ruble was stubbornly slumped at 65 to the dollar.

It's clear why falling oil prices and a declining ruble would strike fear into even the leopard-friendly Putin. The Russian economy remains overwhelmingly dependent on oil and natural gas, which in 2013 accounted for 68 percent of the country's export revenues and 50 percent of its federal budget. Diminishing global energy prices could lead to a 4.5 percent GDP contraction in 2015, according to the country's central bank. A declining ruble would similarly wallop the country's holders of hard-currency debt, $130 billion of which come due this year.

What's not clear is how Putin and his colleagues could realistically have expected to achieve anything by hiking the interest rate. Unless the increase was intended to attract foreign capital--a very unlikely event--it could only have led to higher inflation and greater downward pressure on the ruble. The country's international debt was destined to become harder to service; the prices of imported goods were likely to rise; and Russian holders of foreign debt were going to face difficulties in accessing foreign currencies.

Yet Putin is hardly the first national leader to chase a stronger currency at the risk of a weaker economy. In the 1920s, Winston Churchill drew down his country's reserve holdings to bolster the British pound, long after the nexus of global financial power had shifted from Britain to the United States. The result was a marked decline in British industrial competitiveness and a sagging economy that contributed to the unfurling of the Great Depression. Half a century later, U.S. President Richard Nixon struggled to maintain the dollar's position as the world's reserve currency despite the growing financial cost to the United States of doing so. And Mexican President Jose Lopez Portillo pledged to "defend the peso like a dog" shortly before being forced by his country's collapsing economy to let the currency float, and plunge. …

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