Putin's Crimea Adventure Has the Russian Economy in Freefall

Before Western leaders could even finalize their plans for economic sanctions on Russia in response to its shocking, unprovoked aggression in Ukraine, the Russian economy had already entered freefall.  Putin’s crude blunder in Crimea is the worst Russian foreign policy mistake of the Putin era, and his country may never recover from it.

As trading opened on the Russian stock market Monday morning, stocks entered freefall, shedding over ten percent of their value.

The Russian currency, the ruble, went right down with the market, striking a new low against the U.S. dollar.

And the losses by the ruble were actually vastly understated. In order to keep the currency from totally imploding, which would in turn send Russian prices into devastating inflation, the Kremlin entered the currency markets and spent upwards of $10 billion in already-depleted hard-currency reserves buying its own rubles to artificially inflate their value.

In other words, the Russian economy began to look very much as it did in 2009, when a Western economic downturn reduced demand for oil, which sent prices downward and caused the Russian economy to collapse.

Western economic sanctions will have the same effect on Russia, but will bite even harder than the 2009 crisis because they will be specifically targeted to damage the Russian economy.  And these sanctions haven’t even been finalized yet, much less implemented, but already Russia is feeling their effects. Russian economic growth had already shriveled to nothing before Russia’s wanton aggression in Ukraine took place, so the country was in no position to sustain an economic hit of this kind.

So the smart Russian money is getting out while the getting is good.

The Kremlin’s own pollster (Russian language link) recently found that three-quarters of the Russian population does not even support Putin’s policy of interfering in Ukraine’s domestic political upheavals, and now the Russian population is being asked to pay through the nose for a policy it doesn’t support.  Whether it will agree to do so is a question that could well determine Putin’s political future.

The extent of Putin’s blunder is hard to describe. In a joint statement, Russia’s seven partner nations on the G-8 stated that they “join together to condemn the Russian Federation’s clear violation of the sovereignty and territorial integrity of Ukraine, in contravention of Russia’s obligations under the UN Charter and its 1997 basing agreement with Ukraine.”  They cancelled their plans to hold a summit in Russia, and the Obama administration began laying the groundwork to exclude Russia from the group entirely.