The Russian economy has been in trouble for months, but last night, things got absurdly bad. The value of the ruble dropped as much as 19 percent in the last 24 hours, the worst single day drop for the ruble in 16 years. Now Russians are reportedly bum-rushing malls to swap their cash for washing machines, TVs or laptops—anything that seems like it might hold its value better than paper money, whose worth is evaporating in real time. The political and economic forces sending Russia into a downward spiral are complex. Here's what you need to know.
Russia's economy has been hurt by two big things: the falling price of oil, and economic sanctions (remember Crimea?). The oil and gas industry generates about half of Russia's revenue, so when a combination of the shale boom in the U.S. and weaker demand worldwide pushed the price from $110 per barrel earlier this year to $60, Russia got hammered. The sanctions imposed by Europe and the US, designed to punish Russian companies for Putin's actions in Ukraine, have hurt, too.
Okay, but why is this happening right now? What changed yesterday?
What we're seeing in recent days resembles full-blown panic. There's nothing really new. At this point, it's about psychology. Fear has taken over, and there's clearly a rush on the part of traders and investors to get their money out of Russian assets. Now we're seeing a run on the entire country.
Shouldn't the Kremlin be doing something?
It is. The Russian Central Bank has been trying to fight this trend, first by using its stockpile of foreign currencies to go out into the market and buy rubles, hoping to prop up the price that way. Then, early in the morning on Tuesday in Moscow, the Central Bank announced a gigantic interest rate increase. The idea is, if you offer people higher interest rates, they're more likely to keep their money in rubles.
Neither of those things have worked. The fear surrounding the Russian economy has taken over. Even dramatically higher interest rates can't convince people to keep their money in rubles.
What’s the best-case scenario for Russians right now?
In an ideal world, Putin would see that his economy is crumbling (the weakening currency and surging interest rates make for a deadly combination of economic contraction and rampant inflation) and take steps that would convince Europe and the US to ease the sanctions. That would probably be enough to stem the panic, and also have a real economic benefit. But to do that, he'd have to dramatically pull back his activity in Ukraine, and frankly that's extremely unlikely to happen. Putin's adventures in Ukraine are very popular in Russia, and that's the one thing he has going for him.
Worst case scenario? Are we there yet?
Out-and-out economic collapse and hyperinflation. It's frightening to think what Putin might do in response to that, but the big fear is that he gets even more aggressive on the geopolitical front to convince his people that Russia's problems are being caused by an outside enemy and that the time is now to stand up militarily.
Silver lining: Caviar's going to get really cheap, right?
Nope. Because of overfishing, there has been a ban on wild black caviar in Russia starting since 2007. Now almost all caviar is farmed, and it's from California and Japan and other places. Vodka's not getting cheaper either: Stoli, Smirnoff, and almost all the other brands you think of as Russian are owned by international conglomerates, which are doing just fine.
Joe Weisenthal is a managing editor at Bloomberg Digital.
