Ruble Rubble

How Crimea Crashed the Russian Economy

The crunch is coming for people on the street, and the Kremlin doesn’t have any good answers for them.

Andrey Rudakov/Bloomberg via Getty Images

KAZAN, Russia—On Monday evening, shoppers at the Korston-Kazan Mall here in the capital of Tatarstan were mesmerized by news that the ruble has become just about the weakest currency in the world. At currency auctions, it traded at around 64.45 rubles to the dollar and 78.8 to the euro. Shoppers complained that was translating into almost instantaneous price hikes that have seen some goods go up by 20 to 50 percent in recent weeks. And things have gotten worse in the last 24 hours.

Does Moscow have a good way out of this crisis? Probably not.

People on fixed incomes and government pensions are the first to feel the pain. “Prices at my favorite Auchan hypermarket grow every day and my salary remains the same, so it means I grow poorer every day,” said bookkeeper Irina Smirnova as we talked at a checkout counter. She’d watched the numbers change: In the summer salmon was around 300 rubles per kilo at Auchan, now it is 600 rubles. Even local chickens were more expensive than in the summer, Smirnova and another woman at the counter complained. Just a few months ago, an average chicken cost 110 rubles per kilo and Monday it is 130 rubles. Tomorrow, who knows?

Those who want to reconstruct the Soviet Union not only outside of Russia’s present borders but also at home should realize that the major difference between those days and these is that, now, everything in Russia is tied to the values of Western currency, and inflation hits every pocket.

In a recent interview for Vedomosti newspaper, Vladimir Panyushin, an analyst at Sberbank CIB, said that the key element needed to “turn down the heat” would be currency interventions on the ruble. He was surprised that the central bank did not understand that. Then, on Tuesday afternoon, after the ruble had fallen again to a stunning 80 to the dollar, the head of the central bank, Elvira Nabiullina, made a statement: “We have to learn to live in a new zone and count more on our own sources of finance,” she said.

What?

Ordinary Russians should read Nabiullina’s statement as, “Get used to being at least twice as poor next year as you were before the annexation of Crimea,” says Vladimir Ryzhkov, a prominent Russian politician and professor at the National Research University Higher School of Economy. “Now Russia does not have enough dollars to pay back billions of corporate bank debts; the payment is due before the new year. In the coming year, prices will continue to grow: Most medicine, which is mostly imported, will grow twice as expensive, as well as all electronic equipment—fridges, iPhones, computers and so on,” Ryzhkov told The Daily Beast.

Ryzhkov said that last March, before “The Center," as Russian authorities refer to President Vladimir Putin, decided to annex Crimea and support rebel movements in the Donbas region of eastern Ukraine, nobody in the Kremlin had a clear vision of the tough European Union and U.S. sanctions that could be imposed on the Russian economy as a result of the conflict. And nobody expected oil prices to plunge so quickly, either.

Earlier this year, it was well over $100 a barrel. Today, it’s lucky to hit $60. Russia depends on oil exports for almost 70 percent of its foreign-currency earnings and almost 50 percent of its annual budget.

Just last March, Russia was stable and rich, swimming in billions of oil dollars, but the Kremlin “wasted people’s oil cash on a useless war in Donbas,” the east of Ukraine, said Ryzhkov.

The fragile economy tied to oil prices now reacts like the needle on a polygraph, testing the truth, or not, of the Kremlin’s claims that everything will be fine.

In just a few hours on Tuesday, the dollar exchange rate collapsed from 64 to 80 rubles before climbing back to about 68. Moscow’s fancy boutiques closed down their doors, as managers were not sure what prices they should charge. Russia’s major gas company, Gazprom, employer of almost half a million people across the country, “started to think about reducing staff by 15-25 percent,” Interfax reported. Last time Gazprom reduced staff was during the crises of 2008.

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The crisis of 2014-2015 looks like it’s going to be one to remember.