In January 2014, 33 Russian rubles exchanged for one US dollar. In December 2014, the amount has more than doubled, reaching 77.2 rubles per dollar on December 16th, a day some dubbed Russia’s Black Tuesday. Russian central bankers raised interest rates by 6.5% overnight, and spent $2 billion to stave off the depreciation. In total, propping up the currency has cost $10 billion since the beginning of the month, and $70 billion since the beginning of the year.
In spite of it all—or because of it all—Russia’s problems are far from over. Default looms closer, as its foreign (public and private) debt is estimated at around $600 billion, and foreign-currency reserves only at $300 billion. The government appealed to the public to be ‘calm and rational’, stressing the need to keep rubles and sell foreign currency. Russians did however go to buy more durable goods, such as cars and home appliances; and although there’s no flight into real goods yet, the tendency is forming in that direction.
The media, economists, and Putin himself blamed Western financial sanctions over the Ukraine conflict—together with other ‘nuisances’ such as oil prices—for Russia’s woes. Indeed, these factors precipitated the slide in purchasing power: sanctions made many local companies unable to refinance their dollar debts, and low oil prices drained some of Russia’s foreign currency reserves. With fewer (and more expensive) imports, rubles were spent and re-spent on domestic goods, where they bid up prices and led to double-digit inflation. But at the bottom of it lie, as you’d expect, mainly monetary factors. Over the last 16 years, the Bank of Russia’s balance sheet rose from about 9 billion rubles to 2.1 trillion this month (an all-time high), while monetary aggregates increased up to a factor of 30 over the same period. Part of the new money was printed to directly fund (military) industries or state-owned companies.
In this light, Russia’s case isn’t special, but just a textbook example of currency collapse due to fiat inflation. It resembles the more recent experiences in Argentina or Venezuela, as well as a possible future of the United States, if for some reason or another the dollar can no longer make its way into foreign (Chinese) bank vaults. But it is nevertheless an interesting development for two reasons. First, it shows just how important international central bank cooperation is for the inflationary policies of national governments. At the moment, Russia cannot rely on other monetary authorities to pressure their banking systems into rolling over its debts. Nor can it rely on an IMF loan, as it did in the 1998 emerging market crisis. Its tensioned political relations have left it alone to pick up the pieces of its reckless monetary policy.
Second, it would seem that both the media and the general public are most disillusioned with a government that loses control over the monetary system. As a result, this week has been perhaps the only time over the last year when Putin’s grip on power has been in doubt. It’s no surprise, however, given that in a world of fiat currencies, bank notes are only backed by other bank notes, and by a fickle, passing trust.
