Ruble Slump Challenges Medvedev-Putin Regime

What a difference a major financial collapse makes. Back when oil was trading the far side of $140 a barrel and other commodities were through the roof, Russia was a swaggering bear. It was more dangerous than the old Soviet Union in that its power came not from guns that couldn't be used but from natural gas supplies that could. With the world slipping deeper into recession, Russia finds itself losing the influence it used so casually a few months ago.

On Monday, the Russian Central Bank allowed a devaluation of the ruble, the twelfth this year. It has been using its large foreign exchange reserves to prop up its unit, but that's the behavior that caused the currency crisis of the late 1990s – it's not a long-term strategy. The central bank as admitted using has much as $100 billion for this purpose and relaized somthings cannot be defended indefinitely.

As a result of Monday's decision, a single euro will buy about 41.6 rubles (an all-time low), and a US dollar will buy 29.3 rubles (the lowest level since 2005). This is good news for Russia's exporters and very bad for its importers. The problem is that it exports commodities that have dropped in price regardless of the currency one uses (for example, crude oil). It is largely a lose-lose even more proposition.

This sticks the Medvedev-Putin regime in a tough spot (and it couldn't happen to a nicer bunch). The government's budget presumes a crude oil price of $70 per barrel for its Ural Mountain crude, which is relatively heavier and more sour than West Texas Intermediate (hence, it commands a lesser price). In fact, Ural crude is going for around $32 a barrel. This will eat a big hole in the budget in a matter of weeks.

While the Kremlin can rely on the world's third largest foreign currency and gold reserves to manage its currency decline and to plug the odd budget short fall, the country faces a bad 2009. Economic officials have suggested that the registered number of unemployed will rise from 1.5 million now to 2.2 million by this time next year. Diversification of the economy is the only true solution, but it's hard to imagine ex-KGB men understanding that, let alone doing much about it. After all, they've got theirs.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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