Russia’s central bank intervened to support the rouble last week, as foreign analysts estimated $21 billion (Rs93,030 crore today) had been pulled out of Russian securities following its incursion into Georgia.
The central bank sold $3.5-4 billion in reserves to stop further depreciation of the rouble. With nearly $600 billion of currency reserves, Russia can afford to support the rouble. It can ignore foreign bleating in the short term. Once oil prices drop, life will become tougher for Russian consumers. That’s when the West will have some leverage.
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Moscow’s stock market has fallen 25% since July. Since less than 1% of Russians own stocks, this may not matter domestically. As a result, so long as oil prices remain high, Russia’s aggressive foreign policy and poor governance record have few economic, or political costs.
The government can fund military adventurism while also improving the standard of living for its citizens. There are inflationary pressures (inflation was 14.7% in the year to July), but Russian gross domestic product is still expected to expand 7.5% in 2008 and 6.8% in 2009, according to The Economist panel.
While Russians are economically comfortable, they will support the government, its aggressive treatment of foreigners and critics, and its efforts to expand Russia’s geopolitical power. A drop in oil prices would change the equation. Russia had a $100 billion payments surplus in 2007, thanks to $240 billion of oil and gas exports. Then, it would have taken a drop in the oil price to something like $40 a barrel from 2007’s $70 average to push the country into a payments deficit. Since then, the Russian government and consumer spending growth have pushed up this “break-even” oil price.
Oil is still trading above $100 a barrel, but the recent trend is sharply downward from the July peak of $140. If it falls much further, a lack of foreign investment and speculation against the rouble will start to matter.
The result would be tighter credit and reduced purchasing power for consumers. That could make Russia’s foreign policy aggression and its statist capitalism unpopular at home.
If the Georgia spat looks like a skirmish in a new Cold War, then maybe it’s one the West can win with energy and monetary policies that damp oil prices—and a little help from a weakening global economy.