Today's 10 percent drop in the value of Russia's ruble is remarkable. Not as much for being the biggest one-day drop in Russia's currency since 1999, but for failing to faze much of anyone in Moscow.
There was no panic in the streets, and no lines outside banks and currency exchanges. But then again, Russians have been here before. Retailers know how to cope, pricing goods and services not in rubles, but in "conditional units" — shorthand for dollars or euros, the conversion rates of which are adjusted daily or even hourly. It's an old habit (and also an illegal one) that got Russians through the hyperinflation of the 1990s, and one that will get them through now.
Under pressure from the collapsing currency and plummeting oil prices, as well as from sanctions that have raised the cost of borrowing for everyone from ordinary consumers to natural gas giant Gazprom, Russia's economy is reeling. Inflation is now predicted to top 11 percent in the first quarter of next year, and the economy may contract by as much as 4.5 percent, according to the Russian Central Bank's own estimates. The government, meanwhile, announced plans to cut spending next year by 10 percent.
In an effort to stop the bleeding, the Central Bank announced hours ago — in the middle of the night — that it would raise interest rates 650 basis points, to 17 percent from 10.5 percent. Words like "stunning," "drastic," and "emergency" are being used to describe the massive hike, and it's far from clear how markets will respond.
The fundamental problems with Russia's economy are well-known: over-reliance on oil, gas, and other resource exports; tremendous inefficiency compounded by creaking infrastructure corruption, red tape, and a lack of legal protection for property rights; and so on. But Russia's companies, currency, and debt are all fundamentally worth much more than they're trading for on global and, now, domestic markets.
The problem is, fundamentals don't move markets — sentiments do.
Some sentiments are fickle, like the ones that help people determine that the maker of Candy Crush is worth billions of dollars. But other sentiments are sticky, and that's particularly true of the hurt feelings that usually follow a default. Moscow knows that, having struggled mightily to overcome the disdain of capital markets after its 1998 default, and has kept admirably current on its financial obligations.
Instead, Moscow has defaulted on its political obligations. Just as Western businesses invested in Russia's remarkable post-1998 economic turnaround, so did Western governments — especially those in Europe — invest in a new relationship. Germany in particular poured tremendous political capital into building bridges with Moscow. So did Italy, France, and even some in the UK. While facilitating access for their corporations, political leaders thought they were also buying leverage and a degree of understanding. When Russia invaded Georgia in 2008 and effectively occupied Abkhazia and South Ossetia, Berlin and others convinced themselves that it was a blip, and that things would return to normal.
Post-Ukraine, however, politicians and investors in Europe — and, increasingly, in Russia itself — have now become convinced of the opposite. The Georgian and Ukrainian incursions today look to be the key data points, and good relations with the West to be the aberration. The bubble of Russian-European détente has burst.
But that's only half the problem. After Vladimir Putin said oil prices would soon stabilize, OPEC members said they would be happy to see prices fall still further. And when the Russian Central Bank raised interest rates 100 basis points last week, the ruble continued to plunge. While last night's rate hike was calculated to shock the ruble back to life, there is a growing sense that Moscow has lost its grip on economic management. The bubble of Kremlin competence has burst too.
That leaves ordinary Russians to do what they have almost always done: With no good way of changing their government's policies, with no way of appealing to leaders in Berlin or Washington or Riyadh, and with no faith in anything but their own ability to cope, they cope. And for the time being, at least, the West will likely write Russia out of the equation of global economic prosperity.
In a sense, these bursting bubbles free Putin to do as he sees fit, having been relieved of the expectations of his domestic masses and his foreign interlocutors. But they also diminish him. Leaders, after all, are a lot like currencies: only as powerful as people believe them to be — and when that belief evaporates, not worth very much at all.
Samuel Greene is director of the Russia Institute at King's College London and author of Moscow in Movement: Power & Opposition in Putin's Russia. Follow him on Twitter: @samagreene