Russian President Vladimir Putin faces a major new challenge after a catastrophic fall in the value of the ruble, which hit a new low Tuesday despite the Central Bank's desperate efforts to halt the selling.
On the streets of Moscow, panicky consumers rushed out to buy home appliances before they became even more expensive.
Putin's popularity has been based on oil-driven economic growth that has helped increase incomes during his 15-year rule. The ruble's collapse, driven by a combination of slumping oil prices and Western sanctions, is denting that pillar of his power.
The Kremlin has tried to shift blame for Russia's economic woes, accusing the West of inflicting economic pain on Russia in an attempt to force a regime change.
The ruble hit a record low of 80 to the dollar — down a catastrophic 24 percent — before making a modest improvement to trade at 72 to the dollar by late Tuesday afternoon. The market plunge defied a whopping pre-dawn interest rate hike of 6.5 percentage points by Russia's Central Bank aimed at defending the currency.
SHOP TILL YOU DROP
The ruble's collapse spurred Russians to rush out and buy imported cars, refrigerators, washing machines, TV sets and other major appliances in a bid to spend their rubles before stores put on new higher price tags.
"Now is the exact time to make all the purchases you've been putting off, because tomorrow there may already be another price," said Alexei Malakhov, a 27-year old IT worker who bought a Google phone for 18,000 rubles ($250) at a Moscow electronics store.
Malakhov said he bought a washing machine two weeks ago, and its price has swelled by 25 percent since then.
"We haven't bought everything we need, but there's no money left," he lamented.
Dmitry Rayenko, who works in sports marketing, bought a stove and a coffee maker.
"You have to be philosophical about it: Buy what you need now," the 45-year-old said. "We're in an economic war, so it's unlikely it will get better in the near term."
Along with Western sanctions, the ruble's depreciation has been driven by a slump in the price of oil to below $56 a barrel from a summer high of $107. The bulk of the government's revenues come from oil.
Yet the selling went beyond what would be justified by the mere fall in oil prices.
"It's easy to use the word, 'panic,' but I think that's what it has been," said Philip Hanson, an expert on the Russian economy at the Royal Institute of International Affairs in London.
"The fall in the ruble is more dramatic than the fall in the price of oil would indicate, and I think there's a crisis of confidence, if you like, a crisis of trust, on the part of everybody involved in the market."
He said that would include companies seeking to move funds into dollars and ordinary citizens trying to shield their savings by exchanging rubles.
Russian state-controlled broadcasters sought to downplay the magnitude of the crisis. But some state officials appeared rattled.
"The situation is critical," Deputy Central Bank chairman Sergei Shvetsov was quoted by Russian news agencies as saying. "We could not have imagined what is happening in our worst dreams."
Sanctions imposed by the U.S. and the European Union in response to Russia's involvement in the conflict in Ukraine are putting pressure on the ruble. As Tuesday's currency crisis unfolded, the White House announced that President Barack Obama will sign legislation slapping new sanctions on Russia.
Russian companies are having trouble refinancing their dollar and euro debts in Western capital markets because of the sanctions.
"So they're pushing to acquire euros or dollars to pay off external debts in a manner in which they would not have otherwise had to do, but for the sanctions," Hanson said.
In other words, they're scrounging for dollars and selling rubles to get them — sending the ruble down farther.
BEHIND THE SCENES
What market watchers said appears to be a behind-the-scenes deal for state oil company Rosneft helped undermine the ruble.
The company, run by Putin's long-time confidant, Igor Sechin, had been clamoring for months for a government bailout because sanctions limit its ability to borrow abroad.
On Friday, it borrowed 625 billion rubles, worth $10.9 billion at the time, by selling bonds at low interest rates — to what analysts said were state-owned banks.
Rosneft denied exchanging any of the bond proceeds for dollars, but analysts said word of the deal appears to have helped send the ruble spiraling downward.
Evgeny Solovyov, an analyst at Societe General in London, says that while Rosneft remains profitable at lower oil prices, it has hefty obligations including $14 billion in debt due this month and in February.
Rosneft is so important that "it's hard to imagine Russia would let Rosneft default. And we have just seen that they won't," Solovyov said.
WHAT IS TO BE DONE?
Tuesday's Central Bank rate hike was intended to encourage currency traders to hold onto their rubles. But analysts said the measure was already insufficient because banks and companies could earn much bigger yields by buying hard currency. Meanwhile, higher rates could hurt the economy.
Analysts said that if the panic ruble-selling continues, the Russian authorities could be forced to impose capital controls. That would be bad news for any foreign investors who still haven't pulled their money out of Russia.
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