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The Kremlin is struggling to restore calm
From the Financial Times of Fri, 19 Dec 2014 19:03:12 GMT
Russia's President Vladimir Putin is see...Russia's President Vladimir Putin is seen through a video camera's viewfinder, as he speaks during his annual press conference in Moscow on December 18, 2014. AFP PHOTO / KIRILL KUDRYAVTSEVKIRILL KUDRYAVTSEV/AFP/Getty Images©AFP

At a lengthy news conference in Moscow on Thursday, Vladimir Putin fielded a question about his status as Russia’s most eligible bachelor. Dressed in a crisp suit and purple tie, the poker-faced president and former KGB agent assured his audience that he loved someone and someone loved him.

In a week when the rouble collapsed in daylight hours and the central bank raised interest rates in the middle of the night, Mr Putin gave similarly vague responses about how he proposed to extract Russia from its worst economic turmoil since 1998.

He warned the Russian people to brace themselves for two years of hardship and suggested that, after 15 years in the Kremlin, he might finally diversify the Russian economy from its reliance on energy, raw materials and military industries.

But Mr Putin was light on specifics — and he remained fiery and defiant, blaming Russia’s economic problems partly on US and EU sanctions, and attributing the Ukraine crisis to Nato attempts to declaw the Russian bear.

“Sometimes I think maybe it would be better for our bear to sit quiet, rather than chasing around the forest after piglets — to sit eating berries and honey instead. Maybe they will leave it in peace,” Mr Putin said. “They will not. Because they will always try to put him on a chain and, as soon as they succeed in doing so, they tear out his fangs and his claws.”

Behind the vivid imagery of the Siberian forest, the mood of Mr Putin’s entourage was sombre. The rouble’s collapse forced a sobering acknowledgment of reality in his administration and across Moscow almost overnight.

“The finance ministry was calculating which rouble exchange rate would drive the budget into the red. We have started guessing what rouble exchange rate will spell the end of Vladimir Vladimirovich [Putin],” said a family member of someone close to the president.

“There is no time. We need to act, and act radically,” said Vladimir Milov, a former deputy energy minister turned opposition politician, warning that Russia is stuck in a liquidity and debt crisis, a budget crisis and a crisis of investor confidence. “From a political point of view, a change in government and central bank leadership doesn’t help because all three crises are the work of one man — the current president, Putin,” he wrote in a blog post. “His resignation is indispensable to overcome these crises because, after 15 years in office, trust in him is gone.”

Sanctions have gradually sucked the dollar liquidity and life out of the Russian economy — they have been like a boa constrictor

- Timothy Ash, chief emerging markets economist at Standard Bank

Apart from Mr Milov and the smattering of like-minded liberals who oppose Mr Putin, few in Russia believe the rouble crisis will sweep the president out of office. “There is no viable opposition. Mr Putin has done a fine job in making sure there isn’t,” says a former Kremlin official. “Now the question is rather how he rejigs his presidency once more to fit the new normal.”

“Normal” was not a word on the lips of thousands of Russians who flocked to banks this week to buy dollars and euros in exchange for roubles of increasingly unpredictable value. At one point on Tuesday, the rouble had fallen by 36 per cent — and the mood on the streets had risen from concern to outright alarm. One central Moscow branch of Sberbank, the nation’s largest lender, had just $100 on the premises by 7pm, after starting the day with $100,000, a cashier told the Financial Times.

Rouble’s tumble

Other Russians, fearing they had missed an opportunity to buy dollars at a favourable rate, converted roubles into tangible goods. Shoppers poured into electronics stores and Ikea outlets late into the night. But the rouble’s volatility was so great that companies closed their online stores for the purpose of recalculating prices.

“When you see a huge run on the banks, it means you’re at the worst point,” said Oleg Kouzmin, a former Russian central bank official who now is an economist at Renaissance Capital, an investment bank.

The conditions for the rouble’s tumble have been in place for months. They include a sharp fall in the price of oil, Russia’s main export; western sanctions, which make it difficult for Russian companies to refinance their external debt; and a crippling loss of confidence in the economic outlook, leading businesses to freeze investments.

Deep-seated shortcomings in the rule of law, corruption and protection of property rights have contributed to capital flight abroad. Net capital flows out of Russia are expected to more than double this year to $134bn, says the central bank. The certainty of a sharp recession and the possibility of more currency fluctuations suggest that the trend will continue unabated in 2015. Small wonder, then, that Mr Putin, in early December, offered what he described as a “full amnesty” for Russians who repatriate their capital.

The rouble, which began to strengthen on Wednesday, was on track yesterday to end the week just 2 per cent weaker than it started it, but the proximate causes of Tuesday’s rout remain contentious. Mr Putin faulted Elvira Nabiullina, the central bank governor, for not intervening fast enough to support the rouble. The one step that might have been decisive enough to arrest the rouble’s slide would have been large-scale sales of Russia’s foreign exchange reserves.

But Mr Putin’s instincts rebel against such actions. One of his proudest achievements is the repayment of Russia’s foreign debt and the accumulation of hundreds of billions of dollars in reserves — concrete proof, in his opinion, of Russia’s recovery of its sovereignty after the 1998 debt default.

Fingers were also pointed at Igor Sechin, a powerful Putin ally and chief executive of Rosneft, a state-owned oil company that is a principal target of western sanctions. Rosneft raised Rbs625bn in bonds just before the maturity of a large dollar debt to foreign banks. The central bank allowed the securities to serve as collateral in a Rbs700bn liquidity auction for Russian banks. In effect, Rosneft covered its refinancing needs by borrowing indirectly from the central bank, putting pressure on the rouble. Mr Putin was due to host a meeting of Russia’s wealthiest businessmen last night to discuss events.

Sanctions hurting

Whoever was most to blame for the rouble’s tumble, few envied Ms Nabiullina’s position. Alexei Kudrin, a respected former finance minister, said on Twitter that the Rosneft deal was “extremely bad timing”. Asked what he would do in her position, Victor Gerashchenko, a former central bank chief, said: “I would ask for a gun and shoot myself.”

What would most benefit the Russian economy, even more than higher oil prices, is an end to western sanctions. In the words of Timothy Ash, chief emerging markets economist at Standard Bank, “western sanctions have gradually sucked the dollar liquidity and life out of the Russian economy — they have been like a boa constrictor.”

A change in leadership doesn’t help because all three crises are the work of one man — the current president, Putin

- Vladimir Milov, a former deputy energy minister turned opposition politician

But as US and EU leaders made clear this week, sanctions will not be lifted unless Russia ends what the west sees as its destabilisation of Ukraine through armed support for separatists in the south-eastern Donbass region. A few hints that Russia is rethinking its behaviour emerged this week. Sergei Lavrov, foreign minister, said Russia would not insist on the “federalisation” of Ukraine, thereby retreating from one of Moscow’s central demands for solving the crisis.

For his part, Mr Putin referred during his news conference to the disputed region as “eastern Ukraine” rather than “Novorossiya” (“New Russia”), a geographical expression from tsarist times that he used earlier this year in a way that implied Russia might stake a claim to a swath of territory from Donetsk to Odessa. Meanwhile, there is some evidence on the ground that pro-Russian rebels and Ukrainian troops are settling into a winter ceasefire.

Nonetheless, it remains unclear how Mr Putin can make concessions on Ukraine big enough to satisfy western governments without damaging his presidency. Since the suppression of large pro-democracy protests in Moscow in December 2011, and especially since last February’s revolution in Kiev, the Putin power apparatus has adopted a growling anti-western nationalism that leaves little room for flexibility.

The long-rumoured removal of Dmitry Medvedev as prime minister might be a positive sign, if he were replaced by Mr Kudrin or someone with a similar reputation for prudent fiscal management and an understanding of Russia’s place in the world economy. But that would not be true if the new premier were, say, Dmitry Rogozin, a hardliner in charge of the military-industrial complex.

“Having him head up the government would probably mean more hostile rhetoric, more money for defence and a more closed economy, while having Kudrin would signal opening up, compromise and reform,” says a European diplomat in Moscow. “Just from the fact that the pendulum seems to swing between these two right now, you can conclude that Putin will opt for anything that offers the best chances for solidifying his grip on power.”

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