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The Graphic Truth: How low will the Russian ruble go?
In an emergency meeting on Tuesday, Russia’s central bank raised interest rates to 12% (up from 8.5%) after its currency reached an almost 17-month low against the US dollar. Clearly the Kremlin is spooked that the Russian ruble has lost 25% of its worth against the greenback over the past seven months alone.
The ruble – which this week slid past 101 against the US dollar, before recovering slightly to 98 on Tuesday – has ebbed and flowed since Russian forces invaded Ukraine in Feb. 2022. For context, when oil prices were soaring last July (bolstered by the Kremlin's capital controls), the ruble touched around 61 to the dollar. But many analysts are skeptical that this move will be able to stabilize the ruble, warning that Western sanctions will make it very difficult for Moscow to attract foreign investment.
Still, last summer, things looked pretty rosy for the Russian economy due to high oil and gas prices which, many suggested, were scarcely being impacted by harsh Western sanctions.
At the time, Russia’s trade surplus was further bolstered by the fact that imports fell as Russians’ spending habits were crimped by the uncertainty of war.
But the current currency turndown shows that when compounded by a range of other fiscal and economic factors, Western sanctions are in fact having a strong impact on Moscow’s trade balance – and the value of its currency.
The decline is significant enough that the Bank of Russia last week announced that it would stop buying foreign currency for the remainder of the year in a bid to avoid further volatility.
So what are the key factors at play?
Energy revenue is down. Western sanctions, augmented by a cap on oil prices introduced by G7 countries in recent months, are hurting the Kremlin’s bottom line. Cash inflows from oil and gas, Russia’s main exports, have fallen by 47% in the first six months of this year compared to the same period in 2022. Although countries like China and India continue to buy large amounts of Russian oil and gas, much of this has been gobbled up at a steep discount.
At the same time, imports have recovered in part because the state itself relies on things from abroad to keep its war machine pumping. And its military spending is only growing. Consider that Russia has doubled its 2023 defense spending target from the previous year to more than $100 billion a year.
Capital flight. Making matters worse, this dynamic has been exacerbated by the fact that many Russians have been pulling their assets from the Russian banking system amid fears about regime instability. According to the central bank, Russians withdrew a whopping 100 billion rubles (around $1 billion) from the banking system over just a few days amid Wagner chief Yevgeny Prigozhin’s short-lived mutiny back in June.
Recent events have led to increased calls to make borrowing costs higher, culminating in today's emergency measures. Indeed, Putin’s top economic advisor said earlier this week that loose monetary policy is to blame for the ruble’s downward spiral. Though the bank raised interest rates to 8.5% last month, it was the first steep hike in more than a year.
Looking ahead. While a weak ruble could actually help the Kremlin fund its war effort – more foreign currency would translate into more rubles to buy stuff – brewing chatter about current parallels to Russia’s last deep financial crisis, 25 years ago on Aug. 17, do not look good for a regime trying to project competence and strength. So how do current trends compare to Russia’s last financial catastrophe of 1998? We take a look at the ruble’s value against the US dollar since then.
All Russians lose in Putin's war
Vladimir Putin claims overwhelming domestic support for Russia's "special military operation" in Ukraine.
Is that true?
Former US Ambassador to Russia Michael McFaul, who talks to Russians almost every day, says what he's hearing is that there no winners inside Russia, where the war has hurt Putin politically.
Even the oligarchs are unhappy: "There is not a single economic actor in Russia [who] thinks this is good."
Why? Before the war, Russians had been richer than at any time in history, McFaul tells Ian Bremmer on GZERO World. Many feel Putin threw it all away, and he'll never get back the credit he'd earned for brining stability to Russia.
Watch the GZERO World episode: Beginning of Putin's end
- Risks of Russia losing: Putin, Ukraine, and potential for escalation ... ›
- The Graphic Truth: Piling sanctions on Russia - GZERO Media ›
- Russian ruble weathers sanctions storm - GZERO Media ›
- What do Russians really think of the war? - GZERO Media ›
- EU tightens visa rules for Russians but keeps borders open - GZERO Media ›
- EU keeps borders open for Russians but tightens visa rules - GZERO Media ›
Zelensky takes center stage
On Wednesday, we’re tracking two developments that could shift the Russia-Ukraine story.
First, from Kyiv, Ukraine’s President Volodymyr Zelensky addressed a joint session of Congress on Wednesday. In his short address, Zelensky played to Americans’ sense of nationalism, history, and emotion, referencing the leaders atop Mount Rushmore as well as Martin Luther King’s “I Have a Dream” speech. “I have a dream. These words are known to each of you,” Zelensky said. “Today, I can say I have a need. I need to protect the sky.”
Zelensky again called for the US and NATO to impose a no-fly zone over Ukraine, and he also asked Congress to push for new sanctions each week to help starve the Russian war machine. His plea reportedly moved members of Congress to tears.
Last week, Congress approved nearly $14 billion to go to Ukraine, and the Biden administration is set to release $800 million on top of the $350 million in military aid they quickly sent when war broke out.
So what more can the US do? “The American people want Biden to do more,” says Jon Lieber, Eurasia Group’s lead US political analyst. “But Biden is running into the political and practical limits of what he can do.” He’s already sanctioned the Russian economy “back to the 1990s,” and the war has led to dozens of US-based businesses pulling out of Russia.
There are two things Biden has clearly stated he will not do: facilitate the transfer of Soviet-era jets from Poland to Ukraine and impose a no-fly zone, which Biden said would risk a direct military clash with Russia. In short, he’s not risking World War III.
As for a no-fly zone? “The American people agree with the president,” says Lieber, referencing a new poll showing that only 23% of Americans support the idea of imposing a no-fly zone over Ukraine (when defined as meaning that Russian planes could be shot down).
Biden’s critics have said he is letting Putin dictate the terms of US engagement in Ukraine, with Sen. Lindsay Graham accusing him of “folding like a cheap suit” over the Polish planes once they figured out that Putin would see any additional steps as an escalation.
But the US is in a bind, says Lieber. “They want to help Ukraine but are afraid of Putin, who continues to press the war in the face of near-universal international condemnation."
Second, Russia has a payment due Wednesday of $117 million in interest on two sovereign Eurobonds.
There are three more payments due this month. If the debt isn’t paid, this will mark the first sovereign default on foreign currency debt since the Bolshevik Revolution more than a century ago. (It defaulted on domestic debt in 1998.) Sanctions, which block Russian access to dollars and euros, will probably leave Russia unable to pay on Wednesday. The economic impact could last for years as Russian borrowing costs climb higher, and many of Russia’s heavily indebted largest companies are later forced into bankruptcy.
- Zelensky plea for additional Ukraine support puts US in a bind - GZERO Media ›
- Zelensky knows how to talk to the West - GZERO Media ›
- Volodymr Zelensky: TIME's 2022 Person of the Year - GZERO Media ›
- Volodymr Zelensky: TIME's 2022 Person of the Year - GZERO Media ›
- Zelensky's welcome in the West reinforces message of unity - GZERO Media ›
Putin's next move won't be a Baltic invasion that could unify NATO
Russian President Vladimir Putin needs a way to boost his popularity at home, but is he likely to launch a military campaign targeting the Baltic states, as Russian studies expert Leon Aron argues in a recent Politico op-ed? Ian Bremmer and Eurasia Group analysts Alex Brideau and Zachary Witlin take out the Red Pen to break down why a Baltic invasion is unlikely to be on Putin's agenda.
Today we're taking a look at a recent op-ed from Politico, penned by Russian studies scholar Leon Aron of AEI.
And the title asks a provocative question, "Could Putin launch another invasion?" Aron links the current political moment in Russia, big protests, struggling economy, and Putin's own thirst for power and popularity, with the factors that led to Russia's incursion into Ukraine and annexation of Crimea in 2014. He lays out the possibility that Russia could make military moves yet again, potentially against Estonia, Latvia, or Lithuania, the three Baltic states that all happen to be members of both the European Union and NATO.
Some context: This has been quite a week for US/Russia relations. President Biden in an interview with ABC News agreed with an assertion that Vladimir Putin is a "killer," I think he called him "soulless," too. And Russia responded by recalling their ambassador to the United States. All this comes as the American intelligence community released a report this week claiming that Russia had launched yet another campaign in the 2020 election to undermine Biden.
So a logical question would be: What is Putin's next move? Could he wage yet another military campaign?
Now, as with many of the pieces that we look at, some points Aron makes are right on the money. Yes, Putin did gain a lot of popularity after the operation in Crimea, especially. And yes, NATO faces real issues; Turkey is barely an ally these days, countries are slow rolling in terms of spending cash that they're promised, the French are talking about strategic autonomy, and yes, Putin always seems to have a surprise or two up his sleeve. But we are completely not convinced by the argument that an invasion of the Balts may be on its way.
So let's take out the Red Pen.
First, Aron writes that Putin's interventions, especially in Ukraine "worked," driving a "Crimean consensus" that victory in war overshadows troubles at home.
Sure, the Crimea intervention "worked" for Putin. Until it didn't. Putin has had to downplay military involvement in Ukraine of late to avoid a backlash from a Russian public that cares primarily about domestic issues still, like pensions, for example. And let's not forget that getting involved in Libya, in Syria, even in Nagorno-Karabakh didn't yield any real popularity bump of note for Putin.
Next, Aron writes that "we tend to repeat what worked." That is, Putin reached for the military lever before when he faced trouble, so he might do so again.
Well, Putin's decision making doesn't occur in a vacuum. Every past intervention was driven by national interest and foreign policy goals. Does Putin care about Putin? Of course. But Putin can't be sure that cooking up a foreign war would help matters it home. In fact, it might actually make them worse.
Finally, Aron says that Putin may consider a "fast and victorious poke at NATO's eastern flank," targeting the Baltic states and breaking NATO.
An attack on the Balts may be fast or it may be victorious, but probably not both. And Putin knows this. Western leaders are conflicted about the alliance, but an assault on full-fledged NATO State and EU members is exactly the kind of provocation that could awaken it. Putin understands this. He hardly wants to bring the alliance together as it's eroding. Low-cost efforts to steadily undermine legitimacy and grabbing targets of opportunity when available, that is much more Putin's speed.
Putin certainly seems to want to be president for life and probably is going to end up running for a fifth term, though a lot can happen in three years. Military moves that diminish his popularity or lead to further widespread protest, never mind bring together his adversaries, that is a strong NYET for now tovarishchey.
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Quick Take: Pro-Navalny Russian protests make Putin defensive; AMLO's COVID diagnosis
Ian Bremmer's Quick Take:
Russian opposition leader Navalny in jail. Hundreds of thousands demonstrating across the country in Russia over well over 100 cities, well over 3000 arrested. And Putin responding by saying that this video that was put out that showed what Navalny said was Putin's palace that costs well over a billion dollars to create and Putin, I got to say, usually he doesn't respond to this stuff very quickly. Looked a little defensive, said didn't really watch it, saw some of it, but it definitely wasn't owned by him or owned by his relatives.
And in the investigation itself, it said it was actually in a holding company by people linked to the Kremlin as opposed to Putin himself. But the hundred million people that have watched it, don't find Putin very credible on this. The interesting thing is the Kremlin clearly sees Navalny as a threat. They're responding in a more defensive way than I've seen the Kremlin respond to really anything since Putin has been president on the domestic front. And I don't know if that means that they can't kill him while he's under detention or whether they feel like they have to. Certainly, it makes it much harder for them to let him go. I think it makes it more likely that he's detained for a longer period of time or he's convicted of some ginned-up crimes. But the influence that he has across the country is actually growing.
And that probably means a harder fist from the Russians in the kind of response to local opposition. Keep in mind the economy's not doing very well. Nobody's is, but Russia's in particular right now, and Putin's approval ratings are not what they were when he first annexed Crimea for example.
Final point Mexico, you may have seen the news, Andres Manuel Lopez Obrador, the president has contracted COVID. So many world leaders have come down with it. Even with the most extraordinary capacity to try to protect these people, coronavirus is incredibly transmissible. And a lot of these leaders in the governments aren't taking it as seriously as they should. That certainly is true of the Mexican president or the Brazilian president or the American president or the UK prime minister. All of whom have gotten coronavirus, though, I would say the French president's taken it quite seriously and he still got it.
But specifically in Mexico, this is important because Lopez Obrador himself controls so much of the decision-making in the country. There's no real functioning cabinet in Mexico, it's all the Mexican president. And the direction and the details of policy in Mexico are not about his ministers, it's about him. So, if Trump had been incapacitated for a few weeks, it wouldn't have much impact on American policy. He didn't do it.
In Brazil, same thing. All the economic policy was largely given to the key ministers Bolsonaro Doesn't really understand economic policy. In Mexico, whatever you think of Lopez Obrador, he's doing it. And so if he's laid up for a long time or in the worst case, if he dies, this is actually going to be a really significant problem for the Mexican government, where there is no obvious successor and very little capacity for governance outside of the Mexican president himself. Let's keep in mind, he's 67 years old. He had a heart attack in 2013 and supposedly suffers from hypertension. So, you put all that together, this is actually something to watch. He gets the best medical care of anybody in Mexico, but it's still something to be concerned about and I suspect we're going to see market reaction to that.
OVER THE TOP: ARCTIC SHIPPING LANES
Last month, the Venta Maersk (pictured above) became the first international container ship to complete the journey from Asia to Europe through the Arctic Circle. Until now, this journey could be made only via the Indian Ocean and through the Suez Canal, or around the Cape of Good Hope and up Africa's west coast.
But an accelerated melting of the polar ice cap means that a stretch of Arctic waters known as the Northern Sea Route (NSR) has now become navigable for several months a year. The NSR has a lot going for it: the trip is 30-50 percent shorter than the traditional routes between Asia and Europe, and it has 100 percent fewer pirates.
The Venta, loaded with electronics and frozen food, left South Korea in August, made a stop in Vladivostok, sailed through the Bering Strait between Alaska and Russia, moved along Russia's north coast, and with the help of a nuclear icebreaker, passed into the Norwegian Sea. It docked in St. Petersburg last Friday.
As the ice melts further and the journey becomes more common, the balance of power in global trade could shift substantially. The biggest winner might well be the Kremlin. A sizable portion of the Northern Sea Route runs through Russia's territorial waters, allowing Moscow to set conditions for passage, grant and deny access, and impose duties along the route. The strategic and economic benefits are obvious.
More broadly, the melting ice cap will make it possible to extract vast quantities of the oil, gas, and minerals thought to lie beneath the Arctic seabed. That will only intensify the competition for territorial claims among Arctic powers—the United States, Russia, Canada, and the Scandinavians. Thus far, Russia has made the biggest claim by arguing that its continental shelf extends deep into the Arctic Circle. And making geopolitical matters more interesting, as we wrote back in April, China will want a piece of the action too.
For now, the need for accompanying icebreakers means costs are high, and the journey remains unpredictable and dangerous. One authoritative study says the route won't be economically viable for significant ship traffic until 2035. (Particularly in the world of long-term investment in transport, that's not as far off as it sounds. We're now closer to 2035 than to 2001.)