Cheap oil roils ruble, but Russia bears the pain

Oil prices have dropped to 12-year-lows, dragging the Russian currency along with it. But the Russian economy may be able to withstand the crunch for now.

Russia's beleaguered ruble fell to an all-time low of over 80 per dollar Wednesday. Wags were quick to note that it will soon meet Vladimir Putin's stratospheric public approval ratings, but going in the opposite direction.

This strange juxtaposition, of Mr. Putin's apparently unshakable popularity against the background of economic pressures that even he admits are growing worse by the day, has a lot of pundits scratching their heads in confusion.

The plunging ruble is being driven down by global prices for Russia's main export, oil, that have fallen to 12-year lows. That's well beneath the Kremlin's own worst-case predictions of $50 per barrel just a few months ago; some predict government's main revenue generator may fall to $20 or lower, throwing the state budget into complete disarray. Social spending faces across-the-board cuts of 10 percent this year – with parliamentary elections due in September – which threatens to hit Putin's electoral base particularly hard.

Russia's economy shrank by almost 4 percent last year, and predictions that it might return to modest growth this year have been shelved. Consumers were hammered last year by 13 percent inflation – which many say is much higher for food, transport, and other basic necessities – while business investment has virtually stalled amid double-digit interest rates.

Yet well over a year into Russia's worst economic recession since the aftermath of the 2008 global financial crash, there are still no signs of panic in Russian streets, supermarkets, or even currency exchanges.

Though public opinion polls show most Russians are acutely aware of the worsening economic situation and more than half expect harder times are coming, public approval of Putin's job performance has remained well over 80 percent through the economic tumult of the past year. And Putin himself remains confident. He even joked about the country's economy woes at his annual press conference last month.

A few rumblings of discontent have been noted, including a brief truckers' revolt late last year against a new road tax, and pensioner protests this week in the Olympic city of Sochi over cancellation of free public transport for senior citizens.

But most experts doubt Russia will see mass protests this year, even amid an increasingly dismal economic environment.

One explanation offered by pundits is that Russians have been distracted by military successes such as the annexation of Crimea and the ongoing air war in Syria – amplified by cheerleading Russian media coverage – which has led most of the population to grudgingly accept lower living standards in exchange for renewed great power status on the international stage.

Others, however, argue that the Western world views Russia through a distorting lens that registers only the bad news and fails to note the resilience of the country's economy in the face of what looks to outsiders like a perfect storm of trouble, including plunging oil prices, Western sanctions, and a significant fall in trade with China.

These experts point out that Russian oil production actually hit record highs in 2015 and that Russia is well placed to survive the current slump in oil prices, since it enjoys some of the world's lowest production costs – which keep going down as the ruble falls. The sliding ruble also benefits other Russian commodity exporters, such as steel, aluminum, diamonds, and chemicals.

"Russia is dealing with this crisis; it is an opportunity for restructuring; it is an opportunity to reduce state involvement because of privatizations, so it is a situation that is controllable," Kirill Dmitriev, the head of the government-created Russian Direct Investment Fund told journalists at the annual Davos World Economic Forum in Switzerland this week.