The Russian Economy is Collapsing
The professional warmongers and defense contractors whose hearts are pounding at the thought of a “second Cold War” between the United States and Russia are going to be sadly disappointed. The conflict will not occur because the Russian economy and Vladimir Putin’s regime are very close to collapse.
A combination of sanctions, bad economic policy, and low oil prices are undermining Russia’s economy right before our eyes. The ruble, Russia’s currency, was trading at 50 to the U.S. dollar on Nov. 28, 2014. In other words, the ruble was worth just 2¢ in U.S. money. Seeking Alpha contributor Wolf Richter pointed out that the ruble has lost 32% (or nearly one third) of its value since June.
The World’s Ugliest Currency
Richter proclaimed the ruble the winner of his “ugliest currency contest,” noting that the ruble has sunk below the Argentine peso in terms of international currencies. It sounds as if Russia is now being hit by hyperinflation, which will destroy its currency and devastate its economy. One has to wonder how long Mr. Putin can stay in power when that reality dawns on the Russian people.
The major reason for the ruble collapse is falling oil prices; economists surveyed by Bloomberg believe that there is now a 75% chance of recession in Russian next year. The currency situation indicates that it has already begun.
There, of course, is no way that a country with a worthless currency and a devastated economy will be able to finance any so
rt of credible military challenge to the United States or sustain a war in Ukraine. Putin will probably have to drastically cut his military just to survive.
This situation is somewhat reminiscent of the later years of the Cold War, when the Soviet Union had massive military resources and a failed economy. Then, just as now, many westerners overestimated the Russian power talking of Soviet victory in the cold war. I was in high school in Colorado back then, and I remember that some of my classmates were convinced they would see the Red Army marching through the streets of Denver in a few years. A few years later, the Soviet Union collapsed, completely to the surprise of most educated Americans.
The difference today is that Putin has neither the economic nor the military resources to build Russia into a great power again. His empire is a house of cards that cannot survive a simple economic shock. It has none of the resources of the Soviets, and it also lacks large numbers of ideologically motivated allies beyond its borders.
Putin’s Gold Standard
The situation is made worse by Putin’s resort to crackpot economic policies that are a century out of date. He’s essentially put Russia on the gold standard (a gold based currency) and is having his “economic advisor” Sergei Glazyev buy up large amounts of gold at a time when the price of gold is collapsing. In other words, Putin is taking real money earned from the sale of valuable resources and investing it in a commodity of dubious value.
This nuttiness does help Russia’s economy a little by increasing the price of gold and providing a few jobs for gold miners – Russia is a major gold producer. Yet that is not what a healthy economy is built upon. A healthy economy is created by producing wealth, not the illusion of wealth.
In fact, Putin’s gold bug ways might be hurting the ruble. Between July 4, 2014 and Nov. 21, 2014, a troy ounce of gold lost nearly $120 in value. The gold price dropped from $1,131.25 a troy ounce on July 4, 2014, to $1,203.75 a troy ounce on Nov. 21, 2014. Putin has lost money on his gold investment.
Okay, here’s my prediction: Vladimir Putin will be gone sometime next year. Instead of a powerful and resurgent Russian Empire, we’ll see chaos in Russia similar to that after the fall of the Soviet Union. That situation will be far more dangerous than the new Cold War some Americans seem to want.
