Maxim Zmeyev / Courtesy Reuters Putin attends a news conference in Moscow, December 2014.

Revenge of the Ruble

What the Crisis Means for Putin

The ruble has already lost almost half its value against the U.S. dollar this year, and its potential collapse has pushed Russian President Vladimir Putin into an increasingly tight corner. In Ukraine, where hostilities have brought sanctions and alienated investors, Putin has only bad options to choose from: He can either make a deal now—one he won’t like, since he holds few cards—or compromise later, once his negotiating position has deteriorated further. No matter what happens, he will end up badly wounded. The question is whether he will drag his country down with him, turning Russia into a full-fledged pariah state. 

When Putin first moved on Ukraine, Western leaders confidently predicted that the economic consequences would force him to retreat. But things didn’t play out that way. After Russia annexed Crimea, the ruble actually strengthened, thanks in part to Moscow’s huge foreign exchange reserves (equivalent, on paper, to half a trillion dollars at the end of last year). Putin seemed to be winning, and it looked as if the potential consequences—capital flight, a currency collapse, a replay of the financial crisis of the late-1990s—would never materialize. 

But that supposed victory was always an illusion. To believe it was real, one would have had to believe that Putin’s adventure in Ukraine would be quick and easy. Many did, especially in the Kremlin. But it should have been clear to Putin and his advisers that if the war lasted much longer than a few months, some exogenous event, such as a European recession or another 2008-style financial panic, would eventually make it impossible to defend the ruble. A drop in oil prices ended up doing just that.

The price of crude has been sliding ever since the U.S. Federal Reserve ended its bond-purchasing program last summer, and prices now stand at a little more than half what they were a year ago. The price of Brent oil, a key benchmark for global

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