Despite Russia’s serious economic woes, President Putin is unlikely to face a major political crisis, as long as weaknesses in the economy do not directly hurt his strongest supporters. Political stability should persist, argues Paul Saunders, if he can continue to blame Russia’s slumping economy on falling oil prices and Western sanctions.

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December has been a very difficult month for Russia’s economy and for Russian President Vladimir Putin. Nevertheless, Russia is not yet on the brink of economic collapse, a major political crisis, or widespread social disorder.

During the first two weeks of December, Russia’s ruble plummeted from approximately 50 rubles per dollar to a low of 80 rubles before rebounding to 60 rubles on December 19. Worse, the Bank of Russia—the country’s central bank—appeared for a day or two to be almost helpless to stop the slide, dramatically increasing interest rates from 10.5% to 17% in a desperate effort to slow ruble sales. [ http://www.bloomberg.com/news/2014-12-16/russia-takes-path-well-taken-in-interest-rate-defense-of-ruble.html ] Overall, Russia has spent $80 billion in reserves during 2014, leaving the country with about $415 billion, according to official statistics. [ http://www.cnbc.com/id/102281424# ]

Oil-Dependent Economy

As has been widely reported, falling oil prices have been the immediate catalyst for Russia’s financial troubles. Russia’s federal budget relies heavily on various taxes and duties on oil production and exports, which account for approximately 45% of Russia’s federal budget revenue. Falling oil prices are a problem not only because of declining corporate revenues to tax, but because tax rates go down as prices drop, magnifying the budgetary impact.

Still, as Mr. Putin acknowledged in his end-of-the-year press conference, Russia would not have been so vulnerable to volatile global energy prices if its government had been more successful in diversifying the Russian economy. [ http://eng.kremlin.ru/news/23406 ] From this perspective, the crisis—like the 2008 financial crisis and, for that matter, the economic pressure that led Soviet leader Mikhail Gorbachev to begin economic and then political reforms in the 1980s—is fundamentally a consequence of bad policy, rather than bad luck.

US and Western economic sanctions contribute to Russia’s economic problems but ultimately are neither the catalyst nor the cause. Earlier in the year, the principal impact of the sanctions was to add to uncertainty, which put some pressure on the ruble and discouraged investors. More recent sanctions, which have included restrictions on short-term borrowing, have intensified the impact of the falling ruble by complicating efforts by major Russian companies to manage their dollar-denominated debts.

Despite this, Mr. Putin said in mid-December that “in a worst-case scenario” Russia’s economy will remain weak for “a couple of years” and will then rebound as the global economy improves and oil prices rise. [ http://eng.kremlin.ru/news/23406 ] While Putin’s primary goal was clearly to reassure Russian citizens concerned about their economic future—and especially teachers, retirees, and others who depend on government salaries and pensions—he may well be right. After all, the slump in oil prices during the 2008 crisis did not last that long.

Political Priorities

Indeed, the key question for Mr. Putin and for the Russian economy is precisely that—when will oil prices begin to edge up again? The answer to this question, which we will discover only when it happens, has significant economic implications for Russia and major political implications for Putin and Russia’s government.

If oil prices remain at current levels for an extended period—and, importantly, if it looks like they won’t increase too much too soon—Russia’s government could face some difficult choices in considering how to spend its reserves, which are down by one-third since before the 2008 crisis, when Russia had $600 billion. Putin has already signaled that he does not want the central bank to waste money defending the ruble—his real priority is protecting government spending to maintain political stability.

In practice, this means trying to avoid cuts to public-sector salaries and pensions and to the defense budget, which supports jobs and salaries among another key Putin constituency. From a cynical political perspective, the reason that Putin has not suffered too much politically so far is that the group most damaged by Russia’s economic slide this year is also the group that was already least supportive of him: the growing urban middle class, especially in Moscow and St. Petersburg. Putin has governed largely without their support since returning to the presidency in 2012; there is no reason to expect that he could not continue to do so.

The most dangerous scenario for Putin is one in which the Russian government has no alternative to making significant reductions in salaries and pensions among his political base, but even this may not seriously threaten his rule if Russia’s president is able to ensure that others take the blame for the country’s weak economy and for the government’s bad policy. If the Kremlin can continue to blame oil prices and Western sanctions for the crisis—and blame Prime Minister Dmitry Medvedev for Russia’s ineffective response to it—then Putin can likely remain secure.

Russians no longer consider Vladimir Putin either invincible or infallible as they did several years ago; this is the principal political consequence of the 2008 financial crisis, protests after the 2011 State Duma elections, and today’s economic troubles. That said, most continue to have confidence in Putin’s leadership (in part due to the lack of alternatives). Only the combination of repeated cuts to salaries and pensions that look long-lasting with a widespread feeling among Russians that the state is cheating or failing them (perhaps by bailing out well-connected companies and individuals even as ordinary people contend with falling incomes or, alternatively, by accepting a humiliating foreign policy defeat in Ukraine) is likely to produce true mass protests. If Putin is careful, he should be able to avoid this situation.

The coming months, and possibly years, might be difficult for Russia and its leaders, but there is so far no reason to expect major changes in Russia’s politics.