Tuesday marked a difficult day for Russia President Vladimir Putin on both the economic and foreign policy fronts. In the early hours of Dec. 16, the Russian Central Bank announced an increase of its benchmark interest rate from 10.5 percent to 17 percent — the largest such hike since 1998. While this decision helped the ruble strengthen for a few hours, the currency then went into a free fall, at one point losing 20 percent of its value and hitting record lows at 80 rubles to the dollar. The ruble finally stabilized in the afternoon, likely due to a Central Bank intervention, and toward the end of the day it strengthened in value, indicating a possible second monetary intervention. Though the escalating economic crisis in Russia puts Putin's government in a precarious position, it could pose strategic challenges for the United States and Europe as well.
The ruble had been gradually weakening for months before its dramatic decline on Tuesday, with the currency losing about half its value since the beginning of the year due to Western sanctions, lower oil prices and declining market confidence. Should Tuesday's interest rate increase fail to stabilize the currency in the short term, the Central Bank could implement additional interest rate hikes, currency interventions or even capital controls to stem the ruble's decline.
On the surface, the Kremlin has worked to present a calm and organized reaction to the ruble's collapse. Putin's spokesman, Dmitry Peskov, assured the public that the Central Bank is acting independently and that Putin did not plan to hold any new or extraordinary meetings on the topic that day. Minister for Economic Development Alexei Ulyukayev — following a meeting with Prime Minister Dmitri Medvedev, Central Bank chief Elvira Nabiullina and other top policymakers — reported that Russia's leadership is not considering capital controls to ameliorate the crisis. A video shown on Russian television, reminiscent of a Hollywood-style movie trailer, promoted an upcoming press conference by Putin on Dec. 18 highlighting Russia's strength and defiance of the West. Russian state media also largely minimized the ruble fall. Nevertheless, the impact of the ruble's fall could be felt as Russian banks saw increased demand for foreign currency and cash, while some businesses — such as Russia's online Apple store — temporary stopped sales.
Meanwhile, the White House announced Tuesday that U.S. President Barack Obama will sign the Ukraine Freedom Support Act of 2014, which passed Congress over the weekend. The bill lays the groundwork for possible additional sanctions on Russia and includes provisions for military support to Ukraine later this week. The president's move will initiate the deadlines for the separate sanction elements of the bill. The act is structured in a way that gives Obama great flexibility in whether to implement all or only some of the sanctions, but it requires the president to apply sanctions on the Russian defense and energy sectors. Sanctions on Gazprom are also possible if the company significantly decreases natural gas supplies to NATO members, Ukraine, Georgia or Moldova.
The most severe of the defense sector sanctions (depending on how many of the act's optional elements Obama decides to implement) would still only have a limited effect on the Russian defense industry, since it does not depend on business or banking inside the United States. Meanwhile, the energy sector sanctions could have more significant effects on the activities of U.S. oil majors involved in projects inside Russia. The act may directly target their ability to conduct business if they continue their activities in Russia. Other sanctions targeting Russian energy companies that rely on equipment imported from the United States are optional.
Overall, the act gives Obama tools to target specific parts of the Russian economy, though apart from some areas of the energy sector, most of these would have only limited effects on the country. Nonetheless, the act is noteworthy because the United States has decided to move on the bill just as Russia experienced its worst financial day in several years. Washington is making a point that rather than easing tensions by relaxing existing sanctions, it has the capability to increase pressure on Moscow. The message here is clear: The United States has Putin on the edge, and it can push him over if it so desired.
However, the United States knows that it can be dangerous to push Russia too far. A collapse of the Russian economy would be felt throughout Europe's economy and those of the rest of the former Soviet space (including countries like Ukraine that are dependent on Western financial assistance). It could have security implications as well. Indeed, Russian Foreign Minister Sergei Lavrov stated in an interview Dec. 15 that Moscow has the right to deploy nuclear weapons in Crimea. This statement came a week after a U.S. deputy secretary of defense, speaking at a U.S. Senate hearing, floated the idea of deploying tactical nuclear weapons in Europe. While both Russia and the West have escalated their rhetoric over the Ukraine crisis, the United States and the European Union certainly do not want the standoff to reach the point where action or buildups on the nuclear front become realistic, particularly at a time when Moscow feels under attack by the West.
It is still too soon to gauge the extent of the damage of Russia's current financial crisis. But Putin is well aware of the impacts of major economic crises on past Russian governments, as it was Russia's 1998 financial crisis that ushered in the downfall of former Russian President Boris Yeltsin and facilitated Putin's own rise to power. At the same time, the United States and the European Union understand that a pushing a nuclear-armed country as large and powerful as Russia toward full-scale collapse can have serious unintended consequences, and such an aim ultimately may not be in their interest, despite the standoff over Ukraine. Thus, both Putin and the West will have to grapple with the dilemmas posed by Tuesday's events in order to avoid a larger crisis.