Putin’s New Prudence

WASHINGTON, DC – This year, the Russian economy is the G-20’s worst performer, contracting by 3.8%, according to the International Monetary Fund’s latest forecast. And things could easily have been worse. President Vladimir Putin claims that his economic policies remain consistent; in fact, he has wisely changed course, limiting the damage that could have been done had he not.

At the end of 2014, Russia was seized by financial panic. The Central Bank of Russia (CBR) responded to collapsing oil prices by floating the ruble, which immediately lost half its value. Desperate Russians rushed to buy whatever they could before their money became worthless. Inflation shot up to 16%.

Putin’s prescription – given at his annual televised press conference last December – was not reassuring: “We intend to use the measures we applied, and rather successfully, back in 2008.” He was referring to Russia’s response to the financial crisis, when it carried out the largest fiscal stimulus in the G-20 – no less than 10% of GDP. The result: GDP fell by 7.8%, the largest drop in the G-20. In short, Putin was proposing to repeat a failed policy.

Fortunately for Russia, Putin did not carry out his promise. In 2008-2009, the CBR pursued a policy of gradual devaluation, bailing out all big state-owned and private corporations, regardless of their performance. This time, Russia has maintained a floating exchange rate, conserving its reserves. The CBR stabilized the market by shock-hiking its interest rate, and has since reduced it gradually, as any sound central bank would.