Most Russians love Vladimir Putin not just for his assertive foreign policy, which has made Russia geopolitically relevant again after a quarter century of inner crisis. The Russian president is cherished as the strongman who restored economic stability after the chaotic era of his predecessor, Boris Yeltsin.
Hyper-inflation, the ruble's exchange rate, Russia's economic growth -- the former KGB agent seemed to have the big levers of power firmly in grip.
But then came the Ukraine crisis, the West's economic sanctions and the collapse of the world oil price. With each day, the situation in Russia now grows more dire and dangerous.
Since the summer, the ruble has lost 50 percent of its value against the U.S. dollar. On Monday alone, the Russian currency plunged 10 percent.
The Russian central bank's abortive attempt late Monday night to support its currency merely fanned the sense of growing panic. The bank raised Russia's prime bank lending rate by nearly two thirds, to the level of an S.O.S.: 17 percent. But even that failed to halt the ruble's decline.
Economists are now seeing parallels to Russia's horrific near collapse in 1998, when the ruble plummeted and Russia defaulted on its debt. But even that wrenching interlude in the country's post-communist era may pale compared to what's taking place in Moscow now.
Russia is now going through "its biggest and most complicated challenge of the post-Soviet era,'' said Sergei Aleksashenko, an economist and the former vice president of the Russian Central Bank.
Marcel Fratzscher, the head of the German DIW economic institute, was more blunt: "Russia is on the brink of economic collapse.''
The drastic hike in interest rates had little effect on the ruble because the currency's direction is inseparably linked to the world market price of oil, which is also plunging.
"Russia is now paying for the failure to really diversify its economy significantly beyond the quasi-state energy sector,'' said Jörg Krämer, the chief economist at Commerzbank, Germany's second-largest bank.
In Russia's still nascent small- and medium-sized business sector, entrepreneurs are in shock over the developments.
As the ruble declines, Russian businesses have to pay more and more to service the same bank loans denominated in foreign currencies and to import goods they need for their own production. Russia's rising inflation rate, at 9.1 percent annually in November, is only raising pressure on struggling businesses.
Even the Russian central bank is forecasting that the country's economy will shrink by 4.5 percent in 2015.
That will likely eliminate or drastically limit what had been a key, growing market for German exporters. Since the bgeginning of the year, sales by automakers Volkswagen and Opel, the German unit of General Motors, have fallen by 20 percent on Russian market weakness.
The Russian central bank's abortive attempt late Monday night to support its currency merely fanned the growing panic.
Across the board, German exports to Russia have declined in the first nine months of the year from their level in 2013. Eckhard Cordes, the head of the Ost-Auschuss or Eastern Committee of the German Economy, a German-Russian trade group, warns of "dramatic developments.''
Political observers in Moscow now expect President Putin to shake up his government. The Russian prime minister, Dmitry Medvedev, was summoned on Tuesday to the Russian parliament, the Duma. The signs are increasing that Mr. Putin may soon reshuffle top personnel -- and Mr. Medvedev could be the most prominent victim.
One thing is clear: An authoritarian government can easily dominate political events in Russia. But the country's economy functions unders its own, more brutal, rules.
The crisis in Russia today is eerily similar to that in 1998, when investors pulled out of the country as the political situation deteriorated. Russians were traumatized by the experience. The rouble plunged, and imported goods became unaffordable. Back then too, the central bank took radical steps to halt the ruble’s fall, tripling the key interest rate from 50 percent to 150 percent in May 1998.
That step unleashed even greater unrest, and speculation grew that Russia was on the brink of a military coup. The economy had collapsed, civil servants and workers weren't paid for months and 80 percent of economic transactions were made through bartering.
A move by the then-central bank chairman led to a turnaround. Viktor Gerashchenko opted for more inflation, saying, “More money needs to come into circulation.” He turned on the currency printing presses and placed a moratorium on ruble-debts although continued to service euro bonds.
This was a light version of the Russian state bankruptcy that its citizens still vividly remember today. But there was one big difference between 1998 and the current crisis: Back then, oil prices eventually rose, causing Russia’s income to rise. A recovery in the oil price is not likely this time.
The current Russian panic was triggered by statements made by the United Arab Emirates oil minister on Sunday. Suhail bin Mohammad al-Mazouri said in Dubai that OPEC, the Organization of Petroleum Exporting Countries, would not cut production volumes even if the oil price went as low as $40 per barrel. By Monday, investors were selling shares and rubles en masse. Today, the combined value of all of the listed companies traded in Moscow are less than the value of Microsoft.
And the ruble keeps falling.
Russia’s central bank chief Elvira Nabiullina’s drastic rate hike this week did not calm the markets. People are panicking.
“If the key interest rate is 17 percent, for people that means 23 to 25 percent in real terms,” said Vladimir Tishomirov, of BKS, a brokerage in Moscow. Nikolai Ostarkov of an organization of Russian businesses calls rates at this level “penalty rates.”
The economy “might be able to survive for two months. After that, we’ll be in recession,” Mr. Ostarkov said.
With her policy, Ms. Nabiullina is trying to entice Russians to put their rubles back into circulation, and get companies to invest and buy domestically to replace imports.
But the reality is different; capital flight out of Russia is rising rapidly and is expected to reach $150 billion this year. The central bank itself expects economic performance to fall by 4.5 percent in 2015 if the oil price stays at $60 per barrel.
Can this year’s economic crisis also lead to a political crisis? It is not impossible.
“Political insecurities in Moscow would be very problematic,” said Ulrich Kater, chief economist at Dekabank.
Most economists are expecting the Russian economic crisis to have only a limited effect on the German economy. Russia accounts for only 3 percent of German exports and is the eight-largest trading partner, the argument goes.
But the figures mask a different reality.
For many companies, Russia is a major, and for some even the most-important foreign market, including retail giant Metro and drug maker Stada. The collapse of the ruble alone will mean that demand from Russia will sink because German products will become too expensive for Russians.
Whether blue chips like BASF and Adidas, or smaller businesses such as Claas, a maker of farm machinery, German firms will feel Russia's pain.
Amid the ruble's decline, Stada booked a double-digit decline in sales. According to Swiss bank UBS, Stada, a generic drug maker based in Bad Vilbel, earned €113 million in Russia last year, before tax and interest. That was 45 percent of its global pretax profits. Stada was forced to revise its earnings forecast lower this spring as Russias crisis heated up. Stada shares have lost a third of their value this year.
Like Stada, 6,400 other German companies sell products in Russia.
“Russia is an important export market for German machine makers and cars,” said Stefan Beilmeier, the chief economist at DZ Bank. In the bank’s most recent survey of small to mid-sized businesses, a quarter of companies said they were “somewhat affected” by the crisis in Russia and Ukraine. Four percent said they were “strongly affected.”
Bionorica, a German maker of herbal medicines, is one of them. The drugmaker made a third of its sales in Russia last year. For tractor maker Claas, Russia generated 20 percent of sales. In Krasnodar, a city in southern Russia, Claas invested €60 million in a factory to make combine harvesters and tractors.
And although Klass has had to write down the value of the new Russian production facility by €10 million to €50 million, Claas still wants to invest another €60 million there. “Just as before, we will sow and reap the harvest there,” said Klaas spokesman Theo Freye.
Bigger companies such as BASF, a chemicals maker, and MAN, a truck and bus maker, are losing money losses in Russia. Fresenius, a supplier of dialysis and hospital services, stopped plans for a joint venture in Russia.
The collapse of the ruble alone will mean that demand from Russia will sink because German products will become too expensive for Russians.
Metro, Germany's largest retailer, is especially dependent on the economic well-being of Russians. With annual sales of more than €4 billion and a good 20,000 employees, the country in crisis is the company’s most important foreign market.
The corporation operates more than 100 Media-Saturn electronics retailer branches and Cash&Carry markets in Russia.
And German banks have already seen their business in Russia decline.
“The economic environment has deteriorated,” said a bank manager in Frankfurt, who declined to be named. The credit exposure of Deutsche Bank, for example, sank in the first quarter from €5.5 billion to €5.2 billion. The primary reason was the caution exhibited by Russian companies, which do most of their business in rubles, and are suffering under the weak currency.
The export and project financier KfW-Ipex has seen its loans outstanding sink from €1.7 billion to €1.5 billion since last summer. Since the beginning of the crisis, uncertainty has prevailed as to the effects of the sanctions and overall economic situation in Russia. “Because of this uncertainty on the part of Russian business partners as well as the German and European investors and exporters, the number of financing inquiries has declined,” according to KfW-Ipex.
In all, the effects on German banks have been limited.
“On the one hand because the overall unsecured credit exposure of private clients and smaller mid-sized businesses is very low, and on the other hand because the institutions primarily finance trade flows, and this business is often safeguarded,” said Michael Dawson-Kropf, director of banking analysis at Fitch Ratings. European banks such as Société Générale, Raiffeisen Bank or Unicredit are under considerably more pressure because they have much more business in Russia.
Mathias Brüggmann is Handelsblatt's chief international correspondent and has served as the newspaper's bureau chief in Moscow, Warsaw and Brussels. Jens Münchrath, Laura de la Motte and Ulf Sommer are editors at Handelsblatt. Kevin O'Brien is editor in chief of Handelsblatt Global Edition. Global Edition editor Allison Williams also contributed to this report. To reach the authors: [email protected], [email protected], [email protected], [email protected] and [email protected].