How Much More Economic Pain Can Vladimir Putin and the Russian People Take?

It looks like the one-two punch of sanctions and cheap oil are about to wreck Russia

It’s been a little more than six months since the full brunt of Western sanctions took force against Russia. The punishment, while slow in coming, has proven devastatingly effective—especially when paired with the crash in oil prices.

Last summer, of course, U.S. and European Union officials had no way of knowing an epic oil selloff was right around the corner. But in hindsight the coordination seems uncanny. Oil prices peaked less than a month before the sanctions were announced. By November, the combination of cheap oil and tighter sanctions was bleeding Russia of billions in budget revenue and had cut it off from the world’s largest capital markets. In December, state-owned oil giant Rosneft had to get a loan backed by the Central Bank of Russia, which is sort of like the U.S. Fed giving a loan to ExxonMobil.

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Recent news reports suggest Russian President Vladimir Putin is doing a better job of hurting the Ukrainian economy than the West is doing of bolstering it—but at what cost? The chaos Putin has sown in Ukraine has extracted a huge toll on his own economy. Together, sanctions and cheap oil have given Russia the deadly combination of a crashing currency and a sinking economy. To manage, Russia’s central bank has tacked between propping up the ruble with higher interest rates, and trying to goose economic growth by lowering them a month later. Neither strategy has worked. The ruble is at near-historic lows against the dollar, and Russia’s economy is in free fall.

Remember those stories last December of Russians stocking up on big-ticket items in anticipation of rampant inflation? Those anxious shoppers were right.

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The cost of this mess is most apparent in Russia’s quickly dwindling stash of foreign currency and gold reserves. A decade of high oil prices and booming Russian crude production helped Putin build up an impressive war chest that peaked in 2008 at around $600 billion. That sum has since fallen to $364 billion, according to new data released by the Central Bank of Russia, and the country has burned through almost $100 billion since July. At the current pace, Russia’s reserves could be closer to $200 billion by the end of the year.

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