Irina Fedulova and her husband have repaid more than one-third of their $150,000 housing loan, but they owe more than when they started, thanks to the collapse of the Russian ruble.
The loan was in dollars but “our salaries are in rubles, and we realize we can't pay it the way things are,” the 42-year-old chemist said by phone from Nizhny Novgorod. “We are so desperate we might have to sell our three-room apartment and move into a smaller one, if we can afford it now.”
Millions of middle-class Russians are facing unexpected hardship this winter amid a 40% decline in global oil prices and Western sanctions aimed at punishing Moscow for its annexation of Crimea and continued threat in eastern Ukraine. The economic crisis accelerated Tuesday as the ruble, which has been in free fall since September, slid an additional 20% in value, down more than 60% for the year.
The central bank responded overnight by increasing interest rates from 10.5% to 17% to raise the cost of borrowing and slow demand for dollars and other convertible currencies. The move had little immediate effect beyond panicking a population that has seen its buying power shrink dramatically this year.
But the jolt signaled that Russia’s long-troubled economy, which depends heavily on oil and natural gas sales, faces high inflation and a probable recession next year.
Prime Minister Dmitry Medvedev summoned key financial and economic officials to his suburban Moscow residence for an emergency meeting to craft a further response to the currency crisis, Russian news reports said.
“The situation is critical,” Sergei Shvetsov, central bank deputy chairman, told reporters as the ministers converged on Medvedev’s home in Gorki. He said the government hadn’t envisioned such a disaster “in our worst nightmares.”
The crisis poses a direct challenge to President Vladimir Putin, who rose to power after the last collapse of the ruble in 1998. He has led the country as president or prime minister since 1999 on an implicit promise that he can deliver political stability and a measure of economic strength.
Now it appears the economic chaos of the 1990s that Putin said he had overcome is returning. And with it have come questions about whether he can maintain his fierce standoff with the West over Ukraine, and even about his hold on power.
Opposition politicians who have been largely silenced since Putin returned to the presidency in 2012 have begun recovering their voices amid the escalating economic troubles.
Just Russia lawmaker Oksana Dmitriyeva laid the blame for the ruble collapse on “chaotic and unprofessional” moves by Putin’s administration and accused the government of having “no strategy” for dealing with the crisis.
Alexei Kudrin, Russia’s finance minister from 2001 to 2011, used Twitter to link the ruble’s slide, in part, to “distrust of the economic policies of the government.”
Western officials and outside analysts don’t expect Putin to back down in Ukraine. But some predicted that the Kremlin would look for ways to ease its economic isolation from the West, even if it was deeply reluctant to be seen reversing course.
“If you are expecting Putin to say, ‘I was wrong — I surrender,’ you’re crazy. Never going to happen,” said a senior Obama administration official who spoke on condition of anonymity to discuss internal assessments. But over time, he said, “Putin may be looking for an offramp — even if he will never admit to caving in.”
The official predicted that the crisis would weaken Putin's political position in Russia over time.
“Putin’s narrative — ‘I saved Russia from chaos’ — no longer holds water,” the official said. “This is not a fatal blow, but it’s a major blow.”
But Ian Bremmer, founder of the Eurasia Group risk consulting firm, said Putin could try to sharpen conflict with the West by allowing more cyber attacks or launching aggressive military moves close to borders of North Atlantic Treaty Organization countries in Eastern Europe.
In any case, the economic fallout is likely to continue. The interest rate increase probably will stifle new business and drive some companies into bankruptcy, bringing a surge in unemployment.
Western businesses, already deeply nervous about operating in Russia, are growing more so.
Apple Inc. announced that it would no longer do online business in Russia because the ruble’s slide could make it a money-losing proposition. Dozens of businesses tied to the international sector, such as tourism and charter airlines, have already closed their doors.
“I am extremely sorry for those who need to go abroad to seek medical assistance they can’t get in Russia,” said Oksana Shepilova, a Moscow tourist company operator. “Now they have to pay twice as much” in rubles.
The ruble’s dramatic fall Tuesday may have been accelerated by reports that the central bank intervened clandestinely in currency trading Monday to help Rosneft, a major oil exporter run by Kremlin insider Igor Sechin, to raise 625 billion rubles, about $10 billion, in bonds at a favorable exchange rate.
Rosneft, Russia’s biggest oil company, has been hit particularly hard by Western sanctions that have forced foreign oil industry partners to withdraw from joint ventures and have cut off the company’s international financing.
Even some of Russia’s powerful oligarchs appear to be losing faith in Putin’s economic policies.
Russian tycoon Gennady Timchenko abruptly announced he was dropping out of a grand project the Kremlin had assigned to one of his companies, the $7-billion construction of a bridge to connect mainland Russia with the Crimean peninsula. The Kremlin annexed Crimea, formerly part of Ukraine, in March.
But the largest impact is likely to be on middle-class Russians who see prices skyrocketing for daily staples.
Valentin Shulzhenko, a 55-year-old engineer in Moscow, said the price of ham and bacon had nearly doubled and coffee was up 90%.
“Sunflower oil went up 100% in price, and it is not even imported,” he complained.
Andrey Baranyuk, who manufactures a brand of outdoor clothing for Russian markets, says his business is declining. He can’t get the dollars he needs to pay for materials and production at factories in Nepal.
“We have been in business a long time and have seen really bad times,” he said, “but this time I really feel there is no hope.”
In Washington, administration officials said President Obama would sign legislation adding further economic sanctions on Russia. They acknowledged that it could complicate efforts to coordinate sanctions with the European Union.
The legislation adds penalties on Russia's military and energy sectors and provides $350 million in additional military aid to Ukraine.
But U.S. officials said they didn't believe the bill would badly disrupt U.S. diplomacy, because the administration had persuaded legislators to allow them to set aside penalties they thought harmful.
Some experts predicted that Russia will try to retaliate by penalizing U.S. companies and individuals.
Loiko reported from St. Petersburg, Richter from Washington and Williams from Los Angeles. Kathleen Hennessey in the Washington bureau contributed to this report.
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