The prospect of sharply lower prices for oil and other commodity exports -- on top of plunging stock markets and a seized-up financial system -- threatens the economic recovery that's been a foundation of Vladimir Putin's rule in Russia.
Falling prices for crude oil played a role in driving down Russia's benchmark RTS stock index 20% this week to the lowest level since June 2005.
Despite a $160 billion Kremlin bailout package, the market is off 73% from its record high set in May, and Finance Minister Alexei Kudrin warned legislators Friday that the declines are likely to continue. Unable to raise cash, Russia's heavily indebted billionaires have been forced to give up prime assets pledged as collateral or beg for bailouts.
Economists have cut forecasts for growth next year to around 3%-4%, down from a 7.7% rate in the first nine months of this year. Central bank reserves have fallen $66.9 billion since early August as investors and ordinary Russians have fled the ruble. Authorities have effectively nationalized four banks and bankers say dozens more are in trouble.
Mr. Putin "was very lucky on the way up. This is the first test," says Rory MacFarquhar, economist at Goldman Sachs in Moscow. "They haven't grasped yet the magnitude of what they're up against." Mr. Putin was president until he moved over to the premiership in May.
Poll data released by the non-governmental Levada Center this week showed small declines in the sky-high approval ratings for Mr. Putin and President Dmitry Medvedev. Possibly encouraged by uniformly upbeat economic coverage on state television, 42% of those surveyed said the current financial problems are likely to be temporary. A smaller group, 31%, said the country faces "serious financial shocks." The center polled 1,600 people with a 3% margin of error.
So far, the impact on the public has been limited, with only a few mid-sized banks failing to honor deposits, prompting takeovers by state-affiliated banks with funds from the central bank. Unemployment remains low, but big metals and auto companies have announced production cuts and some sectors are reporting sharp slowdowns in October as banks have cut off lending.
But the first sustained declines in the ruble's exchange rate against the dollar in years -- a trend many economists expect to accelerate -- have raised public concerns. "Make no mistake, it's moving over to the real economy," said a senior official at a major Russian bank.
At one of the first major official briefings since the crisis began, a top government official Friday said, "There is no crisis now . . . economic growth will remain positive." He wouldn't venture a forecast for next year, though he indicated it would likely be below 5%.
He said the government's widely praised policy in the last few years of saving the bulk of its oil revenues means the Kremlin, with $531 billion in reserves, has adequate "safety cushions" to protect the economy and banking system and avoid sharp cuts in government spending.
"Russia's financial system will withstand this, we'll make sure of that," he said. "But it's rather expensive."
Most of the damage to the stock market has already been done, he said. Over $30 billion of foreign capital fled since the August war in Georgia and the ruble's decline against the dollar spooked investors.
The government will begin in the next week or so to spend 175 billion rubles from one of its oil funds to buy blue-chip stocks and bonds in what the official said was a long-term investment, not an effort to reverse the market trend. Already, economists say Russia will have to shelve its plan for a large sovereign-wealth fund that will invest in foreign companies.
The senior official said average prices for the year will be well above the $70 at which the budget is in balance. Even next year, when the needed figure is projected to be $95 and prices are likely to be in the $60-$80 range, he said, the government won't have to slash spending.
He said new projects might be cut back. But that could be politically difficult, since President Medvedev and Mr. Putin have been promising in recent weeks major new military programs, as well as bailouts for struggling industries.
Prices for Russian Urals crude oil fell below $70 this week to some of the lowest levels seen in a year. With global growth slowing sharply, prices for nickel, aluminum and other commodity exports also have plunged, sharply cutting the flow of money into Russia's economy.
Economists warned that a steeper decline in the oil price -- likely if the global financial turmoil continues -- along with $180 billion in debt coming due by the end of next year, could do much more damage. J.P. Morgan analysts warned in a report Friday that in a pessimistic scenario of $50 Urals crude oil next year, Russia could burn through more than half of its reserves as capital flight surges in 2009. Goldman Sachs said a price that low would mean zero economic growth.