So if you are not up to date on Russian politics or the Russian economy, you may be a little lost with this post. I’ll give a bit of a background to try to help. Earlier in 2014, Ukraine faced a revolution within its country. During the chaos, Russia moved into the Crimean peninsula (a strip of land between the two countries) and essentially declared it Russian territory. The world was outraged and the United States placed economic and political sanctions on Russia for their actions. Russia has a history of this, as they sent troops into the independent country of Georgia a few years ago. Russian President Vladimir Putin is not of fan of the West and especially not of the United States.
Since the sanctions on Russia were put into place, the Russian economy began to slow. During the last few months, with oil prices plummeting, the Russian economy quickly followed. Russia’s biggest investment was in oil with essentially no diversity within its portfolio. The collapse in oil prices and sanctions by the United States has destroyed the Russian ruble. One of the most devastating sanctions put into place by the United States was blocking the ruble from being traded with the U.S. dollar. Because of this, international companies which trade based on the U.S. have suspended all transactions with Russia when trading with the ruble. This suspension has just collapsed the Russian economy even further.
The Russian people are now living in a country that has no diversified investment, a currency that is about as worthless as a piece of paper is to you, a president who has poorly managed the Russian relations with neighboring countries and allies, and a country that is no longer a participant in the G8 or in NATO because of its actions. They also are now no longer to purchase things from overseas businesses because of their suspension of trade with the ruble. It is certainly not a good time to be a Russian. But what does that mean for the rest of us? And if the United States placed sanctions on Russia, why are we worried about the Russian economy collapsing? Isn’t that the goal? Not exactly.
The most obvious problem is that U.S. companies such as Apple, GM, McDonalds, and even John Deere have lost a once thriving market for their goods. This leads to a direct impact on the profits of these—as well as other—companies. But at the same time, in this day and age, with a global interconnected economy, a total collapse of an economy the size of Russia would lead to a default of Russian debt and would send the rest of the world economy into a tailspin. The majority of Russian debt is held by Italian, American, and French banks. The only thing that has stopped the total collapse is the Kremlin pumping dollars into the Russian economy that it had saved up during its boom years with high oil prices. However, President Putin has said he will not completely drain these reserves and will not continue using the funds long term. Once he stops, the economy very well could collapse.
Now the question becomes does the United States ease the sanctions on Russia and allow the ruble to once again be traded with the dollar and attempt to raise its value once again. This one move could stave off a depression from hitting Russia. It is almost a no-brainer that it must happen…the question now simply becomes what will the United States demand from Russia in order to do so. Of course, President Putin will turn around and use those demands to show the Russian people that the United States is threatening to destroy the Russian economy…further garnering hatred of America and support for Putin. Somehow he will always win…but for the betterment of the entire world, it’s a sacrifice we must make. And we must make it sooner rather than later.