Economist Paul Krugman: 'Drastic' steps to defend the ruble won’t erase Russia’s 'depression-level slump'

After plummeting in value because of the economic sanctions imposed by the Biden Administration and its European allies in the North Atlantic Treaty Organization (NATO), the ruble has bounced back. Liberal economist Paul Krugman analyzes this development in his April 1 column for the New York Times, stressing that although Russia has taken “drastic” steps to defend its currency, the Russian economy is still facing a “depression-level slump.”

Russia’s invasion of Ukraine, launched on February 24, has inflicted considerable misery. More than 4.2 million Ukrainian refugees have fled their country, according to United Nations data. But the war is not going well for Russia. Russian forces have failed to capture the Ukrainian capital Kyiv, and a senior NATO official estimates that somewhere between 7000 and 15,000 Russian troops have been killed during the invasion.

“Ukrainian forces are counterattacking, and in many places, Russia appears to be losing ground,” Krugman observes. “One thing Russia has managed to defend quite effectively, however, is the value of its currency. The ruble plunged in the days after the Ukraine invasion, but it has since recovered almost all of its losses.”

Krugman notes that Russian Central Bank Governor Elvira Nabiullina, who has a “role equivalent to that of Jerome Powell at the Federal Reserve” in the U.S., and her colleagues have “pulled out all the stops to defend the ruble.”

“They raised the key interest rate — more or less equivalent to the federal funds rate in the United States — from 9.5 to 20%, to induce people to keep their funds in Russia,” the economist/Times columnist observes. “They also imposed extensive controls to prevent capital flight: Russians have faced restrictions on moving their money into their foreign bank accounts, and foreign investors have been prohibited from exiting Russian stocks, and more…. It’s not puzzling to see the ruble recover given such drastic measures.”

Krugman continues, “The question is why Russia is willing to defend its currency at the expense of all other goals. After all, the draconian measures taken to stabilize the ruble will probably deepen what is already looking like a depression-level slump in Russia’s real economy, brought on by surprisingly wide and effective sanctions imposed by the Free World — I think we can resurrect that term, don’t you? — in response to its military aggression.”

The recovery of the ruble, Krugman argues, doesn’t mean that the Russian economy is in good shape. “Authoritarian regimes,” he notes, “often try to suppress unfavorable economic data.

“If Russia’s economy deteriorates as badly as most expect in the near future, it seems all too likely that the nation’s muzzled media will simply deny that anything bad is happening,” Krugman writes. “One thing they couldn’t deny, however, would be a drastically depreciated ruble. So, defending the ruble — never mind the real economy — makes sense as a propaganda strategy…. Russia’s defense of the ruble, while impressive, isn’t a sign that the Putin regime is handling economic policy well… U.S. intelligence claims that Putin’s military advisers have been afraid to tell him how badly the war is going. Is there any reason to believe that his economic advisers will be any more courageous?”

Krugman adds, “So Russia’s defense of the ruble, while impressive, isn’t a sign that the Putin regime is handling economic policy well. It reflects, instead, an odd choice of priorities, and may actually be a further sign of Russia’s policy dysfunction.”