Ukraine incursion appears grave miscalculation as financial fallout grows.
Kremlin insiders gathered in secret last February to answer a crucial question for Vladimir Putin - could Russia afford the economic blowback from taking over Crimea?
Moscow said yes. The markets aren't so sure.
As President Putin exulted at the Winter Olympics in Sochi 10 months ago, aides assured him Russia was rich enough to withstand the financial repercussions from a possible incursion into Ukraine, according to two officials involved in the talks.
That conclusion now looks like a grave miscalculation. Russia has driven interest rates to punishing levels and spent at least US$87 billion, or 17 per cent, of its foreign-exchange reserves trying to prevent a collapse in the ruble from spiralling into a panic. So far, nothing has worked.
Putin now faces what could be the nation's most serious economic crisis since 1998, when Russia's devaluation and default reverberated around the world. US and European sanctions and, more significantly, plummeting oil prices are eroding the reserves that emboldened Putin to annex Crimea despite an international outcry.
The story of Russia's foreign-exchange reserves traces the arc of Putin's power, from the collapse of the late 1990s to the oil-soaked riches of the 2000s to the new dread that prevails today.
When rising crude prices were firing the economy, Russia's swelling reserves became a symbol of economic might and a point of pride for Putin.
Three government officials characterised the February discussions as critical to Putin's thinking on Ukraine. The series of talks came before Russia helped Viktor Yanukovych, then-president of Ukraine and a Putin ally, flee from violent protests.
Putin, 62, was told Russia had enough foreign currency reserves to annex Crimea and withstand any sanctions that might follow. The President might not have proceeded had Russia not built up its cash cushion in good times, said the three officials.
The central bank shouldn't "thoughtlessly burn up" its reserves, Putin said this week at his annual news conference. "Thank god, they even grew during this year."
As of last week, Russia had US$415 billion in total reserves, with about US$169 billion spread between two specialised funds. But with the ruble's collapse, this trove is being depleted faster than almost anyone had predicted. Panic has begun to set in among ordinary Russians.
"We're facing an uncontrollable shock that will undermine trust in Putin's entire economic model," said Kirill Rogov, a senior research fellow at the Gaidar Institute for Economic Policy who's advised the Government in Moscow. "The reserves aren't enough."
For policy makers, there are no easy answers. The central bank unexpectedly raised its benchmark interest rate to 17 per cent on Wednesday and could drive rates higher still, further jeopardising growth.
Russia could also keep using its hard currency to buy rubles on the open market, in hopes of stabilising the exchange rate. The Bank of Russia will probably spend another US$70 billion to defend the ruble, which has almost halved against the US dollar this year, according to economists.
But reaching into reserves would make it more difficult for Putin to cushion a looming recession with Government spending, coddle favoured business leaders and project power abroad. It could also threaten Russia's credit rating.
"For Putin, the reserves that Russia has accumulated over the past 14 years equal political power," said Alexei Kudrin, who ran the country's finances from 2000 to 2011.
When Putin entered the Kremlin, in 1999, Russia was nearly broke. He had less than US$13 billion at his disposal and faced US$133 billion of foreign debt, mostly from the Soviet era.
Over the next eight years, rising crude prices fuelled average growth of 7 per cent a year, filled state coffers and prompted ratings companies to raise their assessments.
That helped embolden Putin. In 2007, when reserves surged past US$300 billion, the President openly criticised the US. In 2008, as the cash pile reached a record US$598 billion, Russia went to war with Georgia. Foreign currency holdings sank to US$376 billion in 2009 during the global financial crisis.
Putin views reserves as a proxy for Russian strength and adjusts foreign policy accordingly, said Tony Brenton, Britain's Ambassador to Russia from 2004 to 2008. For instance, Russia would have reacted more strongly to the 1999 Nato bombing of Serbia, an ally, had it not been so dependent on Western aid at the time, Brenton said.
As the latest ruble crisis deepens, some Russian lawmakers have called for Putin to impose capital controls, a step both the President and the central bank have publicly opposed. The Finance Ministry is urging exporters to convert more revenue into rubles to support the currency.
If sanctions persist, Russia could lose its investment-grade credit rating, Deutsche Bank has warned. Such a development would represent a personal embarrassment for Putin.
A cut below investment grade would also force some funds to sell what Russian government debt they hold. It could also lead to downgrades of major companies such as OAO Gazprom and OAO Lukoil, adding further pressure to the market.
Russia is currently rated one level above junk by Standard & Poor's and two steps above at Moody's Investors Service and Fitch Ratings.
About 40 per cent of Russia's reserves are held in two sovereign wealth funds that are controlled by the Finance Ministry. The Government is looking for ways to tap these funds to help cash-strapped enterprises while maintaining as much international currency as possible. Russian companies have about US$50 billion in non-ruble bonds and loans due by the end of 2015.
One option is to convert some of the US$80 billion Wellbeing Fund, which was designed to safeguard the pension system, into rubles to provide emergency loans to companies.
The Finance Ministry has already said it will use the other sovereign fund, the US$89 billion Reserve Fund, to cover at least half a projected 1 trillion-ruble budget shortfall next year.
The only way to lend this way would be for the ministry to sell foreign currency to the central bank, which would then have to print rubles, increasing the money supply, according to Ekaterina Vlasova, an economist at Citigroup in Moscow. Inflation, already running at more than 9 per cent, would probably accelerate, Vlasova said.
Officials have acknowledged that tapping reserves could further imperil the country's standing with investors.
"Using the wealth funds is a serious risk for Russia's credit rating," said Konstantin Vyshkovsky, head of the Finance Ministry's debt department. Few in Moscow, however, expect Putin to panic.
"For Putin, just one thing matters - is there money?" said Sergei Aleksashenko, a former first deputy chairman of the central bank.
spent supporting ruble.
in total reserves.
benchmark interest rate.
Ruble has almost halved against the US dollar this year.