A STEEP plunge in the rouble, caused by sanctions over the Ukraine crisis and falling oil prices, has underlined Russia’s heavy dependence on Western finance to balance its dollar-thirsty economy.

    For all President Vladimir Putin’s anti-Western bravado and talk of shifting Russia’s economic ties to Asia, the last few weeks show the opposite — that the cogs of the economy are oiled by financial flows from the West.

    A fall in foreign exchange inflows has prompted some economists to ask whether Putin and his government might be encouraged to wind down the conflict in Ukraine and divert resources and attention to the economy.

    “There’s enough incentive on them to make a political settlement ... With Russia the story is about FX,” said one economist, who requested anonymity. “That is Russia’s Achilles’ heel.”

    The rouble has shed some 20 percent against the dollar this year, including 6.5 percent in the last month alone, and the immediate catalyst for the breakneck descent is the tumbling price of oil, Russia’s major export.

    Putin’s promises to reduce reliance on energy exports have not been fulfilled, and each one-dollar fall in the oil price knocks around US$2.5-US$3 billion off Russia’s exports over the course of a year, implying that the US$25 decline seen in the last three months could cost Russia US$65-US$75 billion.

    If all other things are equal, that would be enough to wipe out the current account surplus that constitutes the basic source of foreign currency earnings.

    An even deeper problem is the hit delivered to foreign exchange inflows by a collapse of foreign investment into Russia as a result of the tensions around east Ukraine, where forces loyal to Kiev have been fighting pro-Russian separatists whom the West says are backed by Russian troops and weapons.

    Balance of payments data for the first nine months of the year shows that investment inflows fell to the tune of US$125 billion, and even turned negative due to repayments of existing debts outweighing new inflows.

    The resulting chasm in the foreign exchange market suggests that, barring a strong rebound of the oil price, the downward pressure on the rouble will continue until Western sanctions are lifted and investment recovers.

    One reason to think that the rouble has yet to price in the full impact of the oil price and investment plunges is the role that the central bank has played in plugging the forex hole.

    The bank has already spent over US$50 billion this year — including more than US$10 billion this month — filling the gap and thereby supporting the rouble.(SD-Agencies)