Will Putin slip on cheap oil?

Russia makes much of its money from selling oil, and is being squeezed by the falling price.Can the country's president survive as his fellow countrymen turn glum? Simon Wilson reports.

Has Putin been good for Russia?

Whatever you think of his authoritarian politics, narcissistic personality, kleptocratic friends and undeclared wars on neighbours, Putin's popularity among ordinary Russians has been rooted in the fact that he oversaw a period of relative economic success.

Putin took over shortly after the humiliation of 1998, when years of economic underperformance and overspending collided with a set of external shocks that triggered crisis and default.

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From 1999 until 2008, during his brief initial period as prime minister and first two terms as president, the economy grew at an annual rate of 7% and real incomes more than doubled.

Pensions and wages were paid on time, and Putin could boast that "not only has Russia now made a full turnaround after years of industrial decline, but it has also become one of the world's ten biggest economies".

What about now?

Things aren't so good. The past year has been an economic nightmare, caused both by factors outside Moscow's control (the tumbling oil price) and those very much within it, namely Russia's seizure of Crimea and military interventions in eastern Ukraine, and the resulting Western sanctions.

The rouble has lost about 50% of its value this year, while inflation is 9% and rising, as the weak currency sends the cost of imported goods higher. Stocks have collapsed, corporate debt levels are surging, net capital outflow is poised to reach a record 6% of GDP, and the government has just ditched Russia's growth forecasts and admitted that it is heading into recession.

How bad will it get?

Official forecasts project a 0.8% contraction next year, but independent economists reckon the slump will be at least 2%-3% and even that assumes the oil price will bounce back from its current sub-$70 lows. All of which makes Putin's implicit pact with the elite and the people "strong" government in return for a richer Russia look decidedly rocky. Already, nervous Russians are converting their roubles into foreign currency in droves.

Meanwhile, protesters marched in 40 cities across Russia last month over health-care spending cuts in 2015 of up to 20%. And Putin has announced a freeze on government salaries that, in the context of spiralling inflation, will see many people whoare used to relative comfort facing a massive slump inreal incomes.

What is Putin thinking?

It appears that Putin has made a major strategic blunder in overestimating the strength of his own hand and underestimating the will of the Western powers to counter him.

Russia has legitimate interests in Ukraine: Crimea is a historic Russian province where many people are delighted to be reunified with Moscow. And eastern Ukraine is a mostly Russian-speaking region where some people would prefer to be part of Russia.

But any trust or goodwill between Putin and the West has been destroyed by Russia's barely covert military support for Ukrainian separatists and Putin's unembarrassed willingness to lie about it.

What else is he doing?

Rather than apologise and offer reparation for the rebels' use of Russian weaponry in the accidental shooting down of a civilian airliner, Putin has instead claimed that "fascists" are conspiring against Russian interests, started throwing his weight around in the Baltics, and reminding everybody that Russia is a nuclearpower that must not be messed with.

In reality, the West hasno interest in a resumed Cold War with Russia; indeed, the global strategic agenda, from eastern Europe to Iran, Syria,and the wider Middle East, requires better ties with Moscow.

Yet last month, when offered a chance to mend fences at the G20 in Australia, Putin instead invited hostility and mockery by stationing four warships off the coast for "protection".

Will Putin survive?

Much depends on the economy. According to most analysts, this is faltering, but not yet on the brink of collapse. Indeed, there are grounds for seeing a silver lining, says Timothy Ash of Standard Bank in a recent research note.

First, lower oil prices could force Russia to undertake much-needed structural reforms aimed at liberalising and diversifying its economy. And second, rouble weakness could help resolve years of "Dutch disease", in which an overvalued currency acted to squeeze out much of the domestic non-oil economy by making it uncompetitive.

"That said, years of underinvestment and now a very uncertain business and economic outlook might still stall the much needed investment required to bring about a supply response," reckons Ash. In which case, all bets are off including how long Russia's elite will tolerate a bungling president leading the country to penury as well as isolation.

Will the oligarchs turn on Putin?

"The big test is what happens once Russians really start to suffer," says the business partner of one of Russia's richest oligarchs, quoted anonymously by The Sunday Times. "At first they'll rally around Putin, but for how long? The wealthy elites are already upset at the course Putin has taken the country on but are too scared to show it". T

heir caution is unlikely to last long, however, says Nathan Vardi in Forbes: Putin's political demise will come "sooner rather than later" and will happen either "through a coup de grce from within the existing power system that will replace him or via a Colour Revolution' (like the Orange one that took place in Ukraine)".