Russia’s year began with a spectacular display of sporting prowess, organisational ability and, above all, financial muscle.

The Winter Olympics in Sochi were the most expensive Games ever, with costs spiralling from a predicted $12 billion (€9.8 billion) to more than $50 billion (€41 billion), as technical challenges mounted and countless interested parties demanded their cut. The Games allowed Russian president Vladimir Putin to portray his country as a resurgent power, a leader among Bric nations that were poised to challenge US hegemony.

The story at year's end is very different. Russia is the subject of US and EU sanctions over its annexation of Crimea and support for separatist rebels in Ukraine. It was barred from the last meeting of G8 states, and relations with the West are at their lowest ebb since the cold war.

This week saw the country's financial markets endure what deputy central bank chief Sergei Shvetsov called a "critical" situation that "could not be imagined even in our nightmares a year ago".

In the early hours of Tuesday in Moscow, the central bank announced a hike in its key interest rates from 10.5 to 17 percent, but the apparently desperate move won only brief respite for the rouble.

After a quick bounce, the currency continued its precipitous slide, falling at one point to 80 against the US dollar and 100 to the euro; at the start of the year, $1 was buying only around 33 roubles and 1 euro about 45 roubles.

Co-ordinated action

On Wednesday, as Russia’s usually timid press criticised the government and central bank and even questioned Putin’s ability to cure the country’s financial woes, talk swirled of a repeat of the 1998 financial crash and people rushed to buy cars, furniture and electronic goods before prices rose; in response, some designer boutiques closed their doors and Apple halted online sales in Russia.

A belated display of co-ordinated action from the finance ministry and central bank halted the rouble’s fall, with major intervention on the currency markets and the announcement of measures both to help businesses meet debt repayments and allow banks postpone potentially crippling write-downs on assets.

The moves powered a 12 per cent recovery in the rouble but the week’s dizzying gyrations – against the backdrop of what is still a 45 per cent drop in the currency’s value this year – left Russia reeling and raised fears over the stability of its economy.

It is an economy that Putin has utterly failed to diversify during 15 years in power and one that still relies on oil and gas for about 60 per cent of its export revenue and 50 per cent of its national budget.

The collapse of energy prices since the summer has placed growing pressure on the state, which bases its budget on an oil price of $100 per barrel. Oil is now trading at around $60, having fallen more than 40 per cent since June.

The major oil producing states of Opec, of which Russia is not a member, say they have no intention of reducing supply to support the oil price, and analysts see no prospect of a strong and sustained recovery in the market in the near future.

Prolonged weakness in energy prices will depress the rouble and force Russia to dip deeper into its foreign reserves. These stand at more than $400 billion, but it has drawn down almost $90 billion from that total this year to slow the slide in the currency’s value.

Russia’s reserves

For Putin, who took over a Russia that was almost bankrupt at the end of the chaotic 1990s, the surge in Russia’s reserves is a source of pride, a symbol of how he – and soaring energy prices – revived the country’s fortunes, and also a shield with which to fend off foreign pressure.

Analysts asked why the central bank did not use those reserves more boldly in the market to buoy the rouble; some believe Putin wants to save them for what could be a long, painful struggle ahead.

Tim Ash of Standard Bank says the Kremlin may view the reserves "as uber-strategic because of the conflict in Ukraine and the geopolitical tensions with the West" and that they should be saved "for later down the line for use on strategic priorities, eg cleaning up the banking sector or building gas pipelines to Asia. It shows that Putin is planning for a long drawn out crisis with the West, and is unlikely to compromise over Ukraine."

Putin puts most of the blame for his country's woes on "external factors". In Russia, the weakness in oil prices is often blamed on an alleged pact between the US and Saudi Arabia to put economic and political pressure on Russia and Iran.

Regardless, the impact is already being felt by ordinary Russians, who are struggling to cope with inflation at 9 per cent and which is expected to rise, and a stagnant economy forecast to shrink by 4.5 per cent next year if oil prices fail to recover.

At his annual televised press conference on Thursday, Putin said Russia must modernise and diversify its economy, improve conditions for smaller businesses and wait for oil prices to recover. It was the same mantra as previous years, and reinforced a growing feeling that Putin and his economic team are devoid of ideas.

"There's not much he can do," says Alexander Konovalov, president of Russia's Institute for Strategic Assessments. "People are starting to grasp that the Kremlin has no strategy and that it's not in a position to manage [the crisis]."

Kirill Rogov of Moscow's Gaidar Institute for Economic Policy says Russia's reserves will not be enough to save the country from major trouble.

“We’re facing an uncontrollable shock that will undermine trust in Putin’s entire economic model,” he says.

The pride inspired by the Sochi Olympics and the annexation of Crimea is fading fast, and even media known for their fawning loyalty to Putin sound unnerved.

"Suddenly, the sense of stability, of controllability of the political process is gone from our lives again," the popular Moskovsky Komsomolets newspaper writes this week. "Gone is the feeling that Putin is a kind of magician who controls everything."

Reshuffle

Analysts expect Putin to make personnel changes soon, perhaps replacing the head of the central bank and even prime minister

Dmitry Medvedev

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The markets would most warmly welcome Alexei Kudrin as his replacement, but the respected former finance minister is seen as too liberal a figure, who would demand military spending cuts that are politically unacceptable for Putin.

Amid conflict in Ukraine and with the West, "hawks" have the upper hand in Moscow, making a figure like Sergei Glazyev a candidate for premier – a move analyst Dmitry Oreshkin says would be a "death sentence for the economy".

As he cast around for solutions to his rouble trouble this week, Putin even took the highly unusual step of consulting Russia’s security council.

"I think the euro and dollar are overvalued," said the council's chief, Nikolai Patrushev, who like Putin is a former head of Russia's security services. "In a while they'll fall. So I think people are making a mistake when they change roubles into foreign currency."