By Christian Lowe
MOSCOW, Dec 29 (Reuters) - Russian Prime Minister Vladimir Putin's determination not to slash the rouble's value comes at a price: it could send the spluttering economy even faster into recession, fuelling the public discontent he set out to avoid.
Despite intense pressure on the rouble from falling world oil prices, Putin has ruled out any sharp fluctuations in the currency, fearing that to take that step would revive voters' painful memories of the economic turmoil in the 1990s.
His officials opted instead for a "salami slice" approach -- devaluing the currency in small increments over several months. The central bank on Monday allowed the ninth mini-devaluation of the rouble this month.
But analysts say that policy is freezing cash flow in the economy because banks, investors and consumers -- expecting that the rouble will fall further and uncertain how far -- are hoarding their assets in foreign currency and refusing to spend.
"They (the government) are between the proverbial rock and a hard place," said Chris Weafer, Chief Strategist with Uralsib.
"They are now having to balance what has become a fairly obvious need for a devaluation with the political risks of backtracking on a fairly clear statement from the prime minister," he said.
CONFIDENCE DRAINING
The economic slowdown is already presenting the Kremlin with the biggest challenge to its rule in a decade, threatening to reverse the growth in incomes on which Putin had built his popularity and his firm grip on power.
The rouble has lost 17 percent of its value against a euro-dollar basket this year despite the central bank spending over $100 billion of its reserves on supporting it.
The country's main stock markets are down about 70 percent from peaks in May, and analysts polled by Reuters predicted the economy would next year slip into recession for the first time in a decade.
Some analysts say the Kremlin's fear of allowing a repeat of 1998, when the rouble crashed and the government lost what little public support it then had, is having the effect of making the problems worse.
"The central bank's attempts to outplay the market will not only decrease reserves, but also suppress economic growth as money will not move," Yevgeny Gavrilenkov, Chief Economist of investment bank Troika Dialog, wrote in a research note.
"Wage and tax arrears have started to appear as credit markets remain frozen, which is one more reminder of the 1998 situation," he said.
Firms such as Toyota have already pegged their prices in Russia to the dollar in a major vote of no confidence in the rouble.
Unable to obtain credit or cash, Russian companies are laying off staff. The government said on Monday it expected the number of jobless claiming benefits to rise 69 percent next year.
MOOD FOR PROTEST
That carries a political risk for Putin, still Russia's dominant political force despite stepping down from the presidency in May to make way for his protege, Dmitry Medvedev.
Leonid Sedov, researcher with independent pollster Levada Centre, said popularity ratings for Putin and Medvedev are largely unchanged. But he added: "The protest mood, the readiness to take part in demonstrations, has grown."
In the first half of this year, 18 percent of people polled by Levada said they believed anti-government protests were quite possible in their town or district. In the second half, that figure was up to 23 percent.
Protests earlier this month against a plan to raise import tariffs on foreign cars were a sign of the public mood.
Underlining the Kremlin's nervousness on the issue, riot police in the Pacific port city of Vladivostok broke up an anti-tariff protest and arrested dozens of people.
"We are entering a phase when millions of people are losing their jobs, their savings, living standards will harshly decline," said Garry Kasparov, a former world chess champion and Kremlin critic. "They have to blame somebody."
MORE SALAMI SLICING
Some market players speculate the central bank could use the long New Year break -- Russians are off work from Jan. 1 to Jan. 11 -- to try to push through a sharp devaluation of the rouble without attracting too much attention.
But analysts predict further mini-devaluations. Economists polled by Reuters forecast that at the end of next year the rouble would stand at about 36 versus a euro-dollar basket, or only around 4 percent down on its level now.
"My guess is that they will continue that policy and go for a (gradual) devaluation for political reasons even though from the economic point of view it would be better just to have a one-off and say 'We are done'," said Uralsib's Weafer.
"People associate devaluation with political crisis," he said. "The government is simply paranoid that a devaluation could trigger these memories."
For a selection of stories on the impact of the financial crisis on Russia, click on (Additional reporting by Toni Vorobyova and Melissa Akin; Editing by Janet McBride)