Vladimir Putin’s worst nightmare may be happening right now

Is Russia’s tanking economy making its leader vulnerable?

A plummeting currency, rising inflation and sagging oil prices — that's the stuff Vladimir Putin's nightmares are probably made of.

The former KGB operative has staked his reputation for years on Russia's spectacular economic growth throughout the 2000s, thanks to its dependence on increasingly lucrative energy exports.

As the price of oil, Russia's most important export, climbed from $16 a barrel in 1999 to more than $140 in 2008, a new middle class enjoyed the fruits of prosperity, eagerly burying the memories of the impoverished 1990s.

Read MoreCrumbling oil makes Putin more dangerous: Expert

But as the Kremlin now lords over Ukraine and stares down the West, Putin's nationalist gambit is finally being felt on the home front, threatening the central notion that's helped keep him in power so long.

"The myth of 'stability' has now been broken," says Anders Aslund, a senior fellow at the Peterson Institute for International Economics.

Russian rubles on display in front of a portrait of Russian President Vladimir Putin.
Ulrich Baungarten | Getty Images
Russian rubles on display in front of a portrait of Russian President Vladimir Putin.

While Putin's grip on power is still far from tenuous, the steady stream of gloomy economic news is probably causing at least some concern in the Kremlin.

The effects of Western sanctions and steady drop in global oil prices to a five-year low of below $70 this week are costing Russia some $140 billion annually, according to the government's own estimates.

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Russian officials on Tuesday warned the country faces a recession in 2015 that could see the economy shrink for the first time in five years.

They believe it will contract by 0.8 percent next year, down from a previous estimate of 1.2 percent growth.

Ordinary Russians have watched as their currency lost nearly 40 percent of its value since the beginning of the year. They can also expect double-digit inflation by early next year, officials predict.

Taken together, these stats are why Putin has long stopped trumpeting his country's economic statistics in order to boost popular support, says Alexander Baunov, an editor of one of Russia's only remaining independent news outlets.

Read MoreAs ruble tumbles,what will Putin do next?

Instead, the third-term president harps on the historical injustices he claims Russia has suffered at the hands of foreign powers, part of a nationalist drive casting his country as a bulwark against the West and shielding him from domestic contempt.

"The frustrated president-economist has turned into the president-historian before our eyes," Baunov wrote Tuesday on Slon.ru. "And usually this portends nothing good."

Even those with ties to Putin are warning about the dangers of his current political strategy, which has spooked investors and boosted capital flight to nearly $130 billion this year.

Late last month, a well-respected former longtime finance minister under Putin argued in a newspaper editorial that the president's "populist approach" would slow economic growth in the long term.

To be sure, most Russians haven't registered the developments quite yet. A majority of the population still credits Putin for restoring what it sees as Russia's rightful role on the global stage.

Thanks to a fierce propaganda campaign that's played out over state-controlled media here, few people realize the economic malaise is the Kremlin's own fault, says Denis Volkov, a researcher at the independent Levada Center think tank.

Read MoreWhy is Putin buying gold?

Instead, many remain resentful of what state television insists are aggressive and irrational Western policies toward Russia.

"Almost no one understands the point of view of the other side," he says. "People do not even understand why the West is imposing sanctions, for example."

The Kremlin has bolstered its narrative with an ongoing onslaught against the last vestiges of independent media. Critical outlets have been emasculated or shuttered and their editors threatened or cowed.

That helps explain why even though 60 percent of Russians say they've noticed the hike in consumer prices, a whopping 82 percent of decided voters would reelect Putin in a snap presidential heat, according to fresh Levada statistics.

Some observers suggest Russia's economy can still float along while depending on its substantial foreign currency reserves — which hover around $400 billion — to stave off economic depression and widespread discontent.

But Aslund says the usable sum of those reserves is actually much smaller, while the price of oil may continue its steady slump.

"I think we are likely to see much more decline than anybody now predicts," he says.

Other observers say that while Putin can still count on the propaganda coup his state media machine has pulled off, it's only because Russians haven't had to cope with the downturn for long.

What comes next, says Volkov, is still anyone's guess.

On one hand, Putin has already successfully weathered a mass protest movement and defanged his political opposition. On the other, it's the first time his 14-year rule has been put through such economic trials.

"We're only in the very beginning of this situation," Volkov adds, "so it's rather hard to forecast how it will develop."