The Dog Days of August for the Russian Stock Market
The Dog Days of Russian August put the Bite on the Russian Stock Market
August is historically a nasty month for Russia. And true to form, in the first ten days of the month this year, the Russian stock market lost a truly breathtaking 20% of its value, plunging from 2000 to 1600 on the dollar-denominated RTS index. The losses were actually far worse than they appeared, because the Kremlin had been feverishly pumping Russia’s precious reserves into the market to artificially inflate demand and limit the damage.
But even worse than the numbers was the reason for them. Julian Rimmer, a broker in Russian shares at CF Global Trading in London, explained: ”Russia is entirely hostage to external factors. The only thing which can arrest the decline would be some form of concerted — and simultaneous — central bank policy response. The perceived lethargy and lack of unanimity is extremely damaging.”
“Entirely hostage.” Ouch. ”Lethargy.” Double ouch. Nice work there, Mr. Putin!
The New York Times Dealbook reports (note that a group of crazed Russian businessmen thought they could buy off this reporter with a free trip to Russia a la Valdai; it blew up massively right in their faces and we could not be better pleased):
From Matt Marshall at VentureBeat:
Russia is the sixth-largest economy in the world, but it’s also a country relatively untouched by foreign investors, especially investors in technology. Could Russia potentially be the home of the next massive tech boom?
The short answer is: No way. At least not anytime soon. That’s the conclusion I’ve come to after a week in Moscow, a week in which I took part in the first ever delegation of US venture capital investors to visit Russia.
The organizers invited me as the sole member of the U.S. media. (Disclosure: My trip was organized by AmBar, a group of U.S.-based Russian professionals, and paid for by Rusnano, a government investment fund. In return, I promised to write an honest account of what I found.)
The Horror of the Russian Bear Market
On Tuesday this week the price of crude oil fell by 4.4% on concerns about the Spanish economy undermining the global recovery and in response the value of Russia’s stock markets plunged even more, the MICEX ruble-denominated exchange tumbling by a jolting 5.7% and the dollar-denominated RTS exchange plummeting a shocking 6.5%.
The fact that Russian shares fall instantly with the price of oil, but fall to a greater extent than that price, conclusively shows how pathetically dependent that Russian economy as a whole really is on oil, a finite resource that is running out fast. It is the unmistakable harbinger of doom for Russian society, as it is eaten away at its very foundations.
The MICEX has now shed one-fifth of its value since April, and the RTS has done likewise. Four more months like that and the entire Russian bourse would be history.
Encouragingly, there is strong evidence that foreign investors are at last wising up to the horrific dangers of investing in Russia, and are turning their backs on the Putin dictatorship.
A tale of a Russian Bull
Between February and April of this year, as shown in the chart at left, the Russian stock market (here represented by the RTS dollar-denominated index) staged an impressive rally, gaining 20%.
But in the last few weeks, the market has given up every single dollar of that gain, free-falling over 15% in another breathtaking debacle, the kind for which the Russian market has become hilariously infamous. Hilarious, that is, unless you are in that market yourself. Then your emotions are rather different.
A serious crisis in Greece spread to Europe as a bailout was requested, and as traders saw the Western economies losing ground they realized that Western demand for Russian oil cold falter. Since the only real value contained in the Russian stock market is in the form of oil stocks, the bottom dropped out of that market.
The Times the are a-Changin’
The Russian RTS stock index's performance last week
A year or so ago, when the U.S. and Russian stock markets were at historic highs, the ratio between the two was roughly 6:1. The U.S. Dow Jones average was valued at 14,000 while the Russian RTS average was at 2,400.
Times have changed. Both the U.S. and Russian stock markets have suffered debiliating setbacks, but the impact on Russia has been far, far worse. Today, the Dow Jones stands at 7,500 while the RTS is at 500. That means the ratio betwen the two is now on the order of 15:1. The relative size of the U.S. stock market compared to Russia’s has, in other words, increased by more the double following the onset of the global economic slowdown. It now stands in the appropriate ratio given the relative sizes of the two countries’ GDPs.
Jeannette Di Louie, Assistant Editor of Mt. Vernon Research, blogging on iStockAnalyst:
For my final blog of the day, I had a choice to write about Russia’s economic harships or the fact that Hugh Heffner has said that he would be open to selling the Playboy enterprise. Sadly for my mostly male audience, I chose to write about the first topic. However, if you’d like to know more about the potential sale, click here. If not, let’s get down to real business…
When we last discussed Russia, the motherland was doing less than phenomenally. In fact, former President and current Prime Minister Vladimir Putin was starting to feel the weight of a turning tide of public sentiment that was once heavily in his favor.
Putin is Worse than Any Foreign Foe
If Bob Dylan, of all people, can agree to use his music to hawk Pepsi Cola, surely all things are possible, and we live in hope. But we continue to be amazed and disappointed at the failure of the Obama administration to reverse course on Russia. Given the harsh criticism leveled at former U.S. President George Bush by Obama’s supporters, one would think it would be a no-brainer for them to reject Bush’s declaration that Putin was “trusthworthy” after having “looked into his eyes and glimpsed his soul” and start demanding that Putin respect human rights. And yet, Obama remains silent. In doing so, he betrays not only the interests of his own people but also those of the people of Russia, because their government, largely unopposed by Washington, is driving their economy to ruin.
The Russian Stock Market, back in Freefall
On Monday this week the Russian RTS dollar-denominated equities index took another massive hit, shedding over 6% of its value and dropping precariously close to the 500-point psychological barrier. Gazprom shares were down over 6% like the broader market, oil major LukOil lost even more (over 8%) and Sberbank, the nation’s bedrock financial institution, was down over a stunning 9% in just one day of trading. The RTS-2 index, which excludes the major equities that the Kremlin purchases with foreign currency money to inflate their value, though down less than 3%, did crash through the 500-point barrier to close at a stunning 496. The main RTS index was only slightly above that, closing at just over 531.
The ruble followed suit, plunging to a new historic low of 32.9 to the dollar, down 1.3% against the dollar/euro mix. The Russian currency has lost nearly one-third of the value it had before the August financial crisis began, and had been devalued a stunning 18 separate times since mid-November of last year when its slide was allowed to begin.
The ramifications for Russia’s reserve funds are dire indeed.
Russia — What kind of Country?
After 2 pm on New Year’s eve, those whose hobby is following the activity of the Russian stock market will have to find a new way to amuse themselves for a while. The markets will shut down at that time and they will not reopen, per Kremlin order, until Sunday — yes, Sunday — January 11th.
Just what kind of crazy “country” are we dealing with here, anyway?
You might think that ten days is an absurdly long time to shut down the national economy, but in fact for Russians it’s not nearly enough. Last Wednesday the Moscow Times reported:
With investors preparing for the holidays and many international funds closed until January, Russia’s equity markets look set for a quiet last two weeks. But the state may also seek to use the Christmas lull to buy up domestic equities as a consolation boost to finish out 2008. The state’s main bailout vehicle, Vneshekonombank, or VEB, will likely take advantage of the low trading volume on the MICEX and RTS exchanges in the coming days to prop up prices, analysts said, which could mitigate — if briefly — what has been a particularly dismal year for Russian stocks.
So the Russians need two weeks to prepare for ten days of binge drinking and doing even less than usual, and the Kremlin is planning to take advantage of this pre-lull miasma to invade and manipulate the stock market, driving its prices up artificially so as to create the illusion of an end-of–year uptick. Ironically, even the MT itself is affected, and won’t publish another issue during Russia’s national orgy of drinking. Its next outing will not come until January 12th.
There’s only one word for all of this, and that words is: Yikes!
The Russian Stock Market, Speaking in Tongues
- The RTS stock index on 12/3/08
The image at left shows the performance of the dollar-denominated RTS stock exchange on Wednesday December 3, 2008.
Though the market lost only 13 points from the opening bell, this represented nearly 2.5% of the exchange’s total value, a stunning fact emphasized by the market being driven close to the critical 600 point psychological barrier, which it has already crashed through on a previous occasion. Gazprom and Sberbank, the two leading Russian companies, were down well beyond the market average, 4.8% and 3.8% respectively. The consumer and retail index was down even more, nearly 8%. The MICEX ruble-denominated index suffered a similar loss. On Tuesday, the losses were even more staggering, and the market was once again shut down to staunch the bloodletting, making about three dozen such occurences since the August crisis began.
It seems we now need a new vocabulary with which to discuss the Russian stock markets, which appear to be speaking in tongues. Saying that the market suffered “only” a 2.5% trading loss would not mean much in any other country, but in Russia these days such losses would be sufficient to run the market all the way into the ground. Now, the Russian market has a “good” day whenever a full trading session is executed without the market but summarily shut down in panic by regulators.
Meanwhile, the market would have fallen even further were it not for the relentless buying by the Kremlin itself to inflate the market’s value, just as the Kremlin is doing with the ruble. As the Kremlin slowly becomes the sole owner of shares, and the price of oil — the Kremlin’s only real asset — dips shockingly below $40/barrel, it really can no longer be said that a stock market exists in Putin’s Russia. In the same way, it can’t be said that elections exist, or high offices of government.
There is only Putin.
Putin goes Potty
So, get this.
At a government meeting this past Monday, Russian “prime minister” Vladimir Putin said that it was “some kind of ugly thing, absolutely unfair” that the Russian stock market had lost 80% of its value in the past eight months because “decisions concerning which securities to buy or sell on Russian markets are, for the most part, made abroad. Moreover, the criteria by which these decisions are made have very little connection to the actual state of our economy or Russian companies.”
James Beadle of Pilgrim Asset Managment couldn’t quite agree. Beadle stated: “Russia’s situation has been, as we know, worse than most emerging markets. I put that down to the weak economic environment, the political risk and a lack of domestic investors.” Russia should have plenty of domestic investors, of course, given Putin’s claims of having raised the national income so dramatically. But it doesn’t, because in fact most of Russia’s oil windfall has been hoarded in the hands of a wealthy few, people who are now terrified to invest because Putin’s crazy forieign and domestic policies have left the nation without any sound economic fundamentals to lean on.
Comrade Putin’s remarks are, in other words, completely insane on two entirely different levels.
The Russian Financial Well, Running Dry
It takes some doing to keep up with the financial meltdown that has been wrought in Russia by the misguided policies of the nation’s dictator, Vladimir Putin.
At the end of the week, Reuters reported that the Putin regime had squandered a breathtaking $58 billion in September and October alone defending the value of the Russian ruble. Another $14 billion had been washed down the rathole of the regime’s efforts to bail out its corrupt and decrepit banking system, bringing the total to a stunning $72 billion before even considering the vast undisclosed amounts being spent to prop up the crippled stock market, or the unknown expenditures that have already occurred in November. $72 billion is roughly 15% of Russia’s total foreign exchange reserve fund, meaning that another year of this kind of spending would wipe out the fund entirely, assuming nothing was spent either on the stock market or economic growth and nothing was needed to compensate for budgetary deficits. None of those assumptions are remotely valid. Russia is on the fast track to bankruptcy, just like the USSR faced not long ago.
According to Reuters: “Finance Minister Alexei Kudrin told the parliament Russia has spent 90 billion roubles ($3.28 billion) on domestic stock and bond purchases so far this year out of the planned 250 billion roubles. ‘As of today, 18 percent of the national wealth fund has been placed on the local market,’ Kudrin said.”
Even “President” Dima Medvedev admitted that things were getting ugly. He stated: “Today, it is clear that the crisis is spreading, unfortunately from the financial sector into the sectors of the real economy. Every industry is affected in its own way. It is impossible to say that one among them is sitting pretty and will not get state money.” So much for the insane Russophile canard that the stock market does not affect real Russians! The old Russian problem of unpaid wages is again front and center, with a 33% increase in arrearages in the month of October.
And then there was the stock market. These days, its exploits read like a cheap dimestore novel than the records of a major bourse.
The RTS index is down nearly 20% this week
For the 35th time since the August financial crisis began, the Russian stock markets were shut down on Thursday at 1:30 pm Moscow time. At their low ebbs, the RTS dollar-denominated index was down over 8%, and the MICEX ruble index was down over 9% (the RTS closed down 7.4% and the MICEX closed down 4.4%) . Shockingly, the MICEX index was flirting with breaking through the 500-point psychological barrier into a 400-point valuation, and the RTS index had Sberbank, the nation’s leading and state-owned financial institution, was down a whopping 13% at its low point, closing down nearly 9%, while Gazprom and LUKOil were both down over 10% at the close. The RTS, too, was flirting with 400-point territory. Crude oil prices continued their slide, threatening $40/barrel territory, and the Russian markets collapsed once again. The RTS is down nearly 20% this week alone, despite repeated market closures and furious Kremlin buying. Had this not occurred, the value of the exchange could well be zero already. European markets were also down, but less than a third the amount Russia was facing.
The MICEX in freefall
The Russian stock market is back in freefall. For the second straight day, the dollar-denominated RTS exchange was shut down to stop horrific financial bloodletting, this time after less than half a day’s trading had taken place. The index plunged by over 4.5% and was artificially halted at noon Moscow time at the shocking value of 577. Mighty Gazprom’s shares were down nearly 6% as the price of oil continued to plummet precipitously. Once again the Russian market, supposedly a “leader” among emerging economies and “insulated” by fossil fuels from world market vagaries, bore the brunt of world losses and was easily out-performed by nations like Poland.
Stock Market Fun
by Dave Essel
Prompted by LR’s post “Freefall on the Russian Stock Market”, I decided to visit the RTSI (www.rts.ru) website. It was good fun. The site is quick and responsive and the charts are something! Click and see a daily, yearly, weekly, monthly, yearly, or 3-year graph.
The way the markets reflect politics is simply wonderful. You don’t need to look further for proof that people put their money where their mouth is, or, in other words: where the mouth (i.e. the information) is, thither goes the money.
In this case, it is OUT of Russia. As well it should be if you value your assets…
Once again on Monday, at 5 pm Moscow time, the dollar-denominated RTS stock exhchage was shut down to staunch frenzied, panicked selling.
When the Kremlin threw in the towel, the market was down 6% and flirting with crashing through the 600 point barrier, into truly shocking 500-point valuation — close to 80% less value than it had six months ago! The RTS market “closed” at 605, and the MICEX ruble-denominated market was shut down as well, having shed over 5% of its value and actually crashed through the 600-point psychological barrier to close at 560.
The oil & gas index led the way down as oil prices continued their precipitous slide and the value of Russian crude oil slipped well below $50/barrel. LUKOIL was down nearly 12% and so was the once-mighty Norilsk Nickle minerals concern. Sberbank was down nearly 10%. “Oil falling below $50 is a very worrying sign for the Russian budget,” admitted Alexander Zakharov, co-head of equities at Moscow-based Metropol.
Amazingly, the Russian ruble was stable, indicating that the Kremlin was spending its reserves at truly furious rate to keep it that way and giving Russia a fully-fledged Potemkin currency. What happens when the reserves run out, as they will do in less than a year at this rate of spending? Only the Devil knows for sure.
A Market in Freefall
Yesterday the Russian government announced that it could no longer afford to defend the Russian ruble on the currency markets, having squandered already a huge portion of its cash reserves doing so and simultaneously creating artificial demand on the Russian stock exchanges to prevent them from totally collapsing. On top of that, the price of oil on world markets dropped below $60 per barrel, a stunning cut in price from the $140 it had reached a few months ago. The result was entirely predictable: The Russian stock markets went into freefall.
Putin’s Russia, Shooting Blanks
The latest breathtaking failure by the Putin regime was documented with a report revealing that Russian oil exports have fallen to 25% below their prior level. The cause of the plunge is quite clear: The Putin regime has failed to lower oil tarriffs in line with the plummeting price of crude oil on world markets, meaning that Russian producers cannot profitably export their stocks and prefer to hold them and await a price rise.
The Putin regime knows only too well that it cannot simply cut the tariffs, which consitute the Kremlin’s main funding source. Yet, it is between a rock and a very hard neo-Soviet place, because if it does not cut the tariffs it may drive the entire oil industry into oblivion.
And that was only the beginning of an avalanche of bad economic news for Russia as the week began.
Streetwise Professor reports:
La Russophobe pointed me to this interesting post from the Conde Nast MarketMakers blog. The post discusses credit spreads for BRIC countries (Brazil, Russia, India, China). These credit spreads measure the creditworthiness of the sovereign debt on each of these countries. The higher the spread, the bigger the market’s estimate of a default (and/or the greater the market’s estimate of the loss conditional on default.)
You will note that as the credit crisis has exploded since late-August, all of these spreads have blown out, meaning that the market estimates that their risks of default have exploded. And surprise, surprise, surprise (cue Gomer Pyle voice), guess whose risk exploded most? Your favorite country and mine, Vlad’s paradise, that island of tranquility in troubled economic times.
In a nutshell, the market has deemed Russia the junkiest of the junky BRIC sovereign credits. And to think, this is the spread on government debt, the government that is sitting on $500 billion. Think of the market’s assessment of the credit risk of the “private” borrowers, eg Deripaska, Fridman/Alfa, Gazprom, Rosneft who are queuing up hat-in-hand to get charity from that government. Well, perhaps one reason for the wide spread is that market participants estimate that the $500 billion will be largely blown bailing out the oligarchs to keep strategic “crown jewels” out of the hands of the cursed foreigners.
An Island of Instability
by Valeriya Novodvorskaya**
Translated from the Russian by Dave Essel
The experts have already expounded on the financial crisis. And although our crisis is linked at one of the chain to the crisis in the West, it has its very own, Soviet, source. That source is rather closer to 1991 (when minister of defence Yazov decided to give the people a treat, opened up the Motherland’s strategic reserves and found that they contained nothing but mice and the equivalent of one dried up MRE each to distribute), than to the Great Depression, which was a crisis of overproduction as a result of which it was e.g. necessary to pour petrol on mountains of oranges and burn them rather than allow them to be sold at dumping prices.
The current crisis in the West is a also a crisis of overproduction. Ours is one of scarcity, a crisis of shortages and arrears.
Spectacular Fraud in the Russian Securities Markets
Well, let’s see now.
Last Friday, there was a horrifying bloodbath in in the Russian stock market, leading the market to be shut down not only for the remainder of the day but for the entire day on Monday.
And on Monday, the price of crude oil fell below $62 on world markets, stunningly far below the $75 baseline needed to preserve the Kremin’s budget. World stock markets plunged further.
And when the Russian stock market closed on Tuesday following its reopening that morning, six of the seven indices on the RTS index were in the red, half of them posting losses in excess of 3%.
Yet the RTS index itself was in the black, closing up nearly 5%. How is that possible, you may ask?
Fraud, dear reader, that is how.
The Russian Stock Market in Horrifying Freefall
Another bubble burst, another world on the RTS -- does Putin still feel the love?
In Friday’s trading the Russian stock market’s RTS dollar-based index (charted at left) crashed through yet another critical psychological barrier. When trading was once again shut down at 1 pm Moscow time to halt the carnage, the RTS index was below 590, down over 7% on the day and less than one quarter of the value the index held in May of this year, down over 75% in just six months. When trading reopened an hour later, the index immediately plunged to a loss of over 13%, just under 550, and the market was shut down again, this time for the rest of the day and ”until further notice.” Financials (down over 12%) and fuels (down nearly 14%) led the way into the abyss, and all this happened before the market could take cognizance of a big drop in the U.S. markets, which were down over 5% in early trading before climbing strongly at noon.
Gazprom and Sberbank were both down a jaw-dropping 22%. These are enterprises controlled lock, stock and barrel by the Russian government, and the government can do nothing to halt their slide, nor can it affect the plunge of the overall market even though it is frantically buying shares and squandering the national savings account to do so.Had the Kremlin not simply pulled the plug on the market at 1 pm, the market could well already have reached zero.There was a time, not long ago at all, when the Russophile madmen were talking about the Russian stock market and the Russian ruble the same way they used to talk about the military power of the USSR. And just as the USSR, despite all that blather, spontaneously collapsed and proved the utter folly of the propaganda, now the neo-Soviet economy has done exactly the same thing.
And as bad as things were on the RTS, they were even worse on the MICEX ruble-based index, where the lion’s share of the actual trading occurs.
The Neo-Communist Stock Market
It’s getting rather embarrassing these days to be a Kremlin flunkie.
One minute you’re given marching orders, for instance, to tell the world the Kremlin isn’t buying up shares in Russian enterprises in a cosmically insane effort to create a Potemkin illusion of prosperity just like they used to do in Soviet times. But no sooner do you start parrotting that absurd line (as a number of Commissars of the Internet did right here on this blog) than the Kremlin comes out and admits it’s going to do exactly that, spending 15% of the National Welfare Fund starting on Monday.
Reader “Dobo” points out the following piece (called “Kremlinomics”) from the Economist which explains in detail why Russia’s stock market has led the world in failure over the past half-year, instead of being the “safe haven” and bellweather of a resurgent economy that Vladimir Putin promised:
President Dmitry Medvedev dreams of turning Moscow into a global financial centre, but he has an awful long way to go. For Russia’s markets have slumped. Even after recent one-day rallies, the dollar-denominated RTS index and the rouble-denominated MICEX index have shed around two-thirds of their value since mid-May (see chart). These falls are bigger than in any other emerging markets, dealing a blow to Kremlin claims that Russia is a safe haven from global financial turmoil.
Harsh statist rhetoric, the shareholder dispute at the TNK-BP joint venture and the war with Georgia all hurt investor sentiment earlier this year. But the financial crisis has done the most damage. The first big companies to admit being in trouble were in construction, retailing and property. As credit markets all but closed, the cheap loans on which they relied dried up. Companies started to change hands for prices that would have seemed derisory just months earlier. Struggling retail and investment banks, including one that was emblematic of Russia’s boom—Renaissance Capital—have been partly or wholly bought by rivals. This week Globex, a small retail bank, experienced a run on deposits. Even Russia’s oligarchs feel the pain. Oleg Deripaska, the aluminium king who is the richest of all, has had to unload a big stake in a Canadian car-parts firm after failing to meet a margin call.
The inexorable march to zero: In the past three weeks the Russian stock market has lost half its value and is down 75% from its historic high
Though world markets were up on Friday (2-3% gains were posted in Europe’s major markets), the Russian stock market broke through yet another psychological barrier in its inexorable retreat, and as of 3 pm Moscow time on Friday the RTS dollar index was down nearly 5%. Following yet another horrifying result of double-digit losses the day before (and yet another predictable market shut-down – they occurred three out of five trading days this week alone), as the price of oil fell below the $70/barrel barrier and called Russia’s basic budgetary assumptions into question the RTS broke through the 700 point barrier to stand at 685 (the MICEX ruble index, in turn, was on the cusp of smashing into 500 territory). This means that the market has now lost nearly 75% of the value it established at its high water mark last May. Gazprom was down 8% on Friday, LukOil down 10% and the oil & gas index down over 6%.