Marshall I. Goldman, emeritus professor of economics at Wellesley College, senior scholar at Harvard University’s Davis Center, and author of Petrostate: Putin, Power and the New Russia, writing in the Moscow Times:
Given how rapidly Russia moved from near-bankruptcy in 1998 to what seemed like unprecedented prosperity in 2007 and early 2008, perhaps we should not be surprised that Russian financial markets have been hit even harder than those in the United States, Europe and Asia.
In addition, the original oligarchs, along with the new ones who rose to wealth with former President Vladimir Putin’s help, have suffered especially large reversals. Billionaires from Oleg Deripaska to Roman Abramovich have lost more than $230 billion as the combined wealth of Forbes magazine’s 25 richest Russians tumbled 62 percent from May 19 to Oct. 6, Bloomberg reported. How did all of this happen?
Economics, Russian Style
You have to hand it to the Russians. No matter how bad things might be today, they can always suprise you — and make tomorrow so much worse you can’t believe you thought yesterday was bad.
Anders Aslund, writing in the Moscow Times, delivers the brutal wakeup call to those in the Kremlin who are asleep at the switch (copious amounts of vodka will do that to you):
These are frightful times. The U.S. financial crisis is clearly the worst since the Great Depression. New York University Professor Nouriel Roubini has long forewarned that this crisis was under way. Subprime mortgages were a sham from the outset, and the government should have regulated them — and the derivatives on which they were based — more closely. Moreover, the U.S. Federal Reserve maintained excessively low interest rates for too long, leading to an excessive monetary expansion.
The U.S. financial system had too little capital for the large credits it issued, especially the ones issued by government-sponsored Freddie Mac and Fannie Mae. The economic boom was too long and magnificent to believe. Booms breed corruption, while recessions strengthen morals. Now, we are waiting for the next shoe to fall. Surprisingly, no hedge-fund failure has been truly spectacular as yet, but some private equity funds are bound to be hit.
Amazingly, forecasts for the U.S. economy for next year are still suggesting growth of 2 percent. That is not likely, however, since the current financial turmoil will inevitably hit the real economy. Both investment and consumption are bound to be constrained as U.S. consumers will try to restore a normal savings ratio, and this will make the economy slump further. A number of large companies in sensitive, cyclical industries such as automobile manufacturing, aviation and construction will probably go under.
On March 26, I wrote a column in this newspaper arguing that Russia was likely to be the safest haven in the event that “the United States approaches a 1929-like depression.” Well, now we are there, but I am no longer convinced that “Russia will most likely suffer the least” from the turmoil.
An editorial in the Financial Times:
In a week of extraordinary events, Friday’s 30 per cent bounce in Russia’s stock market ranks with the best of them. The $130bn support package stitched together during Moscow’s two-day market shutdown achieved its immediate goal. But, like the bigger crisis 10 years ago, Russia’s crash of 2008 has long-term implications.
First, it punctured the conceit that Moscow can soon become a global financial centre. The market plunge exposed deep cracks in its financial infrastructure. Russia must deepen its domestic capital pool, accelerate moves to get pension funds into equities, and develop its retail investment market. It must cultivate properly functioning domestic bank lending so that businesses can finance themselves on competitive terms. And it must ensure future central bank liquidity injections are more efficiently disbursed into the financial system.
Former Russian deputy prime minister Boris Nemstov, in the middle of an argument Putin style with the neo-Soviet Kremlin
Now here is an example of the blogosphere at its best.
- Step #1: We put up a post analyzing the Russian stock market crash.
- Step #2: Posting a link, commenter “Dobo” shows us a report on Kavkaz Centre talking up an interview by former deputy PM Boris Nemstov on the same subject.
- Step #3: We ask for a link to the source interview.
- Step #4: Another commenter (“Felix“) provides it.
- Step #5: Our expert translator Dave Essel offers his brilliant English rendering. Mind you, all this is gratis, work donated to help the people of Russia escape from dictatorship.
- Step #6: We publish it (after the jump). But for this chain of events, Mr. Nemtsov’s brave insights might never have seen the light of day in English. It makes us a very formidable community. Let’s have more of the same, shall we?
Writing in the Lebanon Daily Star, leading Russia expert Anders Aslund (a former Yeltsin advisor) argues that Vladimir Putin — whom he refers to as a “villain” – has become too costly a burden for Russia to bear much longer:
Today, the whole world is being hit by a tremendous financial crisis, but Russia is facing a perfect storm. The Russian stock market is in free fall, plummeting by 60 percent since May 19, a loss of $900 billion. And the plunge is accelerating. As a result, Russia’s economic growth is likely to fall sharply and suddenly.
One problem is that, after a long period of fiscal prudence, Russia’s government has shown extraordinary ineptitude. Russia has enjoyed average annual economic growth of 7 percent since 1999. With huge current-account and budget surpluses, it had accumulated international reserves of $600 billion by July. Its public debt was almost eliminated. But the open economy that has bred Russia’s economic success requires the maintenance of sensible policies to succeed.
Writing in the Moscow Times, Russian economist Konstantin Sonin says that the Russian stock market is doomed (actually, he said it, before Black Tuesday, making him look pretty sharp indeed):
President Dmitry Medvedev likes to blame Russia’s stock market troubles on the global financial crisis that was triggered by the U.S. housing market bust, while critics of Medvedev and Prime Minister Vladimir Putin see it as the result of the government’s mistakes.
The truth lies somewhere in the middle, but probably closer to Medvedev’s position. Developing markets fluctuate in unison, so most of Russia’s losses can be attributed to investors’ jitters over the worsening global crisis. But the MSCI Emerging Markets Index, which tracks stock markets in developing economies, fell by just 20 percent since May, while Russia’s stock market dropped by more than 40 percent. This suggests that Russia’s leadership played a significant role in the stock market decline.
The Russian stock market has plunged below the 1400 psychological barrier and, as shown above, its key indexes are down nearly 45% since June
The Russian stock market continues its freefall, and the Kremlin is in full-on panic mode. As the graphic above indicates, the RTS metals index is down 45% from its June position, and the other indexes are hot on its heels. The Moscow Times reports: “Hit by the news that second-quarter economic growth fell to 7.5 percent, from 8.5 percent a quarter earlier, and a year-to-date inflation figure of 9.8 percent, the dollar-denominated RTS fell to 1,309.49 points, a two-year low, closing at 1,334.33, a fall of 4.4 percent. The more liquid, ruble-denominated MICEX fell 3.8 percent to 1,114.67 at the close, its lowest level in 27 months.” And this in a climate of radically higher oil prices! Do you dare imagine what would be happening to this market if oil was still at $60 a barrel? UPDATE: The following day, the market crashed through the 1300 psychological barrier to close at 1298.08 on the RTS, ignoring the reassurances given by “president” Medvedev, as described below. The MICEX was flirting with triple digits, and Russia was warned against artificially inflating the market with a government cash infusion, on pain of a reduced credit rating.
Russian “president” Dima Medvedev’s reaction? Pure gibberish, frighteningly unhinged.
The Guardian reports:
For Russia’s leadership, it seemed everything had gone right. In three weeks, the country had invaded Georgia, crushed its military and defied international opinion by recognising the breakaway republics of South Ossetia and Abkhazia. Western threats came to nothing. Russia’s attack on Georgia went unpunished.
But victory has been undermined by an alarming flight of capital. Analysts estimate that, since the war began on August 8, $19bn (£10.7bn) has been withdrawn from the country. The Kremlin is also facing other economic problems. They include a rapid drop in the oil price, which has fallen almost 30% from peaks close to $150 a barrel, and a 9.7% increase in inflation since the start of the year.
Analysts believe the war could become a catalyst for a more profound slowdown following at least seven years of unprecedented economic growth. So far the Kremlin has managed to unite Russians in support for the invasion of Georgia. But as the economy cools, the euphoria is wearing off.
“The war in Georgia has been the major driver of the whole thing. Officially capital flight has been $19bn. We estimate it could be $20bn-$25bn,” said Vladimir Osakovsky, a Moscow-based analyst at UniCredit.
“For most of this year we were viewed as a safe haven. Capital was flowing into Russian markets and into Russian funds. We have lost this safe-haven sense.”
The Russian stock market is in freefall
One picture truly is worth ten thousand screams as the Russian stock market closes this week. The RTS index is down over 6.5% on Friday, just one day, barely above 1400, down one thousand points or an astonishing, appalling 40% down since its summer high of 2400.
Writing in the Moscow Times Anders Aslund, a senior fellow of the Peterson Institute for International Economics and the author of Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed, gives Russians the bad news about their economic future under the dictator Vladimir Putin, a proud KGB spy with no economic training who has never run a business. Following, a second piece from Aslund in which he explains how Russian economic weakness can be exploited in the new cold war to the West’s advantage.
Aug. 8 stands out as a fateful day for Russia. It marks Prime Minister Vladimir Putin’s greatest strategic blunder. In one blow, he wiped out half a trillion dollars of stock market value, stalled all domestic reforms and isolated Russia from the outside world. Russia’s attack on its small democratic neighbor was bad enough, but its recognition of two conquered protectorates as independent states has been supported only by Hamas, Belarus, Venezuela and Cuba. Putin is turning Russia into a rogue state.
Since August 6th when Russia invaded Georgia in a wanton act of imperialist aggression, the Russian stock market has lost a stunning one-sixth of its total value
Investors Business Daily reports:
In contrast with the West’s otherwise tepid response to Moscow’s new nationalism, one group has taken a tough stance — investors, who are leading the march out of Russia’s markets.
The Russian stock market tracks the Georgia crisis
Putin, Enemy of Markets
The Moscow Times reported on Wednesday: “Russia stocks slumped badly Tuesday as concerns over the continuing Georgia crisis fueled investor pessimism . . . . The dollar-dominated RTS index sank 5.2 percent to 1,685.6 points, its lowest since November 2006, while the ruble-denominated MICEX Index dropped 6 percent to 1,361.54 points, its steepest fall in almost seven months.”
As the chart above clearly shows, between August 6th, when Russia invaded Georgia, and August 10th, when it agreed to a ceasefire at the urging of French President Nicholas Sarkozy, the market lost over 10% of its value. It then recovered on news that the country would stop fighting, only to plunge again when it became clear that Russia had no intention of keeping its promise to Sarkozy, as world condemnation escalated. Informed investors understand the basic reality: The Russian market is a hollow fraud, utterly dependent upon the fluctuating market for crude oil, with no normal foundation based on diversity and consumer production. On top of that, Russia is governed by a rogue regime capable of seizing assets and starting unwinnable wars at the drop of a hat, isolating Russia from world markets and terrorizing businessmen of all stripes.
The Motley Fool gets it: “With all that’s occurring in Russia these days, I’m wondering how long it’ll be before Western investment in that nation grinds to a halt.” They say Russia is now an “investment gulag.”
Paul Goble reports that Russia’s war of aggression in Georgia has cost the country billions in capital flight alone:
More than seven billion U.S. dollars left Russia during Moscow’s military campaign in Georgia, a rate more than ten times higher than earlier in the year and the product at least in part of fears that “certain political risks” are making the Russian Federation a less attractive place for investment, according to Russian Finance Minister Aleksei Kudrin.
Rich and Poor in Russia
The Moscow Times reports that the more things change in Russia, the more they stay the same. The nation still labors under the same appalling class inequities that provoked the Bolshevik revolution and persisted in Communist times:
Nikolai Nikitin by all appearances is Russia’s Average Joe. The 82-year-old retiree with blinking blue eyes supplements his monthly pension of 4,000 rubles ($170) with what grows in the garden in front of his small wooden house. His nephew Mikhail, 47, brings home another 15,000 rubles ($635) a month from his job as a security guard. Together they barely scrape a living. Nikitin may not be so average in having surpassed the country’s male life expectancy of 59 by 23 years. But in his neighborhood, he stands out for his poverty. Nikitin is encircled by wealth.