Special Extra — The Russian Economy, Imploding

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 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.

He stated: “In the end these changes are not dramatic. … If the right decisions are made, the situation will straighten out. We will return to the levels that we saw at the start of the year. In any case, I believe this is within the power of the government.” Crazed denial that extreme can only stem from one source:  Abject panic.  Nobody can help but hear the echoes of the insane denials that used to issue from the Politburo whenever the USSR came a cropper.   Is Medvedev actually saying not only that the loss of 45% of the market’s value isn’t serious, but that his government has control over what the market does? Can he really believe such a thing? Doesn’t it occur to him that people may ask: If you can control it, why haven’t you stopped it already?

Dima Medvedev has never run a business and has no training in economics.  To put it mildly, he hasn’t got the slightest idea what he is talking about — and in fact, it’s not even him talking. Medvedev is nothing more than the sock puppet of Vladimir Putin, who himself has never run a business or trained in economics either. Both men are products of a Soviet education, and are utterly helpless to even comprehend, much less rectify, the horrific damage they have done to the Russian economy.

He does, though, at least admit that Russia’s economy is the servile slave of America’s, not a self-sufficient safe haven:  “We cannot change the situation on say, the American market. The Americans will have to sort out their mortgage system and other financial instruments themselves, though, to put things plainly, they have let us all down.” But if he understands this, then how can he be aggressively attacking the U.S.? Shouldn’t he be supporting it?

Meanwhile, Russians are beginning to make mass demostrations against terrifying rises in domestic prices, especially and ironically fuel costs.  Medvedev ignores them.  As Georgy Bovt writes:

Before the Georgia war, President Dmitry Medvedev spent a lot of time talking about modernizing the country, but since the conflict, these plans have been completely ignored. Moscow’s political agenda is now devoted entirely to opposing the West, and especially the United States.  The president and prime minister have been giving interviews almost every day, mostly to the Western media but also to Russian journalists. The topics are always the same — the new Cold War, sanctions and who started the war. It seems as though Russia’s leaders are obsessed with these issues.  They never got this worked up over the country’s decrepit medical and educational systems, the backward technology and science sectors, the underfinanced pension system or the ailing transportation and housing sectors. All of these crucial infrastructure areas are in a state of deep crisis and urgently require modernization.

How is today’s Russia any different from the USSR? How can it, if it is no different, expect any different fate?

26 responses to “Special Extra — The Russian Economy, Imploding

  1. It might be a good time to buy Russian companies. There in lies a strong Western response. The West could begin to purchase these “undervalued” companies. If Putin resists these “hostile” takeovers, then that will certain frighten away investors. The Russian economy will fall apart as a result. If Putin allows such takeovers to take place, then Western countries will have more leverage over Russian policy. Win win for the West.

  2. You forgot to add the Anti US rant.
    “Medvedev also appeared to try to lay the blame elsewhere, sounding a tough, anti-U.S. note.

    “We cannot change the situation on the U.S. market. Let the Americans sort out their mortgage system themselves,” he said. “But of course … they have pretty much set everyone up for this.”

    No, Dima. Russian fundamentals and the lack of the rule of law are to blame for your country’s economic woes. The latter, you should understand, being a lawyer. When the Russian PM lashes out at a corporation and that corporation loses $6 billion dollars in value in a matter of hours, such actions send investors fleeing. You never hear Bush or other Western leaders taking on their own corporations. (Except for Senator Schumer, who is an idiot anyway, like Putin. ) Until the rule of law is established in Russia, there will be no serious investment climate. As RP has mention before, you will always have your riverboat gamblers, and slot junkies who will play their hand in Russia. Serious investment demands predictability, stability and the rule of law. Three factors missing from Russia today.

  3. Kolchak, you have a very good mind for business. Politicians really have no effect on the economy unless they try to control it.

    When it’s in a nosedive socialists try to control it to the nth degree. Russian companies can expect more taxes, and more regulation. That is not a market that I am willing to invest in.

    Send my best wishes, and a humble pie to the great general.

  4. Russian companies can expect more taxes, and more regulation. That is not a market that I am willing to invest in.

    ————

    So that’s why Russian government is going to reduce NDS from 18% to 12% in month?

    You have such perverted view on Russia, i don’t know where you get all this shit from.

  5. curiouslyinspired

    Kinda suicidal to even consider investing in a market where the government can subsequently declare all purchases null and void, retrospectively, and change the applicable laws, also retrospectively. It’s not just about taxes or the government “allowing” any Western takeover activity at any moment in time.

  6. The news can only get worse in the coming months and years. Wait until investors understand that the Russian oil and gas sector is stagnating. In spite of record prices, Russia has been investing little in maintaining, let alone increasing, production. As Novaya Gazeta published and was reported in this blog, GAZPROM will have to spend hundreds of billions of dollars just to maintain production, and the company is already over 60 billion dollars in debt. Where will the money come from to sustain production to keep the company from going bankrupt?

    The Novaya Gazeta also reports that Russian companies owe half-a-trillion dollars to foreign creditors. Much of this money was borrowed by banks and lent to Russian consumers to fuel the economic boom. However, a lot of this debt is bad debt. Faced with inflation, a lot of consumers are simply defaulting on their loans. The banks, to cover their losses, have to lend even more to hide their losses, and the money they were lending was quite often borrowed abroad. They will have to pay back large loans, many are due in the fall. They were hoping to borrow more to cover previous loans. This will be difficult given the global credit crunch and the war with Georgia. If they can’t pay back their loans and can’t refinance, this leaves them few options. No wonder Russian banking stocks are going down so fast.

    This leaves an oil and gas economy that is still producing, but facing increasing costs just to maintain production and a banks that are teetering on a bubble that could explode at any moment.

    Is it time to start talking about the “D” word once again? D being of course “default.”

  7. I’m glad you people will stay out of the Russian market. I hope all Americans will stay out of it, and move out of it fast. More room for others.

    Please leave:)

  8. mm, yes, maybe the best thing for Russia in the long run would be if no one would invest at this point (or inthe nearer future of, say, a year or two) and just see what happens. People tend to get upset when they run out of food and THAT might actually be a good incentive for the everyday regular Russians to do something about the current government.

    Plus, once things have gone so bad, the West can swoop in with aid packets and every Russian would worship that which is called the Western Humanitarian Civilization…

    one can only hope :)

  9. General Khlynov, you have spoken like a true patriot. However, the problem Russia will face is what will happen when other investors do not step in, and when Russian money flees the country. Who is going to step in to finance the billions, nay trillions, that Russia will need in coming years to maintain, repair and upgrade its decaying infrastructure?

  10. I think it is a moment of truth for the russian stock market, bottom has been reached. It is strong buy on LukOil, and despite falling of a Sberbank for today, I would strongly recommend to open a long position on major Russian companies. You’ll most likely get amazing 25-50% upside before the NY. Time will show – La Russophobe, please do not kill my comment.
    It is also a moment of truth for mr. Medvedev. He clearly sides away with Putin, who promised “send Metchel a doctor” – investors were in panic on Putin’s remark. Medvedev, in reverse, makes a special effort today, announcing government is going to buy-out blue chips, which instantly led to rise of some major energy companies and Aeroflot. Looks like good and bad cop strategy.
    Please also note that asian and emerging markets are sharply falling as well on US investors covering up for Fannie&Freddie and pulling $ out of emerging markets, driving up USD/EUR a big way.

    So, folks, it is your chance. Hold on your breath and buy on http://www.micex.ru/ you’re not gonna regret it.

    LA RUSSOPHOBE RESPONDS: Crazy little Dima — will you make all their losses good if you are wrong? Your empty words sound so neo-Soviet, it is a wonderful window into the depths to which modern Russian society has sunk. Please keep it up! People will think we are paying you to say these things!

  11. You may look into LukOil (LKOH), Tatneft (TATN), Mechel (MTLR), for the next few days watch over Sberbank (SBER) – http://www.rts.ru/en/

    I disagree that Russia ever claimed independence on USA, it’s childish. Author completely out of sync with reality and never watched Russia Today or RBC TV it seems. Russian financial system is tightly linked to US economy (US is de facto a financial center of globalization). Russia is one of the biggest global consumers for american IT and hightech sector, we have just bought a license to produce Crysler Sebring (aka Volga Siber). Chiniese just stealing it (industry spying scandals last few years) ..

    Russia never aggressively attacked US yet, I guess you need to try much harder to completely alienate us and the rest of world as well, author just have a very short memory for the history. Russia helped establishing US state 200 years ago, we had anti-Hitler coalition and Putin was first to offer help on 9/11.

    And if you need to know how the real crisis looks like – go visit Detroit. Russian economy is booming, it is nothing close like that currently.

    LA RUSSOPHOBE RESPONDS: If Russia admits it’s economy depends on the USA, then why does it attack the USA? Isn’t it suicide? Never aggressively attacked? How would Russia respond if America provided to Chechnya the same weapons Russia now provides to Iran, Syria and Venezuela, and landed bombers in Chechnya? Your remarks are idiotic and embarassing to the people of Russia. They are unhinged from reality and totally unsupported by any links to evidence of any kind. Shame on you! Pathetic!

  12. Dmitry, I do agree that the Russian economy is/was booming, however, booms quickly become busts when a speculative bubble bursts. This is what was seen in the United States with the free fall in housing market: realtors who are now out of work were buying their BMW’s.

    As it stands, Russia was benefiting from a number of bubbles: an oil bubble (when people were forecasting a $200/barrel price); a real estate bubble (can you honestly say that a khrushevka in Moscow is objectively worth $200,000+?); a credit bubble whereby banks were lending money to any Russian with a job and you went from close to zero consumer credit, to hundreds of billions lent out over a few years…. Now that these bubbles have popped or are likely to do so soon, this risks undermining the “boom” in Russia.

    The fact of the matter is that the Russian economy is reliant on the sale of oil and gas to foreign markets, but Russia has been investing little to maintain output. This means that without massive investments in the coming few years, Russia won’t be able to supply both its foreign buyers or its local market. If ever there was a cold winter, GAZPROM may be faced with the hard choice or cutting off electricity and heat to the Russian market or shutting off its foreign exports.

  13. Michael, I am in electronic CAD myself, running a company. This Oil bubble made me feel like an outcast still working very hard 10+ hours a day. I badly want the Oil bubble to burst, it’s a curse for Russia having such a big oil-driven inflation and cost of living (regular food is 5x more expensive comparing Trader Joe in California, for instance).

    To talk greedy investor, LukOil has gas stations all over the world (in US, branded differently), and our fed reserve Kudrin finally agreed to oil tax cuts today. Sberbank agressively advertises on the TV (ti menia konechno lubish ..), so I am quite positive it is gonna rise. Still, I’ll wait for few days of solid growth.

  14. You can see some of the signs of the damage that high oil prices are having on the the Russian economy. Vedmosti reports falling growth in industrial investment/production: see http://www.vedomosti.ru/newspaper/article.shtml?2008/09/02/159646. If the numbers continue to fall, this will be reminiscent of 1998.

  15. read at http://www.guardian.co.uk/media/2008/sep/09/advertising.mediabusiness :
    Offices of Rupert Murdoch’s Russian ad firm searched

    read at http://www.iht.com/articles/2008/09/11/business/jcd.php :

    The News Corp. chief executive, Rupert Murdoch, meanwhile, has expressed nervousness about investments in Russia, where News Outdoor generated the bulk of its revenue – $385 million – last year.

    “The more I read about investments in Russia, the less I like the feel of it,” Murdoch said last month.

  16. read (in french) at http://www.latribune.fr/info/JC-Decaux-pourrait-ceder-30–de-son-capital-a-Rupert-Murdoch-~-ID4BDB22F7CF1FA7E9C12574C10043C542-$Channel=Entreprises%20&%20secteurs-$SubChannel=Communication what Murdoch said about Russia and News Outdoor:
    :

    “Plus nous aurons eu de succès, plus nous serons susceptibles d’être volés. Il vaut mieux que nous vendions maintenant.”

    I translate: The more we succeed, the more we risk to be stolen. It is better to sell now.

  17. Advance fee fraud Russian style –

    Dear Western Investor

    We own a very large oil and gas field, it is situated in a harsh-weather offshore enviroment. We need some high-tech platforms, a pipeline, a liquifaction plant for the gas and a terminal for the oil.

    Please send us $20billion and the platforms, pipline, LNG plant and oil terminal….In return we will grant you a majority stake in the profits and the option to participate in further ventures.

  18. Russian stock market and Russia as a country do not have any future. Oil prices nosediving, money is flying out of the country, financial and real estate collapses are coming. West will not provide any credits (Clinton is not a President and Greenspan is not a Fed Chairman). Result – civil war and a bloodshed . I am absolutely sure that Russia as an single entity will not survive till 2015.

  19. The sad part is that Russia will have provided the legitimacy for the collapse of the Russian Federation: if the Ossetians and the Abkhaz can be freed from Georgia, then the Tatars and all the other national republics can be freed from Russia.

  20. LR – we have seen how the US reacts when an enemy power arms a near-by country, such as Cuba. Bay of Pigs anybody? The attempted overthrow of Chavez not so long ago?

    In any case, Chechnya is in Russia, bad analogy.

    Get over it: Russia is acting like a regional power, and in Central Asia, the US is less powerful than Russia.

    Power is diminished by distance. Basic geopolitics.

    If you weren’t so hung-up on high-faluting ‘morality’, you’d be much more able to address the situation in Georgia realistically.

    If you cared as much about American/Western interest as you are obsessed with Russian misbehaviour, the following article should make you cry mamochka:

    http://atimes.com/atimes/Central_Asia/JI12Ag01.html

    Maybe you should tell your friends in the State Department to get their act together… the window of opportunity is closing fast…

    You want to defeat Russia? Stop thinking in straight lines like a damn Yankee and become a bit more strategic.

    You focus on the wrong things, like… Ukraine. And you miss the really important stuff, like… Turkey.

  21. General Khlynov, you never did address my question. Where will Russia find the money it needs to continue modernizing its economy?

    Also, in reading the article you provided, my interpretation is quite different: it is not a case of Russia being diplomatically adept, rather it is one of Turkey pursuing its own interests. It too sees itself as a regional power.

  22. “Stop thinking in straight lines like a damn Yankee and become a bit more strategic.”

    Funny you should say that, all yankees are told of the objective, and told to expidite in the fastest/safest manner possible.

    Russia on the other hand seems to throw people at a wall, and shoot anybody that retreats.

  23. LR – we have seen how the US reacts when an enemy power arms a near-by country, such as Cuba. Bay of Pigs anybody?

    I don’t even know where to start with this. I’ll start with this.
    1. Kennedy was not qualified to be president in the first place. Which confuses me, because if you are trying to get McCain elected, he is only a useful idiot, where Obama is fellow traveler.

    2. The Cuban missile Crisis happened AFTER the Bay of Pigs. Again the useful idiots in this country still think Kennedy was a great president. I don’t see any real reason why you would try to shake them out of their almost religious contentment.

    3. Kennedy kept the missile crisis so discrete that I knew the details of it before my father did. As an added detail, I wasn’t even born yet.

    4. You kind of left out something. When arming your enemies neighbors, nuclear weapons will draw unwanted attention. If you expect us to let that slide, you really need to see a psychologist, or even a lobotomist.

    5. Just as a for your info, the only reason that the Bay of Pigs went bad is because of Kennedy, and only Kennedy. You really should make a bronze statue in his honor.

    6. The added comment of “anybody” makes you look unsure of yourself, and as a result weak. I am confused though, I could never see a man as weak as your argument.

  24. “Get over it: Russia is acting like a regional power, and in Central Asia, the US is less powerful than Russia.

    Power is diminished by distance. Basic geopolitics. ”

    Do you want to shore your bets?

  25. The US already has two airbases in Turkey. I’m really getting bored with you.

    Normally when I get into a debate I will learn something, but General Killnobody is really starting to dissapoint me.

  26. non of this happened the way you make out.

    Russia is doing great.

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