Those Pesky Neo-Soviet Chickens, Roosting
Since early summer, the Russian stock market has lost nearly three quarters of a trillion dollars, almost half its total value. Yes, that’s trillion, with “T.” It has lost, in other words, almost a full year’s gross domestic product. As Streetwise Professor notes: “The US market has been moving largely sideways during a period when the Russian market has moved down approximately 45 percent. The recent precipitous drops in the Russian indices have not been matched by similar declines in the Dow or S&P, or any of the European indices.” Thus, the idea that Russia is any kind of safe haven, much less independent of the West, has been soundly obliterated.
The Kremlin’s response has been typical, first a flat denial of any problem (Russia’s silly little “president” Dima Medvedev exclaimed: “Russia — thanks to its situation and role in the world’s division of labor, thanks to its geography, thanks to its intellectual potential — will always be attractive for investments”) and then an attempt to artificially inflate the value of the market (in other words, the desperate and panicked Russian government is using its reserves to buy stocks nobody wants, a practice its own finance minister, Alexei Kudrin, condemned just weeks ago) — rather than, perish the thought, to even consider anything like actual reform.
Russia’s market has been exposed for what it is, not a diversified reflection of a vibrant economy but a gambling casino where “80 percent of the shares are in companies exporting commodities with a history of boom-bust cycles” presided over by a clan of proud KGB thugs who simpy couldn’t care less about the law. The price of oil is down one-third since a summer high around $150 per barrel, and the Russian stock market is down an identical amount (in fact, even a bit more). That says it all.
The repercussions of this folly are dire. The New York Times reports:
Investors have pulled nearly $5 billion this year from emerging market funds with a heavy Russia weighting. While initially seen as a problem confined to the Russian stock market, which is volatile in the best of times, the drop in share prices is now spilling over to the real economy. Companies that had pledged shares as collateral for loans, for example, are now facing margin calls, bankers in Moscow say. Russian officials are projecting federal revenue growth of 1.8 percent, compared with an estimated 13.8 percent this year. Just in the last week, the value of Russia’s hard currency reserves has dropped $8.9 billion. The ruble is down 6 percent since the war in Georgia.
In a normal economy, there would at least be some consolation in the fact that the ruble’s value is plummeting. In a normal economy, that would mean domestic producers would get a boost from increased demand as foreign products became more expensive. But Russia, to say the least, isn’t a normal economy.
Russia’s economy is run by proud KGB thugs who act like the mafia. Such people are incapable of promoting policies that would boost domestic industry, and Russia remains totally dependent on imports across huge swaths of the consumer sector. It’s doubtful, in fact, that the Putin regime would build domestic production even if it could. That would mean building power bases independent of the Kremlin, and Putin fears that most of all.
So the result is that Russia has no domestic products to take up the slack, and Russians simpy bear a crippling burden of inflationary pressure, which was already devastating, as the ruble falls and the price of imports rises.
The Associated Press reports: “The message from the Kremlin is not to panic. But that’s exactly what many investors in Russia are doing. Eighteen months ago, it seemed unthinkable.” But it was hardly unthinkable to readers of this blog; in fact, to us the only surprise is that this collapse took so long to occur.