Special Extra: Out of the Frying Pan into the Farce

History repeats itself

History repeats itself

There are no words which can adequately capture the nature of the fraud that is daily being carried out at behind the scenes at the Russian stock market these days.  Fortunately, one doesn’t need words to do so, but can rely on the RTSI charts.

Just look at that line!  Twice in the past 30 days we have witnessed the RTS index slide into freefall. Twice we have seen the Kremlin shut down the market and bludgeon it the way a bunch of mafia hoods beat up a recalcitrant grocer who doesn’t want to pay protection. Twice we have seen the RTSI chart flatline, first on September 17th and then yesterday, October 8th, producing a cute little brother. Twice we have seen the market, terrorized and wild-eyed, leap radically upward as soon as the floodgates are opened. Twice in response, we have seen the market shut down to prevent overheating. After the first such incident, it took less than two weeks for the market to slide back into freefall.  How long will it take before Thursday’s 11% gain on the RTSI to be reversed?

We can only gape slack-jawed and ask: Who do these people think they are fooling?  This is not comedy, this is now broad farce, total dysfunction, one which threatens the survival of Russia as a serious nation.

If you have $100 and lose 30% of it, you now have $70.  If you then gain 30%, you rise back to $91, 9% below where you were when you started.  Keep that up for a little while, and soon you’re wearing a burlap sack and begging for pennies. This phenomenon is now in the process of gutting the Russian markets, driving them into oblivion, as the Kremlin pours truckloads of cash from the nation’s savings into the markets, hoping to create the illusion of revival only to see their efforts fall apart in short order.

Thursday’s rise was due largely to a stunning 27% hike in the price of LUKOil shares, inducing a 16% jump in the RTS oil index.  State controlled entities Gazprom and Sberbank  was up, 14%  and 9% respectively, the same thing that happened on Tuesday when the Kremlin sought to staunch Monday’s record-setting bloodletting.  The financials index was up 2%, but the other five RTS sectoral indices barely budged or were down substantially (mining leading the way, down over 5%).  The RTS-2 index, which excludes the major Kremlin players, was down over 2% on the day.  So once again, the Kremlin’s actions only served to confirm how utterly dependent the market is on the oil industry and how absurdly subject to Kremlin manipulation the market remains.

The Moscow Times reports that the Kremlin is suppressing information about the market collapse from the public, using newpapers and television as weapons of propaganda just as in Soviet times. Russians are as ignorant of their government’s performance as they ever were in Soviet times, and they will surely take the same consequences.

12 responses to “Special Extra: Out of the Frying Pan into the Farce

  1. “Золотовалютные резервы России сокращаются, в борьбе с кризисом, и если в таком объеме тратить их дальше, то резервов, по оценке экспертов, хватит на 110 торговых дней.”

    As I have been saying all along, Russia risks spending all its reserves in less than a year. This citation is from gazeta.ru and it cites experts who predict that at this rate all of Russian gold and foreign currency reserves will be spent in 110 business day.

    What will Russia do then if oil is trading at $50-a-barrel and the country is in a deficit with no reserves left to protect the ruble?

    Source: http://gazeta.ru/financial/2008/10/09/2852776.shtml

    LA RUSSOPHOBE RESPONDS: Otlichno! Bolshoe spasibo tebe mishenka!

  2. Michel asked: What will Russia do then if oil is trading at $50-a-barrel and the country is in a deficit with no reserves left to protect the ruble?

    I don’t know what they will do, but I will have a celebratory shot of the best Ukrainian horilka or a glass of Georgian wine.

  3. La Russophobe, незачто!

    Oleg, I may join you in that celebratory shot :) The Russian State certainly wallowed in hubris these last few years, and hopefully some good will come out of all of this.

  4. Russia and OPEC have won if the the Western psyche now things $50 are low oil prices.

    Putin became popular and Russia became rich with $30-50 oil. This range was considered “high” a few years ago.

    If the West now thinks $50 is low, Russia and OPEC will own us.

  5. I say $50 because of an article that I read a while back. The point that was made is that the price of oil usually corresponds to the most expensive barrel of oil that is pumped out at that time. The author argued that the price of that most expensive barrel of oil now being extracted is $50. If the price falls below that price, that means that prices will eventually climb as supply and demand will eventually bring prices up to that minimum. As nobody will extract oil that costs more to get out of the ground than you can sell infinitely, this will lead to less oil being produced and as production falls, market forces eventually push prices up. However, price of oil can overshoot this minimum until market forces bring it back to a more reasonable level, in the same way that market forces can push oil prices too high for a short while. This means we could see $30 a barrel oil, but it is not likely to last unless there is a major oil strike somewhere that will flood the market with cheap oil.

  6. True, a barrel of the unrefined crap is a $10 item. To the question: ”What will Russia do?” I’m betting on killing, kidnapping, blackmailing, scamming. The usual, on a larger scale. Russia is Africa for white people. Without the benefit of a warm climate and friendly people.

  7. Folks, global economy facing a collapse. Dow gets down like 700 hundred points tonight. It is a real nightmare for everyone,the Russians and US pensioners with 401K. Gosh this is so bad, thing is just equally evil for all of us. It’s not only Russia with it’s “independent” stock market, it looks like whole financial global world is shaken.

  8. I think it’s quite clear that oil will not get back to $10 any time soon. Russian budget assumes at least $70 oil. They will be ok with $50 oil but they won’t have much extra money lying around as they do now (assuming they don’t waste it propping up stock market like they wasted money propping up ruble in 1998). And they won’t be able to pressure Ukraine and other countries that much if the gas prices go down to $200-300 (possible in the global recession).

  9. BOGDAN OF ENUCHALIA

    That’s why the Russkis are arming Syria and Iran at a double speed. If the ME war breaks up they (the S0viets) will be winners again. And they will keep winning until te so called West learns to dig and slurp its own liquid and gaseous shit…

  10. The problem for Russia if oil stays at $60 or $50 or even $70 will be finding the money to maintain production. Novaya Gazeta had a good analysis of how much money Russia will have to invest in oil and gas production just to MAINTAIN production is in the hundreds of billions.

    Russia was and is faced by two distinct problems. The first, as was noted in a previous post by La Russophobe, is that it is pumping oil and gas out of fields that were brought online during Soviet times. These were the ones that were closest and easiest to drill. The new ones they will have to develop are much farther and will be much more costly. It will be hard to get the money to do this when you have discredited yourself internationally just before a global credit crisis.

    The other problem Russia had to deal with was the increasing internal demand for oil and gas. In the last decade, the demand for oil and gas within Russia grew considerably. As Russian demand grew, this left less oil and gas for export while production was stagnating. In the natural gas sector, Russia was able to maintain its exports by buying natural gas from its Central Asian neighbors. This left Russia in an awkward position: if the Russian economy grows because of oil and gas petrodollars, this leads to less oil and gas for export, which is the main source of funds that is financing the prosperity in the first place.

    If you put all this together, this potentially leaves Russia in a very nasty place in the coming years. The Russian state risks falling into deficits with no reserves as they will have been spent trying to prop up banks, stock markets and paying off the Russian oil and gas companies debt. Plus, on to of that, production may fall leaving Russia with even less money. Then once the money is gone, the ruble will fall. Already the Russian online newspapers are starting to whisper about devaluation.

  11. It’s very funny to read all this 2 years later…gives a good insight to LR economy skills :)

  12. Pingback: Some Thoughts on the Financial Crisis « Anatoly Karlin

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