Stripping Putin Bare
It can’t possibly have come as a surprise to any intelligent person that a Russian scientist had been nabbed trying to help Iran build nuclear weapons, or that Russian dictator Vladimir Putin’s Russia did not keep its word— its written promise — to remove Russian forces from Georgia by the end of last Friday. Nor can it surprise anyone — and it should hearten many — to hear Russia wailing and moaning about “secret” UN-NATO meetings designed to respond to Russian duplicity as Russia awakens from its drunken bender to realize it is despised by the entire planet.
But it may come as a surprise to some to realize how many personal errors by Putin are hidden behind the recent collapse of the Russian stock markets, which spent the lion’s share of last week either shut down entirely or in freefall.
In a recent opinion piece for the Moscow Times, former Kremlin insider Andrei Illarionov wrote in regard to Russia’s recent stock market collapse:
The Kremlin has been quick to blame the West, and primarily the United States, for the country’s troubles. Prime Minister Vladimir Putin blamed Western “speculators” who pulled out their investments en masse at the first sign of trouble. He also denied that Russia’s aggression toward Georgia played any role in the market’s fall. Putin suggested that the crisis is connected “not with the problems of the Russian economy, but with problems of the West’s economy.” In recent comments, he even referred to it as the “American contagion.” President Dmitry Medvedev concurred, saying, “The United States caused the whole crisis with its own financial market. … Regarding the factors that were responsible for the drops in the Russian stock market, I would estimate it as follows: 75 percent of the fall in the stock market is connected with consequences of the global financial crisis and 25 percent due to our internal problem, including consequences of the war in the Caucasus.”
Medvedev continued his paranoid “blame America” tirade in Evian France while meeting with the French president and aggressively seeking to pursue a “divide and conquer” strategy on Europe.
As Illarionov indicated, there so many naked lies in Putin’s statements that it’s hard to know where to begin. Maybe that’s his strategy. And let’s be clear: Those lies have just one purpose, to cover up the critical mistakes Putin himself has made in guiding his nation.
Mistake #1: Unilateralism
First, as Der Spiegelhas reported in September: “On Aug. 8, Russia went to war with Georgia. Fearing a new Cold War, foreign portfolio investors took fright, selling the ruble and Russian bonds as well as stocks.” Investors fled Russia for one simple reason: They were surprised by the Georgia attack. They were surprised because Putin failed to consult with them before acting, an egregious mistake on his part, and an amazingly hypocritical one given that he had waxed indignant when treated that way by the United States. Russia totally failed to build effective working relationships with the nations of Europe prior to the crisis, alienating and terrorizing them with threats related to energy supplies, and then when it took military action it found itself utterly alone. Russia’s recent failed attempt to convince Portugal not to recognize Kosovo’s declaration of independence, after Russia itself recognized Ossetia, shows how fundamentally ineffective the Putin regime’s foreign policy has been.
Mistake #2: Braggadocio
Second, DS also reported: “Only a few months ago, Russian financiers and politicians were boasting that Russia was a financial safe haven, apparently immune from the global credit crunch. As recently as June, an International Monetary Fund mission to Russia concluded that ‘there are no significant negative spillovers from the global financial market turmoil.'” So much as he might like to blame America, in fact Putin himself is responsible for arrogantly inflating the world’s expectations about the potency of his government and the Russian economy. It hardly makes sense for Putin to have been relentlessly poking his finger in America’s eye if the American economy was capable of wrecking havoc on Russia at a moment’s notice.
Mistake #3: Interference
Third, DS reported: “The first big shock came in late July, when Russian Prime Minister Vladimir Putin made an unexpected public attack on Mechel, a leading steel company, accusing it of price-fixing. An acrimonious shareholder dispute at Anglo-Russian oil company TNK-BP added to market nerves.” When Putin says that investors are merely speculators, he’s simply lying. Putin has launched direct attacks on long-term foreign investors (add the Hermitage Fund to that list) and Russian firms as well, displaying arbitarary power in an effort to control them. Putin’s own policies, long before the market panic, were driving out foreigners, divesting them of their interests and subjugating Russian firms as well. And it all traces back to Putin’s unbridled assault on YUKOS and Mikhail Khodorkovsky. Putin lit the fuse, not foreigners.
Mistake #4: Lack of Oversight
Ironcially, Putin is guilty not only of excessive interference in the markets but also of inadequate oversight. Fourth, DS reported:
Having taken out loans to buy stocks, many investors suddenly found themselves forced to put up extra collateral as stock prices began to fall. The only way to raise cash in a hurry was to sell more stocks, creating an unstoppable vicious circle. “Once things start, you get automatic mechanisms that kick in. People don’t know where it’s going to stop,” says Richard Hainsworth, general director of the Rus-Rating credit-rating agency in Moscow.
So Russia was involved in its own spiral of domestic speculation which Russian regulators had done nothing to halt, virtually the identical problem Putin characterizes as a “contagion” where America is concerned.
Mistake #5: Failure of Fundmentals
Fifth, DS reports: “Long-term savings in Russia are close to nonexistent. Most Russians still rely on the state to provide their pensions, and few have anything more than rudimentary insurance. Without stable institutional providers of long-term capital, Russian markets have to rely on volatile foreign capital.” In other words, Putin blithely overlooks his total failure to develop the Russian economy’s fundamentals. The main reason the Russian stock market tanked is that Russia lacks a solid base of long-term domestic capital. And as Boris Nemtsov has show in his paper on Gazprom, this lack of fundamentals applies to both sides of the market, the investors and the business they invest in. Putin has failed to promote investment and growth in the crucial industrial sectors of the economy, choosing to divert the oil windfall to a new cold war. As such, he leaves his economy unable to fend of the vagaries of the business cycle. As DS concludes:
With Wall Street in chaos, investors’ appetite for riskier emerging markets such as Russia seems bound to diminish. Putin recently predicted that foreign capital inflows would fall to $50 billion this year, down from $81 billion in 2007. “If foreign investors don’t buy debt and equity, Russian companies will find it harder to raise capital and therefore harder to grow,” says Kingsmill Bond, chief strategist at Russian investment bank Troika Dialog. “That is the Achilles’ heel of this market.” That could ultimately spell serious problems not just for the Russian stock market but for the entire Russian economy.
Russia as a nation simply cannot survive this sweeping mismanagement of both domestic and foreign policy. These failures are no different than those which brought down the USSR, and the government is hiding them from the Russian people in exactly the way the USSR always did.
Bloomberg recently reported:
The 67 percent decline in Russian equities this year resembles the U.S. stock market crash of 1929 because of the damaging effect of highly leveraged investors, MICEX chief executive Alexei Rybnikov said Wednesday. Russian stocks have suffered three days of declines greater than 14 percent in the last month, spurred in part by leveraged investors reducing their holdings after margin calls from their brokers. Speculators making bets with borrowed money also contributed to the 1929 U.S. stock market crash. “It’s pretty much the same thing,” Rybnikov said. Besides the level of leverage of domestic and foreign investors, Rybnikov cited the lack of long-term money from institutions and the absence of government pension reform as contributing to the market collapse. “We don’t have any long-term money here,” he said. “We need to sit down and think about what we need to do long term to make the Russian financial system more stable.”
Following the collapse of 1929, Regulation T required U.S. investors to purchase stock only when the amount of equity in their accounts made up 50 percent of the purchase price. The Federal Service for Financial Markets on Sept. 26 increased the level of equity required for stock purchases to 50 percent from the previous 25 percent. Falling stock prices can lead investors to exceed the amount of margin borrowing allowed under regulations, leading to a call from their brokers to deposit more equity or sell shares, which can drive prices down further. Regulators shut the MICEX stock exchange for the rest of the day as well as Thursday after the 30-stock MICEX Index dropped 14 percent. The ruble-denominated index is down 67 percent from its May high.
Russia doesn’t have a stock market, it has a gambling casino because of Vladimir Putin’s policies. A serious nation can’t be run that way. It’s as simple as that. And instead of trying to change that reality, Putin is simply and shamelessly spending the national savings account to create a Potemkin gambling casino just like the infamous Emperor’s set of fine new clothes. The net result, of course, is the end of market capitalism in Russia, right on the heels of the end of democracy. The Russian government will end up owning the entire country just as surely as the USSR ever did — and in that sense the Putin dictatorship probably welcomes the stock market collapse as the perfect excuse for final consolidation of economic dictatorship in Russia.