The Russian Market and the Russian Common Man

As we reported last week, the Russophile propaganda line that the country’s stock market collapse doesn’t affect the common man is laughably false, though to be sure the disaster has had devasting consequences for Russia’s wealthy class.  If the market really doesn’t matter, then Russians should be outraged to see their government burning rapidly through the national savings in order to salavage the market’s reputation and the fortunes of a few oligarchs.  But, of course, it does matter. We’ve already reported on the Washington Post story showing the massive falloff that has already occurred in construction contracts in Moscow, which will lead to layoffs in the industry and ever-worsening shortages of housing.  Russia’s commodity-based economy is being victimized across the board as demand for products like oil and steel disappear.  These events are major boons, of course, for manufacturing economies like those in Europe and the United States.

Indeed, the mere fact that those on the Kremlin’s side believe it might be possible that their stock market could collapse without affecting life on the street is a pretty good explanation of why the stock market has collapsed.  And now the Times of India adds more detail to this horror story:

No longer quite so flush from vast oil and gas wealth, Russia’s economy is feeling the pinch from the global crisis and problems at home, putting investors and small businesspeople on edge. While economic growth has surged upwards at rates of over seven percent in recent months, plunging stockmarkets and massive central bank intervention have told a different story, denting a feeling of immunity from wider trends.

“To be honest I think the American crisis, which seemed so far away, could affect Russia,” said Yury, a computer programmer employed by a large mobile phone company, complaining that he had lost “all confidence in stock market instruments and the financial market.”

“As a result of this crisis I’ve lost 300,000 rubles (8,400 euros/$11,600) – 40 percent of what I had managed to save in recent years,” said the 37-year-old Muscovite, who asked that his surname be withheld.

The downbeat mood was expressed last week by Prime Minister Vladimir Putin, who said Russia had picked up an “infection” from the United States. Global financial turbulence has been accompanied by falling world oil prices, a factor particularly likely to concentrate minds in Russia given its position as a top world energy producer.

Russia’s stockmarkets have plunged from one low to the next, partly affected by negative perceptions connected to August’s war with Georgia. The benchmark RTS index lost 27 percent in September and is down 42 percent from the start of the war.

Alexander and Mikhail, two brothers from Moscow each with their own businesses, are feeling the pinch from a lack of liquidity in the banking system. “Money is circulating more slowly. Normally when we make a bank transfer the recipient gets it the next day. Now it takes two days or more. We have to telephone the bank and ask what’s going on in order to get them to make the transfer,” said Mikhail, 25, who heads an electrical goods company.

“The banks are behaving inappropriately,” he said. “The banks are holding on to the money,” said his 34-year-old brother Alexander, who employs about 20 people in a carpentry business. “As I’ve got reserves I’m not suffering yet but people are complaining,” he said.

He goes on to describe the difficulties he has encountered obtaining credit for a new car, despite huge billboard advertisements around Moscow offering credit, and complains his bank has announced a “review” of it credit policies.

Moscow-based financial analyst Chris Weafer estimated this week that ongoing injections of cash into the economy by Russia’s authorities – money taken from the national budget and the country’s vast currency and gold reserves – could ultimately reach $135.5 billion (187.8 billion euros).

He predicted that many smaller institutions among the more than 1,000 licensed banks in Russia could fail in the coming six months and said the government’s decision to divert large quantities of cash into the economy would slow down needed infrastructure investment.

But ultimately, he concluded, the authorities have little choice, especially against the background of a devastating 1998 banking crisis that became a symbol of post-Soviet failure.

“With memories of the banking defaults in the 1990s still relatively fresh in the mind of the public the government knows full well that any accident or badly handled problem in a well-known bank or corporation could easily lead to panic among depositors and huge lines at banks to withdraw money,” Weafer said in an article in the English-language Moscow Times newspaper.

6 responses to “The Russian Market and the Russian Common Man

  1. I am interested to know where the money is going. If all these people are cashing out, they need to put their money somewhere. They could put it in a mattress. I doubt they would do that. If they did, they would put it in dollars. This move strengthens US dollars. They could buy T Bills and US bonds and some stock. Again this helps the US.

    The Russian Government won’t have the cash reserves to build up its military. I doubt China is going give them loans to do so. The US benefits in many way from the Russian Stock Market Meltdown.

  2. Considering Dow was falling rapidly, investors where selling US securities. That created an extra demand for USD liquidity, which crashed quite a few investment banks.

    Thus, investors globally exited stocks, funds and entered into cash. Seeing local currencies to drop vs USD (growing on increased demand), suggested that currency diversification is needed. In Russia, it is typically 33/33/33 RUB:EUR:USD. Central bank does similar bi-currency balancing, accordingly to Kudrin.

    PS. Help setting Svetlana Bakhmina free on http://bakhmina.ru

  3. Dmitry, thanks for putting up the free Bakhima link, any decent human being ought to be appalled at her fate. And, the fate of all of the Yukos people for that matter.

  4. Russia: Better placed than most to weather the crisis
    http://www.ft.com/cms/s/0/fb6b66ee-94ca-11dd-953e-000077b07658.html

  5. Dmitry, US securities are insured, which means that people were selling them to invest in something a little more profitable.

    When the Dow hit 90’s levels, investors seemed to recognize that the market couldn’t possibly be that overvalued.

    Russian investment, actually Asian investment in the USD is corrupted by counterfieters. Which is why most US investors don’t mind the overvaluation of the Euro.

    Socialists are like crabs, when a single crab tries to escape, another one drags it back into the bucket.

  6. Which brings me to my next topic, Who is to blame.

    Shoplifting seems innocent enough, but who ultimately pays? You do, a bussiness that is trying to stay viable is forced to mark up the prices to pay their employees.

    That loss is split(kind of)between taxes, wages, incentives and prices. Charity should be based on a number of socioeconomic principles however it should never be based on duress.

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