Reader “Dobo” points out the following piece (called “Kremlinomics”) from the Economist which explains in detail why Russia’s stock market has led the world in failure over the past half-year, instead of being the “safe haven” and bellweather of a resurgent economy that Vladimir Putin promised:
President Dmitry Medvedev dreams of turning Moscow into a global financial centre, but he has an awful long way to go. For Russia’s markets have slumped. Even after recent one-day rallies, the dollar-denominated RTS index and the rouble-denominated MICEX index have shed around two-thirds of their value since mid-May (see chart). These falls are bigger than in any other emerging markets, dealing a blow to Kremlin claims that Russia is a safe haven from global financial turmoil.
Harsh statist rhetoric, the shareholder dispute at the TNK-BP joint venture and the war with Georgia all hurt investor sentiment earlier this year. But the financial crisis has done the most damage. The first big companies to admit being in trouble were in construction, retailing and property. As credit markets all but closed, the cheap loans on which they relied dried up. Companies started to change hands for prices that would have seemed derisory just months earlier. Struggling retail and investment banks, including one that was emblematic of Russia’s boom—Renaissance Capital—have been partly or wholly bought by rivals. This week Globex, a small retail bank, experienced a run on deposits. Even Russia’s oligarchs feel the pain. Oleg Deripaska, the aluminium king who is the richest of all, has had to unload a big stake in a Canadian car-parts firm after failing to meet a margin call.
So far, ordinary Russians have been less bruised. Many have found it harder to borrow money, but state television has tended to play down the crisis. Big job or wage cuts have yet to materialise. The prime minister, Vladimir Putin, and his loyalist successor, Mr Medvedev, have built their popularity on delivering steadily improving living standards to Russians. Any reverse could unravel the political system they have created.
The Kremlin’s response to the crisis has been mixed. Spooked by plunging stockmarkets, regulators have preferred to suspend trading for long periods, and to introduce technical rules to limit the sharpest swings. Frequent market closures meant that London temporarily became a busier marketplace for Russian equities. The Russian markets themselves have lost much credibility.
The main Kremlin plan has been a $200 billion rescue package for banks and companies. The government also plans to buy up blue-chip shares. With the world’s third-largest foreign-currency reserves, the depths of the Kremlin’s pockets are not in doubt. But many economists fret about the efficiency with which the money will be distributed. And the prospect of the Kremlin taking control of more swathes of the economy will hardly reassure them.