The Russian Financial Well, Running Dry
It takes some doing to keep up with the financial meltdown that has been wrought in Russia by the misguided policies of the nation’s dictator, Vladimir Putin.
At the end of the week, Reuters reported that the Putin regime had squandered a breathtaking $58 billion in September and October alone defending the value of the Russian ruble. Another $14 billion had been washed down the rathole of the regime’s efforts to bail out its corrupt and decrepit banking system, bringing the total to a stunning $72 billion before even considering the vast undisclosed amounts being spent to prop up the crippled stock market, or the unknown expenditures that have already occurred in November. $72 billion is roughly 15% of Russia’s total foreign exchange reserve fund, meaning that another year of this kind of spending would wipe out the fund entirely, assuming nothing was spent either on the stock market or economic growth and nothing was needed to compensate for budgetary deficits. None of those assumptions are remotely valid. Russia is on the fast track to bankruptcy, just like the USSR faced not long ago.
According to Reuters: “Finance Minister Alexei Kudrin told the parliament Russia has spent 90 billion roubles ($3.28 billion) on domestic stock and bond purchases so far this year out of the planned 250 billion roubles. ‘As of today, 18 percent of the national wealth fund has been placed on the local market,’ Kudrin said.”
Even “President” Dima Medvedev admitted that things were getting ugly. He stated: “Today, it is clear that the crisis is spreading, unfortunately from the financial sector into the sectors of the real economy. Every industry is affected in its own way. It is impossible to say that one among them is sitting pretty and will not get state money.” So much for the insane Russophile canard that the stock market does not affect real Russians! The old Russian problem of unpaid wages is again front and center, with a 33% increase in arrearages in the month of October.
And then there was the stock market. These days, its exploits read like a cheap dimestore novel than the records of a major bourse.
On Tuesday, the markets entered freefall, with both the RTS and MICEX exchanges were down 6% and when both were shut down for the second straight day after similar bloodletting on Monday, as they both crashed through the critical 600-point psychological barrier and threatened 500 as well. Yet, when they opened again late in the day the losses were reversed and they closed with modest gains. On Wednesday, a bizarre split opened between the RTS and the MICEX. The RTS closed up 0.68% while the MICEX was down 3.63%. Neither of these developments were actually that surprising, however, especially not the latter, not if you know that the RTS contains the shares of all the key industrial giants of interest to the Kremlin and is where you would purchase their shares in dollars — as the Kremlin would do if it were spending its FOREX account to artificially inflate the market, which is what it in fact was doing. The RTS-2 index, which excludes the key firms like the MICEX, was also down nearly 3% on Wednesday.
Meanwhile, throughout all this carnage, the ruble held steady. That was, of course, because the Kremlin was furiously spending billions of the Russian people’s savings in order to create a Potemkin currency and hide its dismal failure to manage the economy. After Putin’s barbaric purges of the media and opposition political parties, the currency is one of the last telltale signs of real information left available to the people of the country, so the Kremlin’s obsession with it is not surprising.
On Thursday, following a sharp slide on Wall Street the day before and another steep drop in the price of crude oil, the markets were back in freefall. The MICEX was down 8.5% and flirting with 400-point territory, while the RTS was down over 7% with Sberbank, the state-owned financial institution, down over 13%, when trading was shut down yet again at 1:30 pm Moscow time. The price of oil dropped below $50/barrel for the first time in more than three years, and analysts were predicting it could fall to $30, a level not seen since late 2003, as global demand declines for first time in more than two decades. The price of a gallon of gas at the U.S. pump had fallen by half since summertime.
On Friday, the MICEX was down over 3% but the RTS was up 3%. Since the RTS is dollar-denominated and would be where the Kremlin would spend its foreign currency reserves to inflate the market artificially, the reason for the disparity was rather clear.
Investors are rightfully freaked out over the unbelievable frequency with which the Kremlin is shutting down the markets whenever losses get inconvenient. The main MICEX index has been shut down 35 separate times in the past four months, or on average a startling twice a week. These actions are attributable to only one factor, panic on the part of the Kremlin, a desperate desire to hide the facts of its mismanagement from the people of the country.