2008, Russia’s Financial Annus Horribilis
Russia’s RTS dollar-indexed stock market ended 2008 as the worst performing major equities market on the planet, down a breathtaking 72% over the course of the year. At the start of the year, Russia’s shamelessly profiteering stock brokerage firms had predicted a 50% gain with a year-end value of 3,000. The market actual closed out 2008 well below 650, less than a quarter of the value they had misled their customers into considering. On more than two dozen occasions, the RTS exchange was simply shut down by government regulators as the only means of preventing total collapse. It was the market’s worst year in a decade. The ruble, down 17% on the year and nearly 4% against the dollar on New Year’s Eve alone, also had its worst year of the past 10. This isn’t just a matter of national prestige: Russians need a strong ruble to be able to afford to buy all the products they must import because their feeble economy can’t produce them itself. Now, the plunging ruble imposes a dramatic new level of price inflation on the Russian consumer, and inflation was already in double digits before the fall began.
Horrifying as all that was, though, it was only the beginning of the tale of Russia’s financial annus horribilis, only the tip of the iceberg of failure into which Russia’s proud KGB spy ruler has crashed his ship of state.
Gazprom, which embodies virtually the entire wealth of the nation, started out the year with market capitalization that ranked it third largest in the world finished the year not ranked in the world’s top 40 companies. Worth some $360 billion on January 1, 2008, by year’s end Gazprom was worth less than $90 billion — a stunning $270 billion in investor losses. At the beginning of the year, Gazprom shills had asserted that the company would post $1 trillion in market capitalization within seven years.
Other Kremlin propagandists had attempted to spread the word that 2009 could see a crude oil price of $250 per barrel. In fact, oil ended 2008 below $50 per barrel, down 61% from the start of the year, with further price drops expected in 2008 — and this was a major factor in the obliteration of Russia’s stock market and currency, which were finally exposed as totally dependent on world energy markets. Russia’s stock market fell in tandem with the price of oil.
One-third of Russia’s foreign-currency reserves were wiped out in a vain and pathetic attempt to create the illusion of value in the ruble and the stock market, fooling nobody. Russia’s credit rating was downgraded by Western analysts who saw through the Kremlin’s mockery with ease.
And even worse — if that is possible — than the data itself was the fact that the Kremlin could not escape the blame. UBS AG Dmitry Vinogradov wrote: “The uninspiring performance of the Russian equity market was driven by the deteriorating global macroeconomic environment, but it was Russia-specific factors that drove the substantial underperformance.” Vinogradov, in other words, was calling Vladimir Putin, who had blamed the crisis on American mismanagement and global forces alone, a shameless and ignorant liar.
Who can have been surprised, then, that the Kremlin’s response to all this humiliating failure was to move toward the abolition of presidential elections and the criminalization of reporting negative financial data?
The Kremlin has no policy response to failure just as no policy initiative of the Kremlin had anything to do with Russia’s brief economic “resurgence.” That so-called “boom” was controlled solely by one factor, world oil prices, and as soon as they fell Russia’s Potemkin economy was unmasked. Russians have chosen to be governed by a proud KGB spy with no economics or business training or experience, someone who knows only one response to problems: supressing them.
It’s a doomsday scenario for “Russia. Not only is Vladimir Putin incapable of innovative solutions to deal with Russia’s problems, but because of his paranoia of competing centers of power he’s prevented Russia from developing a diversified market economy that could implement such solutions, and now he will not even admit Russia has a problem. Instead, just as in Soviet times he will drive the nation deeper and deeper into a state of childish denial, making any attempt to solve the problem totally impossible. The USSR was totally destroyed by such polices.
We see no way for Russia to avoid the same result.