The Russian Stock Market, back in Freefall
On Monday this week the Russian RTS dollar-denominated equities index took another massive hit, shedding over 6% of its value and dropping precariously close to the 500-point psychological barrier. Gazprom shares were down over 6% like the broader market, oil major LukOil lost even more (over 8%) and Sberbank, the nation’s bedrock financial institution, was down over a stunning 9% in just one day of trading. The RTS-2 index, which excludes the major equities that the Kremlin purchases with foreign currency money to inflate their value, though down less than 3%, did crash through the 500-point barrier to close at a stunning 496. The main RTS index was only slightly above that, closing at just over 531.
The ruble followed suit, plunging to a new historic low of 32.9 to the dollar, down 1.3% against the dollar/euro mix. The Russian currency has lost nearly one-third of the value it had before the August financial crisis began, and had been devalued a stunning 18 separate times since mid-November of last year when its slide was allowed to begin.
The ramifications for Russia’s reserve funds are dire indeed.
All this was carnage accompanied by the announcement of so-called “prime minster” Vladimir Putin that the government would recalculate its budget to expect a price of crude oil of $41/barrel — less than half the amount upon which the prior budgetary assumptions had been based and $6/barrel more than the price oil actually closed at on Monday after an 8% drop (Russia’s inferior Urals blend sells for even less than the world market price). This led government economists to predict a ruble-dollar ratio of 35:1 in 2009, with 13% inflation and up to a 7% budget deficit.
The bloodletting continued on Tuesday. The RTS shed another three points to close below 515, and Sberbank lost another giant chunk of its value, 8% for a total loss of over 17% in just two days. The RTS-2 index was also down over 3% to close near 480.
Now, in addition to struggling to stabilize the ruble (increasingly under pressure due to soaring inflation) and stock market (already on life support), and to provide liquidity to banks on the verge of collapse, Russia’s dwindling FOREX account will be burdened by an actual budget deficit.
It’s difficult to see how Russia as we know it will survive this pressure. The only thing that could save the country from either disintegration or a massive totalitarian crackdown would be a signficant rise in crude oil prices — but to the contrary increasingly bleak spending data from the U.S. market indicates that the price of oil is quite likely to fall, in fact to fall well below the $41 projection that Putin has cavalierly just made.
And, it will get worse. The UN is now predicting that Russia’s economy will shrink by 3% or so if oil prices stay below $35 a barrel. The Google translation of the Grani.ru article is actually decent: http://translate.google.com/translate?prev=hp&hl=en&u=http%3A%2F%2Fgrani.ru%2FEconomy%2Fm.146569.html&sl=ru&tl=en.
The Russian Central Bank printed large amounts of currency, increasing the notes outstanding by almost 3500% over the 1998-2008 period. That caused large amounts of inflation in Russia.
With a financial disaster encroaching swiftly, the Russian Government is sure to print ever greater amounts to pay its bills. Judging of how it handles its journalists, one would be wise to put their money elsewhere.
The Russian Government cannot print US dollars or Euros. It cannot produce with a similar ease gold, diamonds or a fine home. I suggest Russians buy a hedge as soon as they are able. Everyone knows the Kremlin and its favoured are doing so.
Yea, its not just Russia. Taken a look at the FTSE and pound sterling.
LA RUSSOPHOBE RESPONDS:
Your “comment” is hilariously ignorant. Does it make you feel better when you can’t feed your family to know that someone in another country can’t either?
Your propaganda is neo-Soviet in character, helping to rationalize and therefore continue Russian failure by avoiding reform. You’re a Russian-hating ignoramus.
In the financial sense, everything is relative. And everything is based on trust. After all, even gold, the most “solid” form or currency is in the end not edible, you can’t fashion it into warm earmuffs or heat your cold apartment with it either. All money is just a symbol, agreed upon by the society, in the largest possible sense of the word, that carries a certain value for which you can then buy stuff.
All currencies are interconnected and depend more or less on each other and external factors as well – such as, for example, a world-wide drought that makes food scarce driving the demand up which drives the price up.
Right now though, people are scared in the Western world. They don’t buy stuff as easily any more, therefore the demand is down, therefore the price goes down. The price of what, you ask? The price of the things that they buy least – in this case stuff made in Russia.
At the same time, people of Russia don’t have an option – they have to buy stuff made in other countries because such stuff is not made in Russia (point in case: foodstuffs, clothing) in large enough quantities. But because the people of the other countries still do want to (and/or need to) buy THOSE things, the price of those things has not fallen as much.
So Russia has to sell cheap and buy expensive, which of course no-one wants to do, it’s bad business. So in order to “afford” the expensive things, russia is just printing more money. That in turn is discrediting the Rouble’s standing because if before there existed, say, 15 dollars and 30 roubles but now there exist 15 dollars and 60 roubles then the person selling obviously still wants their dollars’ worth for their commodities, right? It’s just common sense, right? I mean, if you have 5 eggs and someone else has 4 flowers and you want to make an equal swap (5 for 5) then you’re not going to want to accept a paper flower in place of a real one, right?
And that’s why even though other currencies may not be doing all that well either, the case is so much worse for the Rouble.