The Russian Market back in Freefall
Last Thursday by 5 pm Moscow time the dollar-denominated RTS stock index had lost nearly 4% of its value and fallen back below the critical 1,000-point psychological barrier which it had broken back above at the end of May. The market hadn’t seen 1,000 since October 2008. The decline put the RTS index down almost 15% for the month of June, and the MICEX ruble-denominated index was down even more for the month, almost 17%, and itself was flirting with crashing through the 1,000-point barrier.
Russian “president” Dima Medvedev was humiliated as the world learned while he was attending a BRIC summit the dollar=denominated bonds were vigorously out-performing the bonds of Brazil, Russia, India and China. Financial analysts were mocking Medvedev’s goofy statements about Russia’s ruble becoming an international reserve currency: “It’s not up to politicians to determine which currency will be the world reserve currency,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “In the end the market decides it.” In fact, they were suggesting that Russia is the black sheep of the BRIC group itself and doesn’t belong there.
The reason for all this Russia failure and humiliation was quite simple.
The soaring dollar was depressing the price of oil, and the falling crude was crushing the life out of the Russian stock market, which in turn undermined the value of the ruble, exposing its fundamental dependence on crude oil markets over which Russia has absolutely no control. The US recession has proven four times milder that what Russia has experienced, highlighting the essential dynamism and resiliance of the American economy as compared with the resource-dependence of its Russian counterpart.
We’ve long believed that the single most terrifying fact about the Russian economy since the crisis began last August has been the shocking manner in which the Russian equities markets have moved into lock step with the international price of oil, indicicating that the last vestiges of diversification have been stripped out of the Russian stock exchange, leaving it nothing but a pathetic vehicle for betting on oil prices, totally at the mercy of American oil demand. A country with a stock market this feeble and helpless cannot lay claim to G-8 membership, nor even compatibility with the highly diversified economies of the BRIC group. This Russia belongs in Africa or Central America.