COLLAPSE OF RUSSIAN STOCKS: RESULT OF THE GLOBAL MALAISE, OR SOMETHING MORE?

With the U.S. investment bank Lehman Brothers collapsing and the U.S. government bailing out insurance giant AIG, Russia’s stock markets continued their steep fall on September 17 after recording record losses the previous day. The ruble-denominated MICEX fell by 17.5 percent and the dollar-denominated RTS fell by 11.5 percent on September 16, with trade on both exchanges halted temporarily because of the sharp declines. The drop in Russia’s stock markets was steep compared with other emerging markets: the Shanghai Composite and the South Korea Composite index, for example, dropped 4.5 percent and 6.1 percent, respectively, on September 16 (Moscow Times, Wall Street Journal, September 17).

Russia’s leaders sought to reassure investors and the general public. President Dmitry Medvedev declared that the Russian market was not in danger and ordered the government to boost liquidity. Prime Minister Vladimir Putin said he had no doubt that the “security cushion that was formed in the Russian economy over the past few years will work.” Putin added: “We are studying the possibility of using Central Bank instruments with long-term impact. We will act carefully” (RIA Novosti, September 16; Moscow Times, September 17). Last week, Medvedev and Putin differed over the causes of the Russian market’s slump. Medvedev said he thought that 75 percent of the fall in Russian market indices was due to the international financial crisis and 25 percent due to “our domestic problems, including the consequences of the war in the Caucasus.” Putin, on the other hand, said: “We thought we might face a liquidity issue. It is in no way linked to the crisis in the Caucasus” (Moscow Times, September 15).

Finance Minister Alexei Kudrin said Russia’s financial problems were not systemic. “There are risks in our system and when there [are] more shocks from the global crisis, there are more risks in Russia; but they do not have an extraordinary, systemic nature,” he said (Reuters, September 16). Kudrin told the World Economic Forum in Davos, Switzerland, earlier this year that Russia was “an island of stability” in the midst of the deepening global economic crisis (Kommersant, January 24). Meanwhile, the French bank BNP Paribas reported earlier this month that investors had pulled about $35 billion out of Russia since the five-day war with Georgia in mid-August (Moscow Times, September 16).

Some observers echoed the Russian government in downplaying the gravity of the financial crisis. Andrei Sharonov, a former deputy economic development and trade minister who is now managing director and chairman of the board of the Russian investment bank Troika Dialog, said Russia’s “small” market had been “swept over” by the wave of global financial instability and that the problems were compounded by such domestic factors as the battle over the TNK-BP joint venture, Putin’s attack on the Mechel coal and steel producer (see EDM, July 28), and the war with Georgia. Still, Sharonov said that these factors had been “smoothed over” and Russia was holding up better than Western markets. He said that Russia’s economy might experience a small “slump” in growth but that its Central Bank had the means to keep the situation under control (Kommersant, September 17).

Other observers, however, were less optimistic. Former Deputy Energy Minister Vladimir Milov said the sharp drop Russia’s stock markets reflected not only the global financial crisis but also political risks that investors in Russia had previously ignored. Against the backdrop of Russia’s “confrontation with the West,” he wrote, foreign investors may be in no hurry to return to the Russian market.

“The collapse of the stock market is a reminder of other systemic problems of our not-fully-reformed economy,” Milov wrote. He added that if Russia had successfully carried out “bank and pension reform” and “large-scale privatization” and had achieved a “qualitative breakthrough” in developing financial institutions and corporate governance, its stock markets could have relied more on “financial resources generated by the Russian financial system” and might not have been “so fatally dependent on changes in the mood of foreign investment funds.” Milov concluded: “In general, it was necessary not to halt structural reforms, but to see them through to completion; not to allow state interference in the economy, but to strengthen institutions. Not to permit raider attacks by the state on business. Not to get involved in a war with Georgia” (Vedomosti, September 17).

For his part, Mikhail Delyagin, director of the Institute of Globalization Problems, suggested that Russia’s rising tide of troubles, including a spurt in inflation and a collapsing infrastructure, were a result of endemic corruption and the dominance of monopolies. “By 2004, the Russian bureaucracy completed reforms that were started in 1987 and ended with it being freed from any control,” he wrote. “Having received complete freedom to act arbitrarily in exchange for political loyalty, it [the bureaucracy] turned into a kleptocracy. Democracy as an institution for forcing the state to behave responsibly was eradicated, which made democratic modernization impossible….Russia’s ruling system emerged in the form of a symbiosis of two competing bureaucratic clans: the liberal fundamentalists, who took away the population’s money in favor of business, and the power [silovoi] oligarchy, which took business’s money away for unproductive consumption” (www.ej.ru, September 17).