HOW BAD CAN IT GET?

But regardless of how deplorable corporate governance in Russia may be, current stock market trends are unlikely to produce a repeat of the August 1998 financial blowout. This is apparent in Russia’s voluminous foreign exchange reserves, which had risen to US$27.1 billion by November 27. All the foreign money now playing the RTS could leave therefore Russia on short notice without putting much downward pressure on the exchange rate. By contrast, official reserves in August 1998 had dropped to US$11.2 billion, and attracting foreign capital inflows was seen as crucial to maintaining the exchange rate. Russia as of mid-2000 reported a current account surplus of US$23.0 billion, whereas at mid-1999 the current account was in deficit to the tune of US$5.8 billion. Perhaps most important, Russia’s federal and regional governments in mid-1998 were running a combined budget deficit that exceeded 8 percent of GDP, which could only be financed by unsustainable domestic and foreign borrowing. By contrast, these budgets (not counting privatization revenues) were essentially in balance in mid-2000, with Russia paying down old debt rather than taking on new obligations. Should the RTS continue to tank this year, it is unlikely for these reasons to take the rest of the Russian economy with it.

These differences are also apparent in Russia’s stock market trends. Compared to 2000, the RTS during 1997-1998 took investors on a real roller-coaster ride. The RTS index doubled from 201 on December 31 1996 to 401 by mid-June 1997, and spent much of July-October 1997 above 500. Despite the onset of East Asian financial contagion that fall, the Russian market still closed out 1997 at 397. The bottom dropped out in May 1998, when the flight from Russia took hold: the RTS in that month dropped from 315 to 191. By August 18–the day of the ruble’s crash–the index had dropped below 100, and by October 5 it had collapsed to 39. Not only is the RTS’s slide since September 2000 much more mild in comparison: it is driven by smaller daily trading volumes as well. Whereas these peaked at US$200 million in October 1997, daily trading volumes on the RTS in 2000 have rarely exceeded US$50 million. Once burned, twice shy investors–both domestic and foreign–seem to be viewing the Russian stock market with a good deal more suspicion this time around (Russian Today, December 4).

YELTSIN “CATEGORICALLY AGAINST” RESTORING SOVIET ANTHEM.