RUSSIA FAVORS STRONGER REGULATION TO TACKLE MARKET VOLATILITY

The Kremlin moved to employ strong regulatory methods to deal with this month’s market turmoil. Russian officials have also tended to cite spreading fallout from the American credit crisis as a major reason for market volatility.

The financial authorities reacted promptly, and the measures they took had positive effects, Prime Minister Vladimir Putin announced on September 22. The market situation stabilized and Russian markets were revived, he told a cabinet meeting (Interfax, RIA-Novosti, September 22).

Russia’s stock market regulator permitted a restart of stock trading from September 19 on and suspended marginal trading and short-selling. The authorities had ordered Russia’s major stock exchanges, RTS and MICEX, to halt trading from September 16 to 18. In an unprecedented move, trading was suspended by FSFR to curb panic-selling, following MICEX’s 17.45 percent plunge on September 16 and RTS’s drop of 11.47 percent on the worst day of trading since the financial crisis of 1998.

As the authorities ordered Russia’s main stock exchanges closed, the Kremlin also pledged 500 billion rubles ($20 billion) to tackle financial turmoil. On September 22 Russia allocated 330 billion rubles ($13 billion) of budget funds to 22 commercial banks. Russia’s Finance Ministry also increased the number of banks eligible to receive emergency budget funding from Russia’s three biggest banks—Sberbank, VTB, and Gazprombank—up to 28 (Interfax, September 22). Subsequently, Russian equities strongly bounced back, and the energy and financial sectors led the gains.

The Russian media appeared to view the state intervention as a major driver of the market revival. The state aid served to energize Russia’s stock markets, The Moscow Times daily commented (The Moscow Times, September 21). After receiving a much-needed adrenalin shot of financial liquidity from the state, the country’s markets were jolted up, it wrote.

Afterward, Russia’s top officials voiced criticism of the current state of the global economy. Earlier this month, Putin suggested reviewing what he described as “international financial architecture.” The whole world economy could not sit on one printing house, he said on September 20, in an apparent reference to U.S. monetary policies. Putin also made no secret of who was to blame for the economic meltdown. Russian economic fundamentals remained normal, while the current difficulties were caused by troubled U.S. and European financial markets, he said on September 18 (Interfax, September 18-20).

On September 22 President Dmitry Medvedev argued that what he described as a “global system to manage” economic processes, including increasing energy and food prices, had become obsolete. “Unfortunately, a new system to sustain a global economic balance has yet to be created,” he said during a visit to Kazakhstan (Interfax, RIA-Novosti, September 22).

Despite the recent market volatility, Russian officials also insisted that the country remained one of the few safe havens globally. The economic situation in Russia was more stable than in the United States, Boris Gryzlov, speaker of the State Duma, the lower house of parliament, claimed on September 18. Russia investors were less prone to panic than their American counterparts, he argued (Interfax, September 18).

In the meantime, the Russian financial authorities have moved to cut the country’s exposure to the American credit crisis. Earlier this month Russian officials indicated that the Central Bank would further cut investment of the country’s reserves in debt instruments of U.S. mortgage agencies. Investment in corporate bonds of the U.S. mortgage agencies amounted to $30 billion, the Audit Chamber revealed on September 16 (Interfax, September 16).

In May the Russian Central Bank said that as of January 1, 2008, it had invested $106 billion of its reserves in the short-term debt of Freddie Mac, Fannie Mae, and Federal Home Loan Banks (FHLBanks). In late July, the Central Bank said the country’s investment in U.S. mortgage agency bonds amounted to less than $50 billion. In August Finance Minister Aleksey Kudrin said that this investment had added more than $1 billion in six months to the Russian state coffers.

Earlier this month, the Russian Finance Ministry argued that chilly political relations between Moscow and Washington did not affect bilateral economic ties. The U.S. financial authorities did not rely on political considerations in their relations with Russia, the ministry said in a statement following telephone talks on September 17 between Kudrin and U.S. Treasury Secretary Henry Paulson. Both sides had a shared interest in stabilizing the financial markets in Russia and the United States, it said (Interfax, September 18).

In the meantime, the Russian authorities have conceded that global market turmoil has adversely affected the country’s state finances. The global financial crisis has cost Russia up to $15 billion in capital flight, Kudrin admitted on September 20. On September 18 the Central Bank said that Russia’s international reserves were down from $574 billion on September 5 to $560 billion on September 12 (Interfax, September 18-20).

The Kremlin therefore appeared to favor stronger regulation in order to tackle market volatility, but it remains to be seen whether the Russian markets revival can prove sustainable amid continued global financial uncertainty.