RUSSIAN STOCK MARKET TANKS.

The Russian stock market, whose performance through the first eight months of 2000 compared favorably with most other emerging markets, has tanked since August, and underwent a particularly sharp downward correction on November 30. The 11 percent drop in the value of the equities traded via the Russian Trading System (RTS) on that day meant that the Russian market had dropped 20 percent since the start of the year. It also reminded nervous investors of the stock market carnage which accompanied Russia’s August 1998 financial crisis. But while a similar macroeconomic meltdown seems unlikely at this juncture, the RTS’s downward spiral does point to the many unhealthy components of the Russian financial system.

The immediate cause of the November 30 sell-off was bad news from the Istanbul Stock Exchange (ISE), because emerging market investors typically view Turkish equities as close substitutes for Russian stocks. The Turkish Central Bank had been defending the lira’s exchange rate against large outflows of foreign capital, and the bank’s foreign exchange reserves dropped by some US$6 billion from November 22 to November 30. Market fears that the defense would fail and produce a large devaluation accelerated Turkish sell-off, and pushed the ISE-100 index down 8 percent. Continuing declines in the NASDAQ–which has been declining steadily this fall due to a slowing U.S. economy and uncertainty about the U.S. presidential elections–have also made investors less willing to take the risk of investing in emerging markets. These trends helped to push the RTS index down 11 percent on November 30, to close at 143, even though trading was halted for an hour when the index fell 8 percent following the market’s opening. By December 4 the RTS had dropped below 142–and a full 20 percent below its end-1999 level of 178.

The November 30 rout was only the most recent bit of bad news in a dismal autumn for Russian equities. The RTS had risen from 110 on December 8, 1999 to a high of 244 on March 24, 2000–the eve of Vladimir Putin’s election as president–on the hope that the new president’s market-reform rhetoric would translate into a better investment environment. While the market took a beating during the Kremlin’s summer attack on the oligarchs, by August 29 the RTS had climbed back up to 246. Russian equities then began their long descent, dropping to 199 on September 29, 189 on October 31, and 161 on November 29. Then came the November 30 drop to 143 (Wall Street Journal, December 1, 4; Russia Today, December 4).

WHO IS TO BLAME?