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Bears in Moscow

Author: Lee Hudson Teslik
September 25, 2008


Given harrowing market swings in the United States and Europe this September, Western news media have largely ignored the fact that Russian markets-one of the world's brightest economic success stories of the past few years-have actually suffered much worse losses. The Russian ruble has rapidly lost value (MarketWatch), and Russia's leading stock index has fallen 57 percent since May (RFE/RL). The Dow Jones Industrial Average, by contrast, dropped roughly 14 percent during the same period. The country now faces what many analysts regard as its most serious economic crisis since 1998 when Moscow defaulted on its international debt.

In fact, the 2008 crisis bears several similarities to the economic breakdown that unfolded almost exactly one decade prior. The first and most obvious is the rapidly plummeting price of oil, the commodity on which Russia's economy floats. While oil prices currently remain well above the lows of a decade ago, current prices have lost significant ground since their July peak of over $147 a barrel, hitting a low in early September of just over $90 (CNN). This sharp volatility proved unnerving for Russia, which produces more oil than any country other than Saudi Arabia. Moscow also relies on exports of natural gas and other commodities, the prices of which have also plummeted from summer highs. Additionally, analysts say the short-term outlook for commodity prices is anything but certain. Major producers worry that failing financial institutions, which had speculated heavily in crude and pushed up prices, could now be forced to rapidly unwind those positions, potentially leading to further price declines. Anders Aslund, a fellow at the Peterson Institute for International Economics, wrote in the Moscow Times that this phenomenon could stretch beyond oil and lead to broader withdrawals of investments in Russian markets.

Geopolitical uncertainty also has weighed heavily on Russian markets. As in the 1990s, when Russia spent some $5.5 billion on military operations in the breakaway province of Chechnya, Moscow again finds itself embroiled in a regional conflict with no obvious end game-this time with Georgia. William Burns, the undersecretary of state for political affairs and former U.S. ambassador to Russia, recently testified before the U.S. Senate that Moscow's military intervention in the breakaway Georgian territories of South Ossetia and Abkhazia has much to do with its recent market woes. Beside the direct costs of the operations, Burns noted several major "opportunity costs" of the conflict, saying they could derail Russian efforts to modernize its economic infrastructure and diversify its economy to make it less dependent on commodities.

Just as the U.S. Treasury has pressed its cleanup plan to stabilize Wall Street, the Kremlin has pushed its own series of reforms. Prime Minister Vladimir Putin has suggested a $100 billion financial rescue package. The Financial Times writes in an editorial that the Russian plan has garnered a significantly more positive response domestically than has the U.S. Treasury's, albeit in a culture not much drawn to contradicting Putin. Still, the economic mood in Moscow remains highly nervous, and major potential problems lie hidden among Russia's own financial institutions. Despite a recent fire sale at the Russian investment bank Renaissance Capital, the Financial Times concludes that "the shake-out in Russian finance has barely begun." Moreover, the Economist writes, cleaning up Russian markets might take much more than saving a few firms. The article points out the major problems presented by structural flaws in several developing world economies, including Russia's, and suggests a major systemic cleanup aimed at rooting out corruption and cronyism. "Bad capitalism," the piece concludes, "carries its own risks."


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