Experts Comment on the Russian Market’s Downward Spiral

MICEX index on Sept. 16Stock trading was suspended for a second day in Russia, as markets continued downward in a free-fall. The online newspaper asked experts for their take on the consequences of Russia’s crashing stock market for the country’s economic and political future:

Independent politician and former Deputy Prime Minister Boris Nemtsov:

The mediocrity of our leadership has now become obvious to even the most hard-headed people. Russia is a record-holder for market collapse, and share values have fallen in half. Russia is suffering more than everyone else. Half a million citizens, who invested in national IPOs, have lost 70-80 percent of their savings. They believed Putin’s promises, that these were good investments. They have been cheated once again. The financial crisis in the US is just one of the reasons for the crack of the Russian stock market. Another is the abominable investment climate in Russia. Putin personally carries responsibility for this: the squeeze on Mechel and [Mikhail] Gutseriev, the transfer of the Sakhalin project to Gazprom, arbitrariness in the courts – it would hard to think up anything worse. A third reason is Russia’s financial isolation after the Georgian-South Ossetian war. Investors consider our political regime to be unpredictable and aggressive.

How will this economic crisis turn out for the majority of citizens? I anticipate that there will be a wild growth in prices for food products, and on other everyday needs and utilities. Inflation will surpass 15 percent, and inflation on socially important goods and services will constitute 25-30 percent. A bank crisis will happen, whereupon the mid-sized banks will suffer, and not the large banks, which will have deplorable consequences for depositors. The bankruptcy of the chekist-governmental corporations in the name of Chemezov and Putin is possible. Our last report says that their collective debt equals 61.6 billion dollars. These are short-term debts, which is why the companies will have trouble refinancing them. No one will give them the money.

There is good news: it is possible that housing prices will fall. Although truth be told, getting credit will be very hard. Mortgage loans will become more expensive. If the situation in the stock market continues to worsen, and prices for oil continue to fall, it is obvious that the growth in the economy and industry will slow. In the nineties, when I was a Deputy Prime Minister, we survived then the price of oil was 10 dollars [per barrel], but for today’s authorities, the Rubicon is 70 dollars. If prices are lower, delays in the payment of pensions and wages may begin. That is to say that the system has no margin of safety. All this is the result of greed on the part of the authorities, and their custom of free-loading. The crisis will grow, because that “emperor is naked,” who makes incompetent decisions. The authorities, in order to preserve their riches and influence, are ready to unleash another war. In this situation, it is very important that the democratic opposition remains clone-knit, and doesn’t allow the country to fall into chaos.

Nikita Krichevsky, Ph.D (economics) and head researcher of the National Strategy Institute

The collapse of the stock market will not affect the economic situation in the country. Problems will arise for several businesses, who took credits on security of their shares. This whole situation was initiated by the Kremlin, who sanctioned investing in these financial pyramids. Zero hour happened on August 8th. The number of injured players was 800 thousand. The people close to authorities, who invested their money for political reasons, walked out. Still, the Kremlin is now taking a shot at saving the market, so that those people who it was responsible to can take out their money. Meanwhile, taxpayer money is being used for this. The primacy of business always stood before the primacy of laws. I hope that these shocks open a prospect for cleaning out the stock market, and that it becomes as it should be. Because now, 30 issuers comprise 99 percent of the market, and more than half of them are oil and gas companies.

Vladislav Inozemtsev, Ph.D (economics), publisher and editor of the Svobodnaya Mysl (Free Thought) magazine, and analyst with Centre for Research of Post-Industrial Studies

I think that nothing extraordinary has happened. The market was overheated. The financial bubble was being blown up by a group of oligarchs. The authorities participated in this, embellishing the improving investment climate in the news. Considering the reduction of oil prices, this panic is natural. A more or less acceptable corridor could be created, with the RTS index at a level of 1000 points. Investors would get used to the new reality. The outlook will depends on how much everyone was involved in the fundamental financial sector. Realistically… a fourth of investments were made by foreign investors. Losses of 40 billion dollars are not catastrophic. Many firms and corporations have free reserves on their books. And infusions, provided by the government in the sum of 2 trillion rubles, will be enough for this.

There is another negative aspect. The KIT Finans investment bank did not pay out its debts in the sum of 6 billion rubles. This will complicate the situation in the banks. The panic can be quelled within half a year, if our companies can receive a financial boost from the West –this is the main source of their financing. If the rates continue to grow, then this could actually become a serious threat. We are receiving opposing signals. Nearer to the end of the year, it will be clear if the situation is heading towards correction or worsening. For now, there is little certainty. As a whole, we should start from the general economic sentiment, that the US will need one or two years to improve the health of its financial sector, which means that we cannot count on growing oil prices.

Leonid Paidiyev, Ph.D. (Economics) and expert from the Open Economy Foundation:

People around the world have warned of this terrible situation, when powerful financial actors, in order to quietly reform themselves, throw all the weight of their losses on the weakest agents. We have quite a grave situation: all the blue chips have fallen. This is disturbing. Out government is taking some steps: buying up gold, currency. I believe it is very important that the ruble be strengthened. The dollar must cost no more than 25 rubles. Otherwise investors will start to panic. Our country was robbed as results of serious mistakes that were permitted by authorities. The large oligarchic structures, in order to cover their financial losses, used foreign borrowing. I have written in detail on what needs to be done so that we don’t fall into this situation in the future. It is necessary to strengthen the power of the personal financial system, through the mechanism of non-inflationary issue. Realizing these ideas requires a democratic society. Whether the government will go for this, I don’t know, because these measures undermine the basis of power of the oligarchic structures themselves. The lessons of other countries show, that aside from democratization, there is no other way. If the authorities don’t exercise enough prudence, a new, powerful economic crisis will arise.

translation by