The MICEX, meanwhile, halted trading at 14:10 after losing 14.24 percent, closing at 513.62.  The two indexes have lost over half their value in the past month alone.  Both will resume trading on Tuesday, October 28th.

The Russian collapse comes in line with falling share prices in Europe, although the reaction in Russia has been much more severe.  Fears of a global recession and oil prices at a 16 month low have made many investors fearful about the state of Russia’s oil and gas-rich economy.  On Thursday, the Standard & Poor’s rating agency lowered Russia’s long-term outlook to “negative” from “stable.”

Crude oil was trading at $63 per barrel on the New York exchange Friday.  This posed a serious problem for Russia’s 2009 budget, which will go into deficit below a price of $70 per barrel.

To combat sinking prices, the OPEC cartel announced today that it would cut production by 1.5 million barrels per day.  Unfortunately, many investors do not believe the move will be enough to counteract shrinking worldwide demand, and the cut did not have an immediate effect on markets.

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Note: Many ordinary Russians do not invest in the stock market, and have not been affected by the market crash.  The global liquidity crisis, however, is beginning to spill over into the real Russian economy, and falling government revenue may ultimately create tangible consequences in government programs, pensions and other essential services.

“All my contacts with representatives of the real sector of the economy describe how these businesses are starting to experience a certain financial hunger,” Putin said.

Russian companies have increasingly reported difficulties in obtaining credit, which has led to layoffs and shortages. Last week, Russian automakers GAZ and KamAZ announced that they were dealing with financial issued by cutting production and shortening the working week, respectively. Heavy industry, banks and retail outlets were also reportedly cutting staff and tightening operations.

Putin went on to urge lawmakers to act immediately to improve liquidity and access to credit, and to finish work on amending the 2008 federal budget.

“Decisions have been adopted, but in some cases cash fails to reach the real economy,” he said.

Still, the Prime Minister distanced his government from the crisis, saying that practically all world economies are hurting. Putin had earlier blamed the United States for failing to act decisively enough.

The Kremlin has already enacted several measures to improve liquidity in Russia’s financial system, including a 950 billion ruble injection into the banking sector. Despite this, Russian markets have imploded since the start of the year, losing over 60% of their value in 2008. Even with new imminent government intervention, the MICEX dropped nearly 5% today, while the RTS was down over 6% at closing.

“I understand that it is not easy for business to work, and that our bureaucratic mechanism is still difficult,” Medvedev said, “but you don’t need to whimper… This isn’t like raising animals on poor soil. You know very well what is happening on the world gold market.”

Medvedev went on to suggest the government could revoke Polyus Gold’s license to mine gold in the region.

“If extracting gold is a marginal economy for you,” he said, “you ought to abandon this line of work. We will find others. Shall we take away your license?”

Concurrently, the Russian president advised local authorities to pay close attention to the needs of business.

Shares of Polyus Gold did not react to Medvedev’s statements, and its listing on the MICEX index had grown 1.22 percent as of 12:30 Moscow time, following the general market sentiment.

Previously, Medvedev has called on Russia’s authorities and security services to stop “causing nightmares” for business. Medvedev was trying to calm Russian markets as they entered a free-fall when Prime Minister Vladimir Putin criticized Mechel, a coal-extracting company.

Polyus Gold is Russia’s largest gold extractor. In 2007, the company’s various units produced 37.8 tons, or roughly 1,214 thousand ounces of gold. Businessmen and billionaires Mikhail Prokhorov and Vladimir Potanin are the company’s largest shareholders.

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Putin Is Ruining Russia’s Economy
Sept. 19, 2008
By GARRY KASPAROV

Moscow

This week’s global market catastrophe kicked the Russian economy when it was already down. On Wednesday trading was suspended for a day and a half. An unprecedented 1.126 trillion rubles (around $44 billion) has been allocated to rescue three major Russian banks. One, Gazprombank, is controlled by Yuri Kovalchuk, Vladimir Putin’s closest partner.

The market’s collapse, down 57% since May, is linked to the dysfunctional nature of the Russian state and economy. Nearly every aspect of commerce in Russia is deeply entangled with state power, if not with Mr. Putin personally. This, for obvious reasons, does not comfort most investors.

One famous investor in particular was worried about the security of doing business in Mr. Putin’s Russia. Rupert Murdoch, speaking on News Corp.’s earnings call on Aug. 5, had this to say: “The more I read about investments in Russia, the less I like the feel of it. The more successful we’d be, the more vulnerable we’d be to have it stolen from us, so there we sell now.”

The hoped-for liberalization under new Russian President Dmitry Medvedev has turned out to be another case of wishful thinking both in Russia and the West. There’s no doubt in the business community about who’s really in charge. After his cronies’ takeover attempt of steel and coal giant Mechel was rebuffed, Mr. Putin’s public outburst of criticism in late July was enough to destroy the company’s market value.

Mechel is a tempting new target now that the price of coal is rising rapidly. As Mikhail Khodorkovsky and his company Yukos found out, in Russia success can be a very dangerous thing. Mechel may yet be another casualty of the mafia-like extortion tactics that have become a standard Kremlin maneuver.

In 2000, BP attempted to rebrand itself with the slogan “beyond petroleum.” These days the company is scrambling to get “beyond Putin.” Robert Dudley, the CEO of BP’s Russian joint venture, fled Russia due to what he called “sustained harassment.” Even the recent truce between BP and its Russian partners in BP-TNK represents a major defeat for the British company. Mr. Dudley attempted to hold a press conference in Moscow in July, but his venue was abruptly cancelled by the National Hotel, a property of the American giant Starwoods. This was not a unique occurrence.

The National Assembly, an opposition parliament with representatives from across Russia and across every ideological line, scheduled a public hearing on the Russia-Georgia conflict for Sept. 11. It was to take place at the new Hilton hotel in Moscow, and I personally signed the contract for the conference room. On Sept. 10, the Hilton cancelled the arrangement, claiming problems in the hall. Maybe all contracts in Russia should now include a third line for the signature of the local KGB official.

Two days after Mr. Murdoch expressed his concerns, Georgia and Russia opened hostilities. Europe and the U.S. waved their hands helplessly as Russian tanks and ships went far beyond defensive or peacekeeping action. It remains to be seen whether the European Union and the North Atlantic Treaty Organization, which have issued contradictory statements, can act meaningfully in the face of Mr. Putin’s belligerence.

Just hours after Nicolas Sarkozy completed his second trip to the region, signed agreements in hand, several of his claims of peacemaking were contradicted by the Kremlin, leaving the energetic French president looking the fool. Mr. Sarkozy has just one more trip to go before he completes his imitation of Neville Chamberlain’s infamous trio of visits to Germany in September 1938. Perhaps Georgia should not be as nervous today as Czechoslovakia was then. But one parallel is real: If there is anything an authoritarian leader cannot abide, it’s a power vacuum on his borders.

Dictatorial power demands to expand into every available space. Establishing effective penalties will require great political will, especially in Europe. There Mr. Putin has defenders like Silvio Berlusconi, who boasted last week about how he prevented the EU from levying sanctions against Russia over its actions in Georgia. The Kremlin also has many influential employees, including former EU leaders Gerhardt Schroeder of Germany and Paavo Lipponen of Finland, who both took plum positions with the Russian energy giant Gazprom immediately after leaving office.

With their reliable business partners in the West, the Kremlin has opened up a lucrative market for what could be called democracy offsets. In exchange for oil and gas from Russia, they provide democratic credentials and pretend Mr. Putin and Mr. Medvedev are elected officials rather than mafia bosses.

Until Russia has a government that is accountable to its citizens, no company or individual will be safe here. The silver lining of the meltdown will be the weeding out of so many of the foreign and domestic profiteers who greedily abetted Mr. Putin’s drive to turn Russia into a dictatorship. But there are still many who hope that all will be back to business as usual once the dust settles. Apparently they think the show must go on, even though many of the lead actors have left the stage — and the theater itself is ablaze.

Mr. Kasparov, leader of The Other Russia coalition, is a contributing editor of The Wall Street Journal.

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 theotherrussia.org

“We cannot change the situation on say, the American market,” he said. “The Americans will have to sort out their mortgage system and other financial instruments themselves, though, to put things plainly, they have let us all down.”

Russia’s two major indexes, the RTS and MICEX, have taken a tumble in recent weeks, and closed for the day at more than two-year lows.

According to Medvedev, there are “two issues we clearly need to think about. First, despite the various difficulties, Russian companies’ assets are still undervalued in many cases, and this creates potential for growth. Second, given that our market is still growing, volatility is an inherent trait and this means that there can be quite serious fluctuations in evaluations, and this has both advantages and disadvantages.”

“These are not the easiest times for the stock market,” Medvedev said. “Unfortunately, there are objective reasons for this situation that lie beyond the power of our financial authorities and are not related to economic factors in our own country.

“Essentially, all of the financial markets and the international financial markets are going through difficult times. At the same time we also have problems of our own.”

“Trends on the stock market have been quite complex of late. But we do not think they are indicative of long-term problems. This is more likely the market’s reaction to a number of unfavorable circumstances, a number of difficulties at the international level and in our own economy.”

Medvedev has previously accused the US of initiating a global economic crisis. In June, Medvedev spoke at the World Economic Forum in St. Petersburg (video). He explained that the huge role of the US in the world economy was one of the major reasons for what he said may be the worst economic crises since the Great Depression.

“The failure to properly assess risk by the largest financial corporations, combined with the aggressive financial policies of the world’s largest economy, have led not only to losses for those corporations,” he said, “but unfortunately have impoverished the majority of people on the planet.”