Russia Economy: Effects of the US Financial Crisis in Russia

Moscow, 2 Oct 2008.

Moscow, 2 Oct 2008. Read Part 1 (India) here. Read Part 2 (China) here.

Part 3: In the aftermath of the Dow collapse and failure for the $700 billion bill to pass through Congress, the world is reacting differently. In this installment, we examine Russia’s condition. [br]

In Part 1, we reported that India was in bad shape. When the markets finally closed, however, the country had largely recovered despite widespread uncertainty and perturbation. In Part 2, we discussed China which was experiencing similar effects – extensive worry and concern but no market collapses.

It stands to reason that this ubiquitous alarm is rife in Russia, as well. Echoing this concern is Dmitry Zhiltsov, a recruiter from St. Petersburg. “It’s like I’m holding my breath, waiting for the collapse,” he said, fearing the worst for his company’s future and his mortgage.

Late last week, just before the bill was nearly pushed through Congress, the World Economic Forum cautioned that the world is up against a “heightened risk of widespread contagion” and “massive consumer credit defaults.”

This consumer credit crunch may hit Russia as well, as the real estate markets there are in a rapidly-expanding bubble. In Moscow in 2000, average property prices were US $700 per square meter; now the average is more than seven times that: US $5,000. Do consumers think they can buy property they can’t afford just because the prices are appreciating? That happened in the US and now the whole house of cards has fallen.

A recent report by The Economist described the risk aversion gaps between the US and the rest of the world, including Russia. It described that while Americans admire risk, they would struggle in a place like Russia where cash and power govern more than law and government.

After all, it was less than 20 years ago that Russia was a communist country, centrally managed with no prospects for risk or individual innovation or entrepreneurship. And when the archaic communist system imploded, people were uncertain about how to move forward – they had no government to tell them what to do, and the law of the land ruled. This produced massive corruption and of course wealth, with a lack of regard or need for government regulation. What was once a highly-controlled economic system is now almost self-controlling. [br]

So any losses or market dips in Russia may well be taken much easier than in the US or especially Western Europe. Since the US financial crisis began, markets in Russia have dropped.

Since early July, the Russian Trading System (RTS) has lost 64% of its value. But on 30 September, trading was suspended on the RTS and on the Moscow Interbank Currency Exchange (MICEX). These were stopped to minimize exposure to the US market turmoil.

After Tuesday’s suspension, markets closed slightly higher. The MICEX gained 0.8% while RTS stock index rose 1.5%.

Yesterday Putin placed the blame squarely on the US saying that American “irresponsibility” created this global financial crisis. He also discredited US claims to world leadership. The US has long assumed to have a superior system than Russia, economically and politically, and Putin did not hesitate to show evidence otherwise.

“We see an inability to take appropriate decisions,” Putin announced at a Cabinet meeting. “This isn’t the irresponsibility of particular individuals, it is the irresponsibility of a system that, as we know, had claims to leadership.” He continued, “Everything that is happening in economics and finance started in the United States.”

As a result, the Russian economy is projected to expand by only 5.7% instead of 6.7%. Russian manufacturing contracted for a second month in September, the first two-month shrinkage in almost a decade.

The government announced that it could buy up to US $19.5 billion in shares to help revive the domestic economy. The ruble has been falling against the dollar for five consecutive days.

Vladamir Gonzalez, EconomyWatch.com