Russia Hit the Rocks Hardest

By Matthews, Owen; Nemtsova, Anna | Newsweek International, October 6, 2008 | Go to article overview

Russia Hit the Rocks Hardest


Matthews, Owen, Nemtsova, Anna, Newsweek International


Byline: Owen Matthews and Anna Nemtsova

The market crash is due in part to Georgia, even if Putin doesn't think so.

By rights, this year's Sochi Economic Forum should have been a victory lap for Vladimir Putin. Russia's president turned prime minister had just, in his own words, "punched the face" of upstart Georgia, and a year of record oil prices had boosted Russia's currency reserves to $700 billion.

But instead of triumph, Russia's premier business-schmooze event was deep in gloom. Since the Georgian war in early August, an estimated $45 billion in foreign investment has left Russia as spooked investors have fled. Now Russian stocks are 57 percent off their May peak--compared with the average emerging-markets hit of 30 percent.

Putin was quick to blame the United States for the market's crash: "A systemic breakdown has occurred in global finances," he told an audience of businessmen, bureaucrats and oligarchs. "This is because of the unsatisfactory economic and financial policies of the world's leading economies, including the U.S." As for the 30 percent difference between Russia and other emerging markets, Putin just ignored it, insisting that Russia was in "a rather stable political and social situation."

Investors beg to differ. What with Georgia, the falling price of oil and a growing record of abuse of foreign investors, Russia seems more and more a broken BRIC. President Dmitry Medvedev tried to stabilize the market by promising a $44 billion credit line to secure banks, and even offering $19.6 billion to buy up flagging shares. But with inflation rising, business costs soaring and the state apparently unwilling to protect investors, the promises aren't working.

That said, Putin is partly right: the market troubles are not all of the Kremlin's making. A 28 percent drop in the price of oil certainly helped drive down Russian stocks. And many foreign investors have reined in their emerging-market portfolios in response to a credit crunch back home. But markets have fallen farther and faster in Russia than anywhere else except China (where red-hot stocks were overdue for a major correction). And while there are still plenty of longer-term China bulls, investor confidence in Russia is now almost non-existent. At least two major Russia funds, the Nikitsky Russia Fund and Hermitage Capital, have pulled out of Russia for good over the past year.

Investor confidence was already falling long before Russia's surprise invasion of Georgia. …

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