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Russia: From Growth to Mere Survival

by: Jonathan O'Shaughnessy October 08, 2008 | about stocks: RSX    

Jonathan O'Shaughnessy

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Yesterday morning, the Wall Street Journal released an article entitled: "Russian Investors Want Bailout of Bailout." This of course, follows Monday's horrific day of trading when the Russian RTS stock index fell 19.1%– the largest drop in a single day in its history.

Merely a few months ago, the Russian exchange (RSX) was being heralded as one of the prospective high-growth gems of the emerging economies. Today, there are extremely serious concerns about the government's ability to keep it from collapsing.

Moscow took steps to ease the financial crisis with its $120B bailout – a sizeable move which temporarily eased the markets. However persistent fears of credit kept most of the money walled up inside the banks. The article states that very little of it has been lent even between them, let alone dispersed among the market: "'There's all this money promised, but so far it's not on the market,' said James Fenkner, head of Red Star Asset Management in Moscow. 'Banks are still not lending money to each other. It's disheartening, because the government was supposed to do something.'"

To me, it's a classic case of economic Game Theory – each player is distrusting others, and subsequently hoarding capital. The banks are afraid their loans won't be paid back, which creates a credit lockup. The $120B bailout helped, but clearly Moscow to date has not done been as forceful as it should have to keep the money flowing throughout the system.

The second hit to Moscow is the falling oil prices. According to the WSJ, Russia has "amassed nearly $600B in currency reserves from high oil prices over the past several years…" and with the falling oil prices (now below $90/bbl), it presents a heavy double-punch to Russian economic integrity. The reserves were meant to be spent on much needed infrastructure for the country. That infrastructure would inevitably fuel growth and improve the quality of life for its population, yet as oil continues to spiral downwards, that spending is most likely going to have to be used to put the economy on life support. Even if the crisis isn't as protracted or as deep as expected (I'm not sure how it could be any more severe, but still), it will inevitably have an impact on the psychological disposition on those in Moscow – withholding more of their budget than they would have otherwise as a safety blanket in case of additional credit shock waves.

The Russian market has imploded: according to Emerginvest, down 60.4% in the last quarter (again, 19.1% of which occurred Monday alone). The troubling truth is that the question no longer remains "How much will Russia grow in the next few years?" Instead, the question is "How damaged will she be when she gets out of this mess?"

Disclosure Statement: Emerginvest is an international finance portal, helping investors find investments from around the world. Emerginvest provides impartial information about world stock markets, and does not have any holdings in foreign equities.

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This article has 4 comments:

  •  
    Oct 08 07:39 AM
    "To me, it's a classic case of economic Game Theory – each player is distrusting others, and subsequently hoarding capital. The banks are afraid their loans won't be paid back, which creates a credit lockup."

    *

    Yes, and why would that be?! Because we live in a "F*ck You Buddy" society! Rather a moral liability, it is deemed rational and clever to cheat... Game theory is Psychopathology!!!

    Watch Adam Curtis' BBC documentary:

    "The Trap: What Happened To Our Dream Of Freedom?"

    www.youtube.com/watch?...
    Reply
  •  
    Oct 08 12:09 PM
    Russia is a study in too much too soon with almost no foundations in place to support the economy. Missing is the middle income group and the institutional framework for decision making that is NOT governmental and political. There is more to do that financial rearrangements.
    Reply
  •  
    Oct 08 05:15 PM
    i keep asking for someone smarter than me to add up all of the russian defaults since ww1 translated into todays $"s.this phony democracy will move the goal posts & screw the investors at any time.its happening here,so for sure it will there.same story with china.its your cash-lose it as you see fit.
    Reply
  •  
    Oct 09 07:05 PM
    Thanks for the comments - I agree somewhat - its clearly been mismanaged. I'm submitting another article based on today's gains if you have a chance to read it.
    Reply
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