by his ever-growing animus toward the United States, Vladimir Putin is using
the global financial crisis as yet another opportunity to fire a rhetorical
shot at America. “This is not the
irresponsibility of some people but the irresponsibility of the system, which
as it is known, claimed to be the leader,” the Russian Prime Minister said in a
speech late last month. Dmitri Medvedev, Putin’s handpicked presidential
successor, seconded his mentor’s sentiments.
“The times when one economy and one country dominated are gone for
good,” he declared at a conference is St. Petersburg.
So unseemly was the Russians’ schadenfreude that
even the New York Times felt compelled to observe: "While it is hardly a new sentiment, in Russia there is a gloating
quality, as the American crisis deepens." But even as Putin and his
friends take delight in America’s difficulties, their own markets are going
down the drain – so much so that at the end of last week Russian stocks were
down more than 75 percent from their all-time high earlier this year.
sure, part of that plunge can be explained by the global financial turmoil that
has affected every economy in the world. The Russian losses, however, have far
exceeded those of other countries. On Friday last week, for example, when world
markets were up 2-3% on average, the Russian bourse fell by 5%. This followed
the double-digit drop the day before which was only halted when trading was
suspended in mid-session. That was the third market shutdown in four days. By
the end of that week, Russian equities had lost two thirds of their value in
less than six months.
could have been even worse had it not been for the suspensions and frantic
stock buying by the Kremlin in an effort to prop up the price. That means that
as far as investors are concerned, shares of Russian businesses are close to
says a great deal, especially since more than half of Russia’s publicly traded
companies are either directly or indirectly involved with extraction and
processing of valuable commodities. These include not only oil and gas, but
also other natural resources and raw materials such as nickel, coal, wood, iron
ore, aluminum, and gold. Given the extraordinarily low valuations of these
businesses, one would expect to see investors moving in to grab the bargains.
But there are few takers for now, and understandably so.
corruption, all-pervasive bureaucracy, complex regulations, an arbitrary
judiciary, and a belligerent foreign policy do not make for an
investment-conducive environment. But what scares investors most is the
Kremlin’s looting of the private sector. Once the Kremlin targets a company as undesirable
there is not much that can be done. Undue resistance and protestations by the
owners can easily culminate in jail time. Earlier this year, media magnate
Rupert Murdoch pointedly addressed
have great growing business there [in Russia] but…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
of Russia’s unhealthy condition, investors began fleeing even before the credit
crunch arrived. Russia was, in fact, already experiencing an outflow of private
capital in January of this year. The hemorrhaging gained strength in the wake
of the Russo-Georgian war in August when billions flowed out within weeks.
Contrary to the claims of the Kremlin’s defenders, the seizure of the global
credit markets was not the cause of the country’s equities fiasco; it merely
exacerbated the problems endemic in the Russian system.
totalitarians, Putin and his henchmen thought they could get away with their
corruption. But there is always recoil to wrongdoing and now they are reaping
the fruits of their misconduct. Even as we speak, the troubles in the financial
and equity markets are inexorably spilling into the wider economy. Jobs are
being cut as companies go under and many small retailers are closing shops.
There is a general sense that something is not right and people are beginning
to hoard food and withdraw cash. The perpetually tried Russian citizenry may
get hit hard once again. If this happens, murmuring and discontent will set in.
Marshall Goldman of Harvard University's Davis Center for Russian and Eurasian
Studies thinks that Russia may be in for some serious socio-political tumult. "If
oil prices continue to drop, there could be political unrest because all this
prosperity and self-assurance we have seen [under Putin] will disappear," he
Putin has refused to acknowledge that there is a problem. Even as the Russian
stock market crashed, the state-controlled media focused their coverage on the
United States and other western democracies. But if events continue along the
downward incline, Putin will eventually have to give account. No doubt he will
blame everything on America, but shifting responsibility on someone so far away
has only limited usefulness when jobs get scarce and bread too expensive.
the hopes of some, the current regime is not about to fall apart. Thanks to the
Kremlin’s vast oil-fed cash reserves – over $500 billion – the clique in power
has enough cushion to weather this storm. The question is whether they will
learn their lesson. Given their hubris and past record, it is not very likely.
In fact, the present turmoil may only further cement their errant ways. Nikolai
Petrov, an expert with the Carnegie Center in Moscow, certainly thinks so:
huge redistribution of property is taking place due to the crisis. The
political elites in the Kremlin are sure now that they've been right all along
about the need for greater state control, and believe that even the West is now
coming around to their point of view.”
rulers even have a euphemism for their authoritarianism calling it “Kremlin
capitalism.” Accordingly, most of Russia’s recent rescue package has gone to
state-controlled companies. Topping the list are the giant gas monopoly Gazprom
and the state oil firm Rosneft. Other state firms that produce “strategic
goods” such as aircraft and weapon systems are being given priority.
Buklemishev, chief analyst for MK Analytica and a former economic official in
the government cautions against the dangers inherent in such “rescue” efforts.
“Putin has re-nationalized key industries and expanded the state's role in the
economy, but the state sector remains corrupt and inefficient, and the
emergency measures will result in the state controlling even more,” he warned.
Gavrilenkov, an analyst with Troika Dialog, a Moscow-based investment bank puts
an exclamation mark on this point: “It's understood that the state will first
support its own companies. In Russia, the state is a megaoligarch.”
keeps pursuing his statist approach, there will inevitably be more crises
ahead, each one worse than the one before. Sooner or later his government will
run out of reserves and there will be no more cash to keep the faulty ship
afloat. The sudden collapse of the Soviet regime is still vivid in the memory
of the Russian people. Should things get too painful, they will begin to wonder
whether the present regime does not deserve the same fate. And this would
certainly not be good news for Mr. Putin and his friends.