Facing Up to the Global Credit Crisis
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According to a recent Wall Street Journal article, Russian stocks on average are trading at slightly more than four times earnings on the MICEX and RTS stock exchanges. This level is down from thirteen times earnings at the market's peak. Overall, compared to fellow BRIC economies, Russia's stock market is down 72 percent off its 2007 peak, compared to 59 percent for Brazil, and 62 percent for India and China, according to statistics compiled by The Asia Times.
Lower commodities prices and the global credit crisis are hitting the Russian economy hard in the last half of 2008. However, unlike in 1998, when Russia's banking system and the savings of middle class Russians were wiped out, Russia has a huge stockpile of hard currency reserves to leverage as collateral in maintaining financial stability. The ruble has lost ground versus the dollar since hitting its peak in the early summer of 2008. However, the ruble has not collapsed into hyperinflation, as it did 10 years ago, and the Russian government is allowing it to depreciate against other world currencies. There are some signs that Russia can ride out the crisis -- if Western credit markets remain open to lending to Russian firms, and the West remains attractive to Russian and other sovereign wealth fund investments.
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Roman Abramovich and other Russian oligarchs have lost billions due to the Russian market meltdown
The Fallout from the Global Credit Crisis in Russia
Whether Moscow and Washington like it or not, Russia is now thoroughly integrated into the global economic system. Regardless of where the financial crisis began (and most analysts agree that it originated with a worldwide glut of money issued by central banks, including the U.S. Federal Reserve), Russia's problems cannot be separated from those of the West. The Russian government has attempted to address the crisis by cutting interest rates, and injecting cash from Russia's $500 billion in hard currency reserves into loans for major companies, including one of the largest banks in the country, Vneshtorbank (VTB). Russia's major electric utilities and automakers, just like American carmakers in Detroit, are also publically declaring that they may need government assistance. Time magazine is reporting that assembly line workers are being laid off or having their wages slashed in Nizhny Novgorod and other regional economic hubs. Russian Finance Minister Alexei Kudrin has warned that not all Russian banks and corporations should count on loans from the state and that they ought to prepare for slower growth in 2009.
Ukraine and the Energy Price Crunch
Russia still seems to have more natural resources and currency reserves to withstand the economic shocks than some of the smaller, richer European economies, like Iceland and Hungary (both members of NATO, and the latter a member of the European Union), and nations in the former Soviet Union, such as Ukraine. The collapse in prices for steel and coal, Ukraine's two most lucrative exports, have made an already shaky political situation in Kyev even more acrimonious.
If Gazprom finds itself short on Western capital for drilling and modernization, the state-owned monopoly will always find it more politically acceptable to boost the artificially low gas prices it charges Ukraine and Belarus than to squeeze domestic utilities and consumers in Russia. Western governments may dislike these actions and once again accuse the Kremlin of bullying Kyev, but they should follow the money. The harsh reality is that natural gas (and the steel made with it, whether in Russia or Ukraine) must at some point reflect the true costs of getting the raw material out of the ground in Siberia and Central Asia and shipping it to points east and west.
The former Soviet republics, as well as the Russians themselves, cannot continue to pay half or less of what Western Europeans pay for the same natural gas indefinitely. Free market economists ought to be applauding such a reckoning rather than dismissing it as "Russia using energy as a weapon". While Russia will continue to subsidize natural gas prices for its own people for some time, unlike other major energy producers such as Saudi Arabia, it does not subsidize dirt cheap gasoline at the pump. In fact, even as gasoline prices have fallen in the U.S. since reaching their peak in July 2008, Russians continue to pay more at the pump than Americans.
Can the West Keep its Own Commitment to the Ideals it Demands of Russia?
For long-term investors who remain cash-rich and liquid, the global financial crisis may present an unprecedented buying opportunity. Many smaller Russian and Ukrainian companies may end up selling for a fraction of their pre-crisis value.
Russia has not yet undergone the wholesale nationalization of its banking or financial sector, as has already occurred in many Western economies. But the question remains: can Russia and Ukraine maintain their commitment to free trade and market economics, even as these concepts are being maligned and blamed for economic failure in the West? Time will tell.