With the crushing attack on Georgia, Russia seemed a state too powerful. Western politics couldn’t stop the Russian advance, but perhaps economics will.
According to Forbes, Moscow’s dollar deominated RTS index fell by 13% in the last week, by 24.2% since Russian troops entered Georgia on Aug. 8, and by 45% since mid-July. The ruble denominated MICEX is down 28% in the last three months. Almost $550 billion worth of value was wiped out in less than four months, said Peter Westin, an analyst at J.P. Morgan, in a research report Thursday.
Investors are pulling capital out of Russia at the fastest rate since Russian bonds defaulted in 1998. While there’s practically no risk of that happening again, other factors are scaring investors:
1. A dependence on oil and gas. As the world’s second largest exporter of oil, the falling price of crude is not good news for Russia. The Micex Oil & Gas Index sank 9.2 percent, the lowest since November 2005. Gazprom dropped 18.62 rubles, or 8.3 percent, to 202.74 rubles on the Micex, its lowest level ever.
2. A lack of domestic institutional investors. Pension funds, mutual funds and insurance companies should be balancing out the markets right now, focusing on steady returns in the long term. But Russia’s pension fund is state-controlled and if investments soured it could face a national crisis. Further, ratings agency Standard & Poor’s warned that Russia’s Triple B sovereign credit rating would be at risk if it injected sovereign capital in to the open markets.
3. Political turmoil. With the invasion of Georgia, investors fear sanctions and international criticism could damage the economy.
4. Low taxes. With oil companies already benefitting from minimal taxation, there is no easy way of lowering taxes to boost short term profits and attract investors.
On the bright side, the Russian government does have a lot of liquid capital, so it needs to find a smart way to inject it in to the market. Russian President Dmitry Medvedev argued Wednesday that Russian assets were undervalued and the market declines were “not long-term.” If he can back that claim up with capital, or put the government’s money where its mouth is, Russia’s markets could level-out quickly.
Russia always projected an image of the most developed, stable BRIC (Brazil Russia India China) country. But if investors continue leaving, the MICEX may fall more than the Shanghai Stock Exchange Composite (SSEC) which is down 64.8% since mid-October 2007.
