Medvedev to markets: “Remain calm! All is well!”

The Financial Times has a bevy of stories on Russian capital markets.  First, there’s the fact that Russia’s wealthy elite is starting to feel the credit crunch:  The falling price of oil and increased political risk following the conflict in Georgia played a prominent role in driving Russia’s stock market to new lows on Wednesday. ...

The Financial Times has a bevy of stories on Russian capital markets.  First, there's the fact that Russia's wealthy elite is starting to feel the credit crunch:  The falling price of oil and increased political risk following the conflict in Georgia played a prominent role in driving Russia’s stock market to new lows on Wednesday. But bankers and traders said that the underlying reason for the selling was a liquidity crunch of the kind that affected western markets a year ago but has only recently appeared in Russia - a serious cash shortage that is forcing banks and funds to sell otherwise attractive assets. Analysts said the market was being forced down as leading Russian businessmen and funds had to liquidate positions due to margin calls as they were unable to raise cash elsewhere. This is interesting, because as although these tycoons need the Russian government, the Russian government needs their support as well.  Meanwhile, Russian President Dmitri Medvedev tries to calm everyone down, with limited success:  Russia is considering using money from its national wealth fund and pension fund to support financial markets where necessary in the future, Alexei Kudrin, finance minister said on Thursday as the country’s stock market trod water despite government moves to bolster confidence. In an unprecedented bid to reassure investors Mr Kudrin said: ”There are several proposals for the banking community to improve the instruments that would allow (markets) to calmly work in this environment,” ”Among these is a proposal to place pension fund money and national wealth fund money on the domestic market. In future it will be possible if it becomes necessary,” Mr Kudrin told reporters, adding the money would be placed in securities. The comments failed to impress the market. On Thursday, the dollar-denominated RTS index opened marginally higher before edging 0.1 per cent lower to 1,333.27, following an almost 12 per cent drop during the previous two sessions. The country’s more heavily traded rouble-denominated Micex index rose 0.6 per cent to 1,120.98. Intervention would knock Russia’s sovereign rating if it proved to be more than a verbal attempt to prop up the stock market, analysts warned. [You're going to say that the war with Georgia caused all of this right?--ed.]  Oh, hell, no.  There's a lot more going on.  This Lex summary seems pretty accurate to me:  Put aside Georgia, TNK-BP, and Vladimir Putin’s verbal mugging of Mechel and there were already good reasons why Russia’s market started falling in May, long before tanks trundled through the Roki tunnel. Those are the recovering dollar – forcing closure of long rouble positions – and falling prices of oil and commodities, whose long rally had underpinned the rise of Russian equities. Those factors are still in play, and fuelling the swing out of all big emerging markets. In Russia’s case they have come together with a big – and justified – leap in political risk that has turned what might have been a more orderly retreat into a rout. My take is that Russia badly miscalculated the economic and political costs of some of their actions -- in particular, the recognition of Abkhazia and South Ossetia.  We'll see if Medvedev can talk up the markets.  My gut -- it's all about the gut these days -- thinks that this sounds a lot more like Kevin Bacon in Animal House (go to 6:10 on the video). Developing.....  UPDATE:  I see that Putin is doing his best Kevin Bacon impersonation as well.  He's also blaming "speculators" on the whole kerfuffle. 

The Financial Times has a bevy of stories on Russian capital markets.  First, there’s the fact that Russia’s wealthy elite is starting to feel the credit crunch

The falling price of oil and increased political risk following the conflict in Georgia played a prominent role in driving Russia’s stock market to new lows on Wednesday. But bankers and traders said that the underlying reason for the selling was a liquidity crunch of the kind that affected western markets a year ago but has only recently appeared in Russia – a serious cash shortage that is forcing banks and funds to sell otherwise attractive assets. Analysts said the market was being forced down as leading Russian businessmen and funds had to liquidate positions due to margin calls as they were unable to raise cash elsewhere.

This is interesting, because as although these tycoons need the Russian government, the Russian government needs their support as well.  Meanwhile, Russian President Dmitri Medvedev tries to calm everyone down, with limited success

Russia is considering using money from its national wealth fund and pension fund to support financial markets where necessary in the future, Alexei Kudrin, finance minister said on Thursday as the country’s stock market trod water despite government moves to bolster confidence. In an unprecedented bid to reassure investors Mr Kudrin said: ”There are several proposals for the banking community to improve the instruments that would allow (markets) to calmly work in this environment,” ”Among these is a proposal to place pension fund money and national wealth fund money on the domestic market. In future it will be possible if it becomes necessary,” Mr Kudrin told reporters, adding the money would be placed in securities. The comments failed to impress the market. On Thursday, the dollar-denominated RTS index opened marginally higher before edging 0.1 per cent lower to 1,333.27, following an almost 12 per cent drop during the previous two sessions. The country’s more heavily traded rouble-denominated Micex index rose 0.6 per cent to 1,120.98. Intervention would knock Russia’s sovereign rating if it proved to be more than a verbal attempt to prop up the stock market, analysts warned.

[You’re going to say that the war with Georgia caused all of this right?–ed.]  Oh, hell, no.  There’s a lot more going on.  This Lex summary seems pretty accurate to me: 

Put aside Georgia, TNK-BP, and Vladimir Putin’s verbal mugging of Mechel and there were already good reasons why Russia’s market started falling in May, long before tanks trundled through the Roki tunnel. Those are the recovering dollar – forcing closure of long rouble positions – and falling prices of oil and commodities, whose long rally had underpinned the rise of Russian equities. Those factors are still in play, and fuelling the swing out of all big emerging markets. In Russia’s case they have come together with a big – and justified – leap in political risk that has turned what might have been a more orderly retreat into a rout.

My take is that Russia badly miscalculated the economic and political costs of some of their actions — in particular, the recognition of Abkhazia and South Ossetia.  We’ll see if Medvedev can talk up the markets.  My gut — it’s all about the gut these days — thinks that this sounds a lot more like Kevin Bacon in Animal House (go to 6:10 on the video). Developing…..  UPDATE:  I see that Putin is doing his best Kevin Bacon impersonation as well.  He’s also blaming “speculators” on the whole kerfuffle. 

Daniel W. Drezner is a professor of international politics at Tufts University’s Fletcher School. He blogged regularly for Foreign Policy from 2009 to 2014. Twitter: @dandrezner

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