By: ANDREW E. KRAMER
The New York Times
September 12, 2008
Rattled by falling oil prices and the war in Georgia, Russia's stock market has slumped so severely that it now threatens the country’s oil-fueled boom of recent years, economists say.
The benchmark RTS index has lost 46 percent of its value since its peak in May, representing a paper loss of about $700 billion for Russian companies. Much of that decline has come since the war in Georgia and the subsequent war of words with the United States and Europe that unsettled foreign investors, who began withdrawing capital.
On Friday the RTS, which peaked in May at 2,487, rebounded slightly, rising 3.36 percent to close at 1,342. The country’s other main stock exchange, the MICEX, was rose 6 percent on Friday, after weeks of heavy losses.
While initially seen as a problem confined to the Russian stock market, which is volatile in the best of times, the drop in share prices is now spilling over to the real economy. Companies that had pledged shares as collateral for loans, for example, are now facing margin calls, bankers in Moscow say.
“It’s a classic squeeze,” said Roland Nash, chief strategist for Renaissance Capital in Moscow.
The underlying problem for the Russian stock market is that about 80 percent of the shares are in companies exporting commodities with a history of boom-bust cycles. Additionally, the risk premium for investing in Russia has risen with the war.
It is unclear which problem caused more damage. In one indication that Russian politics lubricated the market slide here, however, investors have pulled nearly $5 billion this year from emerging market funds with a heavy Russia weighting, according to EPFR Global, a company that tracks fund flows. By comparison, investments in Middle East and African funds, which are also seen as dependent on commodity prices, have risen this year.
The decline has elicited a response from officials here that economists described as panicky, including a number of plans that would have seemed inconceivable a few months ago.
For next year, Russian officials are projecting federal revenue growth of 1.8 percent, compared with an estimated 13.8 percent this year. Just in the last week, the value of Russia’s hard currency reserves has dropped $8.9 billion. The ruble is down 6 percent since the war in Georgia.
“The government and central bank need to do all they can to ensure inflow of additional financial resources into the financial market,” President Dmitri A. Medvedev said Thursday. “This is absolutely obvious, and this must be done for sure.”
The finance minister, Aleksei L. Kudrin, who had opposed investing any of Russia’s $573 billion in hard currency reserves in the domestic market during a milder correction a year ago, this week approved of the idea. Mr. Kudrin added Thursday that the government might also tap money in the state pension fund to invest in equities.
In a stop-gap measure, the Central Bank has injected more than $11 billion into the Russian banking system and is intervening to halt the daily decline in the ruble’s exchange rate with the dollar. Investors, however, remained skeptical.
“Going forward, one of the big issues that people have with the Russian market is too much state ownership, too much manipulation,” Rory MacFarquhar, an economist for Goldman Sachs in Moscow, said in a telephone interview. “Nobody is going to believe that is not politicized.”
