August 12th, 2011

Russian markets disproportionately hurt by recent financial panic

This month’s fluctuations in the world financial markets are having an outsized effect on the Russian economy, the editors of Vedomosti wrote Wednesday.

The authors note that the RTS and MICEX have “dropped almost harder than the other” markets due to the expectation that investors would shed investments in oil in favor of more reliable assets like precious metals and (irony aside) U.S. bonds. (Russian markets were already in a disadvantageous position, as analysts have estimated that Moscow trades at a 30-50 percent markdown compared to other emerging markets – what’s often called the “Khodorkovsky discount,” after the former head of Yukos.)

While gold and oil tend to make major moves during economic panics, those moves aren’t always upward, as is the case this month, write the editors:

Raw materials often serve as a crisis alternative to securities. But today, only gold is going up in price, which, in essence, is not even a raw material, but money. Oil got cheaper […as] investors are expecting a cooling of the economy in China and a recession in the U.S.

A cooling of demand for oil, and a continued price drop, does not bode well for the Russian economy as its constructed in 2011. Citi analysts wrote earlier this week that, as compared to the economic crisis of 2008, the Russia’s dependence on oil has grown: “In 2008, the budget was balanced at a price of around $60 per barrel, but now the required price is about $120.”

During the last financial panic, in 2008, it took about six to nine months before Russia felt its worst affects. That time may conveniently fall after the next presidential election, when the new/old victor will be able to implement his own austerity measures – with nearly six years left in his term to see how they play out.

Either way, Russia’s intransigence on modernization and continued reliance on fossil fuels will only hurt its standing among investors looking to cash in on emerging markets – and, down the line, will hurt a nation badly needing public sector assistance to ease poverty and create jobs.

Categories: Economics, Investment Tags:
  1. No comments yet.
  1. No trackbacks yet.