Russian Stock Market Collapse Exacerbates Its Credit Crunch

Russia’s stock market took a beating as foreigners started getting cold feet over the British Petroleum row, when a consortium of oligarchs engaged in a power and money grab over a Moscow-based development joint venture, TNK. But falling oil prices are also a bad harbinger for a resource-dependent economy.

From Bloomberg:

Russia’s stock market collapse is exacerbating a liquidity squeeze and threatening to cut into production and employment, putting the brakes on 10 years of economic growth.

“The sharp contraction of the stock markets has resulted in a major crisis of confidence between banks,” said Vladimir Osakovsky, chief economist at UniCredit SpA in Moscow. “That, in turn has reduced the scale of the interbank lending market, which is cutting into available investment resources to the economy.”

Russian President Dmitry Medvedev’s pledge yesterday to channel an another 950 billion rubles ($36 billion) of loans for banks failed to forestall a 14 percent plunge in the Micex Index today. The government already promised last month to make more than $150 billion available to banks and companies with loans, cash auctions and tax cuts to preserve the boom a decade after a crash in 1998 wiped out banks and residents’ savings.

Micex trading was halted at 11:05 a.m. after it fell for a sixth day to the lowest level in almost 3 1/2 years. The suspension will remain in force until Oct. 10, unless regulators say otherwise. The RTS exchange was suspended indefinitely. Trading was halted 10 times in the past three weeks, including today.

“We should expect a slowdown and the slowdown is already happening,” said Anton Struchenevsky, an economist at Moscow- based Troika Dialog investment bank. “Demand is decreasing as consumers are virtually cut off from loans, producers are encountering problems.”

Russian manufacturing shrank for a second month in September, the first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed…

Now the global financial crisis is pushing down energy and metals prices, Russia’s main revenue contributors, and creating a confidence crisis in the banking sector, Deputy Economy Minister Andrei Klepach said yesterday in Moscow.

Russia’s Urals blend of crude fell to $79.99 a barrel today, compared with this year’s high of $140.80 a barrel on July 3, ….

Economic growth may slow this year more than the government forecast because of the global credit crunch, presidential aide Arkady Dvorkovich said last month. The Economy Ministry is targeting growth of 7.8 percent this year, compared with 8.1 percent in 2007.

The Finance Ministry pledged $44 billion for OAO Sberbank, VTB Group and OAO Gazprombank on Sept. 17 on the understanding that the funds would be used to end a seizure on money markets. Now, the government is seeking to channel $36 billion in subordinate loans to banks from Russia’s $562.8 billion of gold and foreign currency reserves and the central bank’s own funds…

The economy is still set to expand in the fourth quarter, compared with the year-earlier period, bringing gross domestic product growth to 7.3 percent for the year, according to Troika’s estimates. Growth will probably slow to 5.5 percent in 2009, Troika’s Struchenevsky said.

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  1. NeoSapiens

    Russia has enough of every kind of resource to weather a crisis. What it lacks is consumer goods which are not vital for survival. That’s why they have undertaken a protectionist policy to deal with the crisis.

    It’s a no brainer. In the meantime they are expanding their influence everywhere. The stock market is a minor sacrifice when you look at the big picture.

  2. fajensen

    Georgia is just the Russians aplying the standards set by ‘liberating’ Kosovo (creating a transit route for all that Afghan heroin destined for Europe).

    But .. what *I* do not understand is why “the west” even bothers with a crackpot like Mikheil Saakashvili in the first place.

    One smells a Cheney!

  3. doc holiday

    I'm providing various unsubstantiated information from the internet below — please do your own DD. Nonetheless, IMHO, world leaders will wake up in a few weeks and suspend derivative trading on a global basis, but I assume it will take a much larger event, like a country club closing, or maybe a few countries going under, or seeing Buffett on CNBC freaking out about his declining fortune, as he screams for help.

    >> FYI: The size of the world stock market is estimated at about $60.9 trillion USD at the end of 2007. The world derivatives market has been estimated at about $480 trillion face or nominal value, 12 times the size of the entire world economy.

    Libor, set by 16 banks in a daily survey by the British Bankers' Association at about noon in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives.

    The equity sell-off has eviscerated some $4.6 trillion of global stock market wealth in the past three weeks alone, according to the market capitalization loss on MSCI's main world equity index.

    Over the last 12 months, that figure is more than $12.4 trillion, of which some $7 trillion comes from the United States.

    Fannie and Freddie already own or guarantee more than 40 percent of the $12 trillion in U.S. home loans.

    Total Global GDP is about $50 Trillion

    The market for Derivatives like Credit Default Swaps is over $60 Trillion

    US Treasury Debt/deficit maybe $12 Trillion

    Iraq War, maybe $3 Trillion

    Global Government Bailout Packages closing in on $1 Trillion.

    >> This is new world order stuff folks and American backed derivatives are going to be viewed as financial terrorist weapons of mass destruction. IMHO, we will see American securities banned and suspended in many countries that will reorganize and kick out global entities that are connected to accounting fraud. If we don't re-engineer wall street immediately, this systemic collapse will change the course of the world within one year.

  4. mxq

    RE:”Suddenly invading Georgia doesn’t seem like a good idea.”

    US politicians are awful, but they have a comparatively developed domestic social and economic (albeit heavily indebted) cushion to fall back on. They cannot take any credit for these cushions, but, nevertheless, they are there.

    Putin is equally if not more awful, but he doesn’t have the luxury of social or economic stability — as reinvestment, apparently has been in the form of judo lessons for top politicians, while things like the complications-during-birth rate is at an appalling 70% for the rest of their people.

  5. Anonymous

    “If we don’t re-engineer wall street immediately, this systemic collapse will change the course of the world within one year.”

    and then?

    how would one go about such a re-engineering?

    just curious doc – i don’t disagree, but i’m no finance wizard.

  6. Anonymous

    how would one go about such a re-engineering?

    1929 October
    1987 October
    2008 October

    Maybe we can start by declaring the entire month of October a bank holiday?

  7. Anonymous

    Maybe I’m wrong, but as we live in a world with finite resources (energy, raw materials, human labor), undefinite growth simply isn’t possible. The current crisis is part of that realization.

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