Ge­or­gia, global woes bat­ter Rus­sia’s strug­gling econ­omy

The Washington Times Weekly - - International Perspective - BY RAISA SHEYNBERG

| Rus­sia’s in­cur­sion into Ge­or­gia last month has ac­cel­er­ated a fi­nan­cial down­turn, cre­at­ing a credit cri­sis that could im­pact Moscow’s in­creas­ingly mus­cu­lar for­eign pol­icy.

The down­turn be­gan sev­eral months be­fore the Aug. 8 es­ca­la­tion in the Cau­ca­sus and has as much to do with global trends and other po­lit­i­cal and eco­nomic de­vel­op­ments as it does with Rus­sia’s ac­tions in Ge­or­gia, spe­cial­ists here say.

“There is a clear risk pre­mium on Rus­sia, but to say that Rus­sia is unique is to ig­nore what the rest of the world is do­ing,” said Erik DePoy, eq­uity strate­gist at Alfa Bank, one of Rus­sia’s largest pri­vate banks. “The Rus­sian mar­ket is not fall­ing in iso­la­tion.”

The RTS in­dex, where Rus­sia’s most prom­i­nent and liq­uid com­pa­nies such as nat­u­ral-gas gi­ant Gazprom are traded, has de­clined by 46 per­cent since its peak in May — 29 per­cent since Au­gust. The Cen­tral Bank of Rus­sia has al­lowed the ru­ble to de­pre­ci­ate against the dol­lar and the euro, con­tribut­ing to an al­ready high inflation rate of 13 per­cent.

Ad­di­tion­ally, the eq­uity-risk pre­mium on in­vest­ments in Rus­sia has reached a five-year high just above 15 per­cent — lev­els last seen at the height of the Yukos af­fair in 2003, when the Rus­sian gov­ern­ment ar­rested the head of a ma­jor oil com­pany on trumped-up charges of tax eva­sion and forced the com­pany into bank­ruptcy.

The pic­ture has clearly wors­ened since the fight­ing erupted in the Cau­ca­sus. Es­ti­mates of cap­i­tal out­flow in the past month range be­tween $15 bil­lion and $20 bil- lion.

Doug Rediker, a Rus­sia spe­cial­ist and for­mer in­vest­ment banker, now at the New Amer­ica Foun­da­tion in Wash­ing­ton, said the abil­ity to fi­nance debt was more im­por­tant than the stock mar­ket in terms of po­ten­tial pres­sure on the Rus­sian gov­ern­ment.

“If the Chi­nese were to stop lend­ing to the United States to­mor­row, it would have a se­vere im­pact, but we would still have a pool of do­mes­tic funds avail­able,” Mr. Rediker said. “In Rus­sia, they don’t have the means to re­place” global lenders.

“The Rus­sian bank­ing sys­tem is not de­vel­oped enough to pro­vide the long-term fi­nanc­ing that com­pa­nies need to grow.”

Rus­sia’s fi­nan­cial woes mir­ror those of other re­source-rich na­tions as com­mod­ity prices have de­clined. Ac­cord­ing to Gold­man Sachs, the Brazil­ian Bovespa in­dex has fallen by 37 per­cent since May.

The liq­uid­ity con­straints are also in line with global trends. Th­ese may take a toll on highly lever­aged prop­erty de­vel­op­ers in Moscow. Al­though prices have not fallen, new construction is down by 2 per­cent or 3 per­cent.

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