Buried under the rouble [updated]

I posted recently on the financial cost Russia has paid for it's war with Georgia. Although this conflict has certainly had a significant affect on the current state of the RTS Index, it appears the downturn is part of a wider trend which began in May.

The New York Times presents the figures. Here are the headlines:

'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.'

'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.'

'...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.'

'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.'

Why is this happening? Too much state ownership, too much manipulation, too much politics, too much violence and too much risk in the market.

Burried under the rouble

The FT brings forward evidence of the financial cost Russia has paid for it's war with Georgia.

"The rouble has dropped by 4 per cent against its euro/dollar basket since before the Georgia conflict [7th August 2008]. More broadly, the conflict has ensured that, probably for years, investors will continue to demand a higher risk premium for Russia. It has thrown into doubt President Dmitry Medvedev’s liberal credentials and commitment to his investor-friendly reform agenda. That could lead to suboptimal growth, and delay or derail Russia’s sorely needed economic modernisation."

(Hat-tip to Charles Crawford A.K.A Blogoir)

Taking the plunge...

BBC News reports that "...the Russian stock market has plunged more than 30% since the country's invasion of Georgia last month."

My first thought on this development was, 'good, that'll give them pause for thought'. My hope was that such a sharp reversal in investment would show the Kremlin that while an adventurous wars can manipulate oil prices to their benefit, it will also significantly affect the level of financial risk investors are exposed to. This uncertain climate will inevitably cause investment to flood out of the country, which it did, with the foreign capital draining from Russian markets at $670 million dollars on average per day since the war in Georgia began. Feeling the pinch, this newting of the hawkish but pragmatic leaders in the Kremlin would force a draw-down and encourage Russia to cease it's action.

On reflection however, it must be remembered that Russia successfully managed to avert market-capitalism for over 80 years while amassing a colossal military machine to challenge the richest nation in the world - a very costly exercise. It should also be noted that the ex-CIS countries, Russia's closest trading partners after the EU, has a population of 278 million which are at the least obliged to purchase first from Russia. And then there is the oil which for every $1 per barrel increase provides Russia with an additional $1 billion per year. The Russian economy appears better equipped at weathering economic storms than was first thought.