Outlook: Markets are playing Russian roulette

A YEAR ago, anyone warning about the inflated level of Western stock markets was generally condemned as a misguided party pooper. Today it's the other way round; there is a growing tendency to regard the remaining bulls as out of touch with reality. Most of the time it doesn't pay to run counter to the herd, and right now, its movement is starting to look distinctly unsettling. Certainly there appears to be nothing in the present outpouring of economic and financial gloom to justify a return to last year's exuberance. Russia has added a new and frightening dimension to the contagion that now grips financial markets around the world.

This is despite the fact that the direct effect of Russia's economic crisis on the West should, of itself, be quite limited. Russia is still a largely contained economy. Its trading links with the rest of Europe are not large, and in the case of the US they are almost non-existent. There is some Western banking, industrial and investment exposure, but it is small compared with the Far East.

The significance of the Russian meltdown, then, is less to do with its real economic impact on the West than its symbolism for a world in turmoil, and its potentially very worrying socio-political consequences. Just as the IMF manages to douse the flames in one emerging market, they spring up elsewhere. Who's going to be next? South Africa? Hong Kong? China? Or possibly Brazil?

Is not the IMF now perilously close to running out of money? And in any case, is throwing large amounts of Western capital at the problem the right medicine? Don't expect it to do much for Russia. Just as in the Far East the main beneficiaries of the aid has been Western creditors, with Russia it's all too likely to vanish into numbered Swiss bank accounts.

While individually these markets are not significant to the West, collectively they add up to a fair old chunk of trade. Moreover, many of these countries are now actively chasing the only growth markets left for their own lowly priced goods - the US and Europe.

These two regions might at the moment still seem relatively healthy, but the outlook is clouded by the fact that the world's other great trading region - that based around Japan - is not. In Japan there's no sign, even on the distant horizon, of the visionary politician necessary to lead the country out of the doldrums.

While it is tempting to think of the problems in emerging markets as temporary, with the bounce not far away, that's far from likely to be the reality. The lesson of the Mexican banking crisis is that the work out for these financial traumas are at best many years.

For ordinary Russians, what's happening may not be as catastrophic as it might seem. Russia is not a money economy; barter has become the main currency for pay and trade. But nor should we underestimate the significance of what's happening. Global capital markets seem to be ripping the world apart as never before. The economic consequences of this are already disturbing in the extreme, but perhaps as worrying is the possibility of a political and social backlash against Western led globalisation - the reimposition in some parts of the world of capital and trade controls.

It is unrealistic, as well as being a contradiction in terms, to think financial markets can be controlled, or told what to do. But they perhaps need urgently to address their public relations image.