Outlook: Markets hit the Russian buffers

FINANCIAL MELTDOWN in Russia has already rattled Western markets very badly. As our news analysis below shows, we are now very definitely in a bear market for equities, both in the UK and the US, even though there is as yet not much selling going on. But what is the long-term meaning for Western markets and economies of this ghastly implosion?

The view that gets the greatest mileage is the comforting but complacent one - which is not very much at all really. Since time immemorial, Russia has been a land and law largely unto itself and, except in times of war, its perennial miseries and the hopelessness of its condition rarely impinge on us. Why should it be any different this time round? The pathos of the food queues, the resigned and endless suffering of the Russian people - no one can have anything but sympathy for Russia's plight. But it doesn't really affect us, does it?

Well, not directly and immediately, of course, but like Asia, it may be a slow burn and the long-term impact could be profound. This is not simply because, as has often been said, Russia is Indonesia with nukes. The geopolitical consequences of the collapse are certainly worrying in the extreme, but they are not the reason shares are plunging. Nor is it because rash investment bankers and Brooklyn-born speculators seem to have lost their shirts playing these markets.

Rather it is the fear that we are on the edge, that the contagion of financial markets will tip the whole world into recession. The steady advance of American-style capitalism, led from the front by the shock troops of its capital markets and supported by the prop of the IMF, seems suddenly and decisively to have been brought to a grinding halt. All over the City and Wall Street, investment bankers are saying Russia has had it, it's on its own and we'll never touch the place again.

One leading emerging markets specialist was quoted in yesterday's Financial Times as saying: "I don't think anybody's going to lend these guys a dime now." Russia may be an extreme example, but after the traumas of the last year, much the same thing is happening in the Pacific Rim countries and to other developing economies all around the world.

As fast as Russia and others can impose exchange controls - their only realistic option given the scale of the flight of money - the international capital markets are in any case packing up their stalls and sticking their money into Western bonds. And there appears to be nothing the IMF or anyone else can do about it.

What we may be witnessing, then, is the end of the globalisation process, or at least a severe setback to its progress lasting possibly many years. Globalisation is all about the free movement of capital; that is its big driving force, and over the last 10 years the financial markets have pushed out the boundaries as never before, feeding the great US bull market on a wave of American triumphalism as they went along.

Is this now all coming to an end? That's the real worry about Russia: not the collapse into political anarchy or economic meltdown in the East, but rather that it is symptomatic of a wider contraction that will end up embracing us all. We must all pray that this is too alarmist a take on events; that it is wrong, or exaggerated.

But it is the reason why equities are plunging, bonds are soaring and the pound is once more climbing back to the three Deutschmark level. These are frightening times we live in, and the end game is still far from clear. No wonder there's such a flight to safety going on.