Now financial crisis takes toll in Russia

The global financial chaos as well as the fallout from the Kremlin's war in the Caucasus have combined to plunge Russia's markets into financial turmoil.

Russia's supposed immunity to the global financial downturn was definitively over today as trading was suspended on Russian stock exchanges for a second day running amid record falls.

Analysts attributed the plummet in share prices to the international economic situation but said that the Russian war in Georgia last month had affected confidence in the country among Western investors.

The government today announced an increased lending package to the country's three biggest banks, with the hope of inducing a knock-on effect of stability.

The rouble-denominated Micex stock exchange had its biggest ever single-day fall since Russia's 1998 crisis yesterday, falling 17 per cent in a single day, and the dollar stock exchange hit a two-year low and continued falling. Chaos on Wall Street and falling oil prices have compounded Russia's problems, as investors begin to doubt the solidity of Russia's economy, which is based largely on energy and commodity exports.

Some analysts downplayed the severity of the crisis and said that the crisis was not likely to affect ordinary Russians in the way that the credit crunch is being felt in Western countries. "I still expect overall GDP growth of 6-7 per cent this year, and no full-fledged credit crunch," said Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow. "This is very different from 1998, because Russia has built up substantial fiscal and monetary reserves over the past eight years."

In 1998, the Russian economy defaulted, plunging the country into economic crisis and sending foreign investors fleeing. But during the reign of Mr Putin, soaring global oil prices meant that Russia was able to amass a vast "stabilisation fund" of reserves to protect the economy from fluctuating commodity prices. Finance Minister Alexei Kudrin yesterday said that the crisis was not yet serious enough to start using funds from the stabilisation fund, but analysts expect the government to do so soon.

"Fundamentally, Russia still represents an attractive destination for foreign investors; its case is still strong," said Mr Lissovolik.

But several deals have already been postponed or cancelled, including the initial public offerings (IPOs) of Russian companies in London and acquisitions of Russian assets by Western companies. Some say that, in a situation where investors are running scared and less likely to accept risk, Russian government actions over the past few months are likely to scare people off.

Back in July, Prime Minister Vladimir Putin criticised mining firm Mechel for selling coal cheaper abroad than on the domestic market. Referring to the company's CEO, who had been taken ill, Mr Putin advised him to get better soon, "or we will have to send him a doctor and clean up all the problems". Mr Putin's remarks were seen as a sign that the state was still prepared to intervene to pressure or destroy companies, and brought back memories of the Yukos saga. The company's value immediately fell by $5 billion.

A protracted dispute between British Petroleum and its Russian partners in the joint venture TNK-BP, its Russian joint venture, as well as the war in Georgia, have led to further doubts about Russia among international investors. The stock market losses may soon be corrected, say analysts, and the government can help improve the liquidity crisis by increasing lending, but investor confidence could take longer to win back.

President Dmitry Medvedev last week said that 75% of Russia's economic woes were due to the international situation, while 25 per cent were due to internal factors, including the crisis in the Caucasus. Mr Putin, however, said last week that the US crisis had led investors to withdraw speculative capital, and that the downturn had little to do with Russia's invasion of Georgia.

"Putin's comments on Mechel made the initial impact, then after Georgia everyone started pulling out of the stock markets," said a British lawyer working in Moscow who has seen deals cancelled and business dry up over the past few weeks. "Add in to the mix that energy and commodity stocks have been falling worldwide on fears of a worldwide recession and you have a fairly bleak picture. If Putin knew how to behave, the crisis would be a lot less serious, as investors had until very recently seen Russia as a good place to weather the global economic storm."