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Russia Wards Off Financial Crisis, But For How Long?

Even before the latest crisis, Russian investors were nervous.
Even before the latest crisis, Russian investors were nervous.
Almost exactly 10 years after a devastating market crash that eradicated much of its middle class, Russia is once again in the grip of financial turmoil.

The Russian stock market last week suffered its sharpest fall since the 1998 meltdown, losing 25 percent in less than three days. By September 18, Russian markets had lost 55 percent of their value compared to their record high in May.

The Kremlin was able to avert a collapse by pledging around $120 billion to prop up markets and banks -- a huge injection of liquidity even by global standards.

Prime Minister Vladimir Putin has been quick to reject parallels with the 1998 financial crash, saying the country's economy today enjoys a "completely different level of development."

Chris Weafer, chief strategist at Moscow's Uralsib investment bank, agrees that Russia's oil-fuelled economy is in much better shape than a decade ago.

"There are three very big differences between now and 1998," Weafer says. "The first is that Russia's financial reserves now exceed the total indebtedness of the country. Secondly, the daily revenue from oil and gas is currently around $900 million a day -- nine times higher what it was in 1998. Thirdly, we actually have a government in charge.

"Those three factors mean that now it's more a case of what the level of growth will be rather than whether or not we will have a default situation," he concludes.

Longer-Term Trends

Still, the crisis has exposed flaws in Russia's financial system. Markets have been sinking throughout the summer due to falling commodity prices, a local credit crunch, and Wall Street's woes.

The global financial crisis has caused investors to turn away from emerging markets such as Russia, a tendency that gathered pace as oil prices plummeted after peaking in mid-July at $147 a barrel.

Russia's investment credentials were further damaged by a bitter shareholder dispute at the British-Russian oil venture TNK-BP and by Putin's threats to investigate mining giant Mechel for alleged price-fixing, which led investors to dump shares of the New York-listed company.

The August military campaign in Georgia dealt a final blow to Russia's stock market -- since the start of the hostilities, investors have withdrawn an estimated $35 billion from the country. President Dmitry Medvedev himself has admitted that the war was responsible for up to a quarter of the stock markets' losses.

The country's vast oil wealth has allowed the Kremlin to avoid a repeat of the 1998 meltdown, which at the time led to the collapse of the banking sector, massive inflation, and social unrest. By September 19, Russian markets had already recovered much of the week's losses.

In addition to the $120 billion relief package, the government says it intends to buy shares in state-owned firms in a bid to boost investor confidence.

A draft law that would increase guarantees for depositors in the event of a banking collapse is also about to be introduced to the State Duma.

Nervous About Banks

And on September 22, the Association of Russian Banks held a news conference to soothe public concern.

"There is no economic basis for psychosis, for negative expectations," says Garegin Tosunian, the association's president. "But human psychology, as a rule, is characterized by its inertia and people start panicking by dreaming up horror stories."

Russians, their memories still fresh from the meltdown that wiped out their life savings 10 years ago, have been turning up at banks en masse to withdraw their money.

"Russia is more vulnerable for the simple reason that Western financial institutions are backed by the United States' powerful Federal Reserve system and by Europe's Central Bank and Finance Ministry," says Mikhail Bernstam, an economics researcher at the U.S. Hoover Institution.

"In Russia, financial organizations have only the Central Bank's reserves. These reserves amount to some $600 billion. But they are not everlasting and if the Central Bank gets into the habit of using its reserves to support the financial system, then the ruble will collapse."

Brokers, too, remain jittery, and analysts say Russia now faces an uphill battle to regain their trust.

Paradoxically, last week's market collapse could be a blessing in disguise for Russia by forcing it to push ahead with much-needed economic reform.

"Over the summer, investors have become concerned that not much was happening, that we had an end to the oil-fuelled boom and yet the government appeared to be making very little progress in actually starting the promised investment programs," Uralsib's Weafer says.

"Russians needed to be kicked to wake them up. It's been a very painful kick, and we hope that this crisis will act as a reality check for the government, the economy, and the people that money doesn't grow on trees."

RFE/RL's Russian Service contributed to this report