Kommersant-Vlast: “A Thousand Trifles Worth $687 Billion”
Dmitry Butrin
Share prices of the company you invested your money in, fell by 50% within a day. The following day they rallied 50%. Is everything all right? The answer to this question, which most russian economists have been asking since July 2008, is simple but nightmarish.
Prime Minister Vladimir Putin should not have spoken in August about problems in the US economy, and juxtaposed Russia as a "safe haven" for foreign investors. Since the RTS index dropped below 800 points in mid-October, no one has been asking what other records the Russian stock market is capable of. It must triple to catch up with the analysts' yearly forecast of 2,400 points. The answer to the classic question of "who is to blame" is this: the Russian record set in the third quarter of 2008 officially had only one foreign sponsor, the US administration, and a host of Russian co-sponsors. They are the ones who made the record shine and glow.
The fall in the capitalisation of RTS share prices in the first nine and a half months of 2008, compared with December 31, 2007 ($1,463 billion), was $978.14 billion, or 66.85%. While in the first quarter of the year the dynamic of change was relatively stable, June saw an abrupt decline. In the first month of the summer, prices slipped by $56.21 billion (3.52%); in July, by $265.22 billion (17.23%); in August, by $177.63 billion (13.94%); and in September, by $244.1 billion (22.25%). The stock exchange had never seen such rates before. Especially since formally, in the summer of 2008, Russia was farther from an economic disaster, which is usually preceded by such a fall, than ever in its history. The third quarter cost company owners $687 billion in capitalisation, or 44.61%.
THE STEEL FACTOR
Every record needs to be prepared. In the case of the Russian stock market, preparations for the record began in 2007, when Igor Artemyev, the head of the Federal Anti-Monopoly Service (FAS), took a look at the state of affairs among Russian competitors. It was then that the so-called first anti-monopoly package - a raft of amendments to the Law On Competition - was conceived and formulated. It was adopted by the State Duma and put into effect in May 2008. The package had many new features, including stiff penalties for forming a cartel, which were not fixed as mere figures, but calculated as percentages of the turnover of a company caught suppressing competition.
The FAS worked so tirelessly to promote the new measures that it infected the new Government with its enthusiasm. Deputy Prime Minister Igor Sechin, who oversees industry in Vladimir Putin's Government, spoke of the need to fight monopoly in the spring of 2008.
In July 2008, the drive spread to the metals industry, overseen by Mr Sechin.
Following a discussion in the Government, Igor Zyuzin, the head of the Mechel steel holding, was invited to Nizhny Novgorod on July 24 to explain to Mr Putin why his company was refusing to sell raw materials to iron and steel plants under long-term contracts. But it so happened that he went to hospital that day and could not explain personally. Such a demonstrative refusal to plead guilty infuriated Mr Putin. The Prime Minister promised "to call a doctor" for Mr Zyuzin and everyone else who was hiding their profits from the Government. Mr Putin's comments sent the Russian stock market crashing by 2%, and Mechel stock, by 30%.
The conflict between Mechel and the Government was later settled: It emerged Mr Zyuzin was not affected by either a threat of prison or bankruptcy, nor by an offer he could not refuse. The stock market recovered and analysts began saying that Russia's investment climate depended on factors other that the Prime Minister's words.
But the makings of a record were there. At least some investors realised that little had changed in Russia since the Yukos affair. There was other evidence as well. An in-house TNK-BP conflict between British and Russian shareholders came out into the open and showed that the latter were perfectly capable of using certain branches of power, such as the judiciary, for example, against BP. Of course, this was no reason to flee the Russian stock market at once. But it was an indication that one had to be prepared to flee as fast as possible when the occasion demanded it.
CONTINGENCY PLANS
This line of thinking was also prompted by another consideration, not related to the economy: in August 2008, Russia went to war against Georgia. The war was short and had no telling macro-economic effects, at least not on Russia. Russia's credit rating did not suffer. Russian companies made no losses either in South Ossetia, or Abkhazia, or anywhere else. The Russian rouble, after a few swings, got back to its former standing with respect to the dollar-euro basket. The war required no heavy spending and even failed to generate demand for additional budgetary allocations for the Defence Ministry. No one (with the exception of Georgia) imposed a trade embargo on Russia, or introduced economic sanctions.
Defence Minister Anatoly Serdyukov could rest assured: the "peace enforcement" operation against Georgia, which he led, did no harm to the national economy. At the end of August, analysts said the war caused no outflow of money from Russia. It was not until September and October, however, that it became apparent that investors saw the war's results in a different light. They now knew how fast they should make their escape when their investments were threatened, including on the stock market. The war-induced fall in the RTS index was not great, but its likely potential of falling in the face of trouble increased many times over, compared with such cases as the Mechel case, the TNK-BP conflict and other smaller but unpleasant events that occurred in Russia in the summer of 2008.
MACROECONOMIC MICROPROBLEMS
What do investors like best about national economies? Steady growth backed by the Government's macroeconomic competence. In the summer of 2008, it became obvious that Russia's growth, which had continued for seven years, was no longer guaranteed. At least, the Government was prepared to discuss an adjustment to its macroeconomic policy to find new ways to ensure growth.
In May, the Federal State Statistics Service (Rosstat) registered a slight slowing down in investment growth rates in the Russian economy. This fact could have become a subject for a professional discussion among economists. But at the time the Government was discussing the Concept for Long-Term Social and Economic Development of Russia through 2020, a document declared to contain the guidelines for the following 12 years (see Vlast No. 38 for this year).
A strategic argument that developed between Economics Minister Elvira Nabiullina and Finance Minister Alexei Kudrin was unlikely to have caused the markets to fall. Yet the markets sensed that Russia had problems in the macroeconomic field, and that there was no consensus in the Cabinet concerning their solution.
Such problems piled up in the summer of 2008. Following the liquidity crisis of August 2007, the Central Bank and Finance Ministry launched a tough monetary policy, signalling the existence of problems in banking. Nevertheless, Central Bank head Sergei Ignatyev said that all problems would be solved without any major changes to the policy. No one doubted his words, but everyone ticked off Russian assets as potential trouble.
When in July the FAS demonstrated to investors a second package of anti-monopoly amendments, which included some explosive theoretical ideas, it earned another tick. As did a suspiciously stable growth of bank loans for Russian companies when capital stopped flowing from abroad. Or a certain slowing down in the construction industry in the first six months of 2008. Or inflation, which refused to fit in with Government and Central Bank plans ever since the start of 2008.
ANTICIPATING NEW RECORDS
In September 2008, the RTS and MICEX indices showed no signs of trouble. Yet the number of ticked-off items had crossed the point of no return. Now we can only guess what triggered the accumulated record potential. Formally, no one is to blame for the crash: neither Vladimir Putin, nor Alexei Kudrin, nor Igor Artemyev, nor Vladimir Milovidov, the head of the Federal Financial Markets Service, nor anybody else - the bankruptcy of Bear Sterns investment bank in the United States, followed by that of Lehman Brothers, brought down stock exchanges across the world, and led to a stampede of capital from Russia, causing an instant RTS meltdown. It was then that investors remembered everything, from the "doctor" to the war, and from anti-monopoly remedies to the "safe haven" untroubled by global storms.
Of course, figures matter little here. The record decapitalisation of the Russian stock exchange could not have been so significant had it not been followed by other records in the autumn of 2008, which suggest that the market crash in the third quarter of 2008 is only the first episode in a chain of very serious problems for the Russian economy since 1998. Unfortunately, this is only the beginning.
