Washington Post (USA): "Financial Crisis In Russia Raises Stakes for Putin"
For the past eight years, the political strength of Russia's leader, Vladimir Putin, has rested on what seemed an unbeatable combination -- a soaring economy that raised average incomes eightfold and a steady drive to consolidate control over government, media and business that stifled any meaningful opposition.
But the turmoil in the past week in the stock markets and banks here has suddenly taken some of the shine off the Russian economy and has raised questions about the continuing viability of the Putin formula.
Emerging markets around the world suffered in the fallout of the U.S. financial crisis as access to credit evaporated and investors sold shares to cover losses elsewhere. But stocks in Russia fell harder and faster than in any other major market.
Banks appeared to be paralyzed, spooked by rumors of defaults, and unwilling or unable to issue loans. Stock market indexes plunged to three-year lows, forcing the Kremlin to adopt emergency measures. Even after a rally Friday, the market has fallen more than 50 percent since May, erasing nearly $800 billion in paper value.
The crisis presents the government with the most serious test of its economy since 1998, when Russia defaulted on debt payments and the ruble collapsed. Putin is seen as the leader who delivered Russia from those troubles, presiding over 7 percent annual growth that has cut poverty in half, enlarged the middle class and transformed Moscow into one of the most expensive cities in the world. At the same time, the public has largely accepted his rollback of democratic reforms; many consider it a key factor in their nation's recovery.
The Kremlin is much better positioned to confront the current crisis than the last one. With virtually no debt, a budget surplus and more than $550 billion in foreign currency reserves, as well as other reserve funds totaling at least $172 billion, the government has been able thus far to prevent a run on banks and contain the financial turmoil.
"All fundamental indicators of the Russian economy are within the norm," Putin told an investment forum Friday as the Kremlin offered $44 billion in emergency loans to the country's top banks and unveiled a plan to spend as much as $20 billion more to bolster the market by buying shares.
But critics warned that the economy remains too dependent on oil exports and that Russia is still dominated by a political system that is viewed by foreign investors as unpredictable and often hostile.
"It's not just oil prices, but the whole environment," said Oleg Buklemishev, chief analyst for MK Analytica and a former economic official in the government. "They have a big war chest, but the money is concentrated in just a few places, and they don't know how to disseminate it and use it to drive the economy."
Putin has re-nationalized key industries and expanded the state's role in the economy, but the state sector remains corrupt and inefficient, and the emergency measures will result in the state controlling even more, Buklemishev said. "Much will depend on how they behave now. . . . If they don't make the proper moves, the reserves could be spent pretty quickly."
The Russian stock market hit its peak in May after Putin stepped down as president and installed his handpicked successor, Dmitry Medvedev, who promptly appointed him prime minister. Investors appeared encouraged by Putin's selection of Medvedev, who presented himself as a moderate in favor of economic and political reforms.
But in late May, a bitter fight for control of the nation's third-largest oil company, TNK-BP, unfolded. The Russian tycoons who owned half the firm appeared to enlist the help of government officials against their partner, British energy giant BP. The authorities launched a tax probe into the firm, raided its offices and refused to renew the visas of most of its foreign employees. Robert Dudley, the chief executive backed by BP, was forced to leave the country July 24.
A day later, Putin alarmed investors further with remarks at a meeting of steel barons in Nizhny Novgorod accusing Mechel, the Russian coal and steel producer, of price-fixing. The company's billionaire owner, Igor V. Zyuzin, had declined to attend the session, claiming illness, and Putin joked darkly about having "to send a doctor to cure him."
The threat, broadcast on television, sent the markets into a tailspin, with shares in Mechel losing half their value.
Then oil prices slid from a July 11 peak of $147 a barrel to as low as $91 in the past week. The boom of the Putin era was fueled by a long climb in oil prices. Taxes on the energy sector account for nearly half the federal budget.
Finance Minister Alexei Kudrin said Friday that the budget would remain balanced next year even if oil fell to $70 a barrel. If it fell to $40 to $50 a barrel, he added, the government had enough reserve funds to prevent any impact on the budget for three years.
Beyond oil, analysts say Russia also faces continuing doubts about the investment climate, given the Kremlin's concentration of political power. These concerns were exacerbated by Russia's war with Georgia last month. Putin's tough, anti-Western rhetoric raised fears of a turn against foreign investors and even greater state control of the economy. Investors pulled nearly $35 billion out of the country in the weeks after the war, according to estimates by BNP Paribas.
"When the government takes actions that frighten people, it has an effect on capital," said Harvey Sawikin, founder of Firebird Management, a hedge fund that focuses on the former Soviet Union and that cut back its Russia holdings. "We're concerned about a country in open conflict with the West, especially in this economic environment."
The market turmoil has been felt primarily by Russia's wealthy because most Russians keep their savings in cash. It is unclear whether the tycoons will present a serious political challenge for Putin, who has cowed most of them into silence.
"Do they have the guts to put pressure on him? I doubt it. They're hurting, but they're so scared they won't open their mouths," said Alexander Lebedev, a billionaire who owns 30 percent of Aeroflot and part of an independent newspaper. He likened the tycoons in Putin's circle to members of a royal court too intent on seeking his help with business deals to risk upsetting him by complaining.
If the credit crisis spreads to other sectors, such as the real estate industry, the pressure on the Kremlin could increase. Rising inflation is a political problem. Most analysts expect inflation to hit 14 or 15 percent this year, which for the first time in Putin's rule would leave the average Russian worse off at the end of the year than at the start.
Crowds upset about rising prices have staged a series of small protests across the country in recent months. Evgeny Gontmakher, an economist with ties to Medvedev, predicted bigger demonstrations in the winter and spring because food prices are climbing even faster than overall inflation.
"People are trying to make money on air instead of investing in real production and businesses," Ivan Smolin, 40, a businessman who participated in a protest in the city of Krasnoyarsk, said of the turmoil in the stock market. He also complained about the government's failure to invest in infrastructure. The length of Russia's paved roads, for example, increased 0.1 percent in the first six years of Putin's rule.
Mikhail Berger, a professor at the Higher School of Economics, said two factions in the Kremlin are competing to set economic policy, one interested in further market reforms and integration in the world economy, and the other favoring greater state control and a more isolationist line against the West.
Putin appeared to lean toward the latter group in the aftermath of the war in Georgia, repeatedly declaring that Russia's economy could continue to thrive without the United States or Europe. But since the stock market crash, he has adopted a softer tone and courted foreign investment.
"We are becoming more dependent on each other through mutual investments," he said Friday, adding that Russia was "banking on private initiative, entrepreneurial freedom, openness and rational integration with the global economy."
Konstantin Sonin, an economist in Moscow who writes a newspaper column, said the government's injection of funds into the financial system will further fuel inflation and allow corrupt and inefficient banks that should be shut down to continue operating.
"The more personalistic the regime is, the less prepared it is for these kinds of crises," he said. "These kinds of regimes always need to be really nasty and repressive or perform well economically. If they don't perform well economically, it pushes them in the nasty direction, and I'm not sure the Russian elite is prepared for that."
