Financial Crisis In Russia Raises Stakes for Putin
Sunday, September 21, 2008
MOSCOW, Sept. 20 -- 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.