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Financial Crisis In Russia Raises Stakes for Putin

A trader in Moscow pauses Friday to make a call. Stock market indexes are less than half what they were in May, erasing nearly $800 billion of paper value.
A trader in Moscow pauses Friday to make a call. Stock market indexes are less than half what they were in May, erasing nearly $800 billion of paper value. (By Misha Japaridze -- Associated Press)

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."


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