Financial markets shut down in Russia: In another heavy-handed intervention of the Putin / Medvedev government on the market on Wednesday 17th September, trading in Russia was totally shut down on the country’s two main stock exchanges, RTS and the Moscow Interbank Currency Exchange (MICEX). This comes as the result of steep falls this week of over 8%. The greatest decline happened on Tuesday and amounted to 11-16%, with a further fall of about 3-6% during the first hours of Wednesday before closure.

The main shares that fell sharply were those of the financial sectior – Sberbank (the country’s largest savings bank) and Vneshtorgbank (bank for Foreign trade). Apparently Gasprombank (the bank of the country’rs gas giant) shares are also in trouble having fallen sharply.

There is a regulation in Russia relating to trading markets which dictates that a fall of over 8% necessitates the closure of exchanges until the situation stabilises.

The slump is the second largest crash on the Russian stock market since 1998, the year of huge economic turmoil. Russia’s main exchange indices has fallen by over 50% since May 08.

Trading is only expected to fully resume on Friday 19th September. Trading on MICEX is restarting today but only in limited areas (incl Repos). RTS remains fully closed today.

A question on Gasprombank: What I find quite amusing is the debacle of Gasprombank. How can a bank which is sitting on top of the country’s largest gas producer get into such dire straits as to have its share price nosedive rapidly? My sources indicate that this is due to total lack of any sensible internal bank management. It’s a virtual goldmine but they don’t know how to run it properly.

Hardly unexpected: This crisis has been coming for a while but with Russians stubbornly denying that it might ever happen to them again. The links of the Russian market to the rest of the world economy are not to be underestimated and global ripple effects of the credit crunch are felt throughout.

The other 2 factors contributing to the current collapse in share prices are – the war in Georgia; and the fall in world oil prices.

Additionally, the Russian government has also generated conditions for their own credit crunch through an unchecked consumer lending in the last few years. Credit was freely available for all matter of purchases with no credit checks and only with some basic proof of income.

My prediction: This is going to get much worse shortly. Russia stands to suffer from the properly bubble bursting at any time soon. At the moment the ongoing building boom is unsustainable and is nothing short of a speculative pyramid scheme in property, with easy-come-easy-go money being invested in the housing market on an anticipation of an further unchecked rise in housing prices. These houses and flats are actually standing empty right across Moscow.

Banks which have been riding on a wave of relative economic prosperity in the past 5 years will start defaulting like they did in 1998 as the shocking state of their bad loan portfolio will emerge, and the credit crunch will set in preventing them from obtaining rescue loans from other institutions.

This might get quite nasty. I get no pleasure in forecasting this as the ones who will really suffer are the average Russian consumers. The rich ones have got their money stashed away in Switzerland long ago and won’t care less.

Advertisements