Moscow's equity markets, whose benchmark measure has declined with increasing rapidity since the start of the year, have turned worse with Russia's invasion of Georgia. The dollar-denominated RTS index is down 33% in three months and the ruble-denominated MICEX is nearly as much off at 28% in the same period.
From mid-May to mid-June, the RTS was down 4%; from mid-June to mid-July it was down 8% from the mid-June level; and from mid-July to mid-August, it has been down 18% from the mid-July level. The MICEX, slipping slightly less, has experienced less downside acceleration, with losses of 5%, 11%, and 15% over thethree monthly intervals. So, what is going on?
To be sure, the conflict in the Caucasus has hurt. On the Friday of the Russian assault on Tskhinvali in the Georgian breakaway region of South Ossetia, the RTS index was down 5.9% on the day (August 8) to close at 1,723. After recovering somewhat, it then lost more ground, so that on August 19 it closed at its lowest level since late 2006, down 5.2% on the day, near 1,686 (although it has rebounded again a little since then).
It is difficult to overstress the technical significance of the fact that the RTS index has penetrated below 1,800 and held there now for nearly two weeks (although closing at the statistically indistinguishable 1,803 on August 12). For seven months from the beginning of December 2006, the RTS oscillated in a narrow range between 1,800 and 2,000, establishing the former level as an important support (resistance) on the basis of the previously achieved early-May 2006 local maximum there.
British academic Martin McCauley suggests that the definitive provocation for the outbreak of hostilities on Georgian territory could likely have come from the circles around South Ossetian secessionist leader Eduard Kokoity attempting to incite a Georgian attack so as to draw Russian forces into the battle. But certainly the physical destruction of Tskhinvali and other cities in South Ossetia could not be in Kokoity's interest. Or could it?
It is worth noting that over three-quarters of individuals in the separatist South Ossetian administration backed by Russia were ethnic Russians from many regions of Russia including outside the Caucasus.
According to one report, the prime minister of the secessionist South Ossetia administration is a cousin of Mikhail Fradkov, who was Russia's prime minister from 2004 to 2007 and now heads Russia's state Foreign Intelligence Service (usually referred to by its Russian initials, SVR).
Moscow Kommersant newspaper's economic policy analyst Dmitrii Butrin calls these circles "military-criminal" and points to the fact that funds for reconstruction of North Caucasus regions inside Russia, on the other side of its mountainous border with Georgia, have diminished from year to year since after the putative end of the second Chechen war in early 2000: when, following the brutal winter siege of Chechen capital Grozny, then-president Putin established direct rule from Moscow and the conflict entered a continuing guerilla phase.
As that funding has diminished, US$780 million has been allocated by Moscow for the reconstruction of South Ossetia.
So perhaps it was not the Russian state but only a small part of its military-political apparatus that has called the shots here. Not that that matters much in the end. President Dmitry Medvedev, who alone under the Russian constitution has the power to order the armed forces into action, surely had no possibility to resist the 58th Army's insistent demands to be unleashed on August 8. It is doubtful that things would have been any different had Prime Minister Vladimir Putin not been in Beijing.
It seems clear from the contrast between repeated declarations in Moscow and events on the ground that only the Russian armed forces will decide when they will pull back from forward positions to the permanent bases they are now establishing within the unaccountably wide "security zones" that they have been constructing with peremptory haste outside the territories of secessionist South Ossetia and Abkhazia in order to separate them physically from the rest of Georgia.
Western investors who had been undaunted by the expropriation and judicial persecution of former Yukos chief Mikhail Khodorkovsky, and who even watched Western businessmen get analogous, if gentler, treatment, all the while believing that it would never happen to themselves, might suddenly find greater doubt assailing their complacency.
It is an open question whether the invasion of Georgia will either retard or altogether cancel consideration of Russia's application for membership of the World Trade Organization. Aside from that, it is not out of the question that the non-Russian members of the G-8 group of leading industrialized nations (the others being the US, UK, Japan, Canada, France, Germany, and Italy) will dissolve the moveable feast and then resurrect themselves minus Russia.
Despite Russia's significance as an energy power, and despite academic studies (even by Russian government advisors) of abstract economic "systems" rather than national economies that physically exist in time and space, Russia's economy is quite unlike those of the other seven members of the G-8. All the popular comment, magazine articles and even books about "capitalism, Russian style" amount to no more than an embarrassed disclaimer of this fact. Russia's membership of the group was really a feel-good "join the club" gesture insisted upon by US president Bill Clinton for his friend, then-Russian president Boris Yeltsin.
Still, equity markets loathe uncertainty, and the Russian market is no exception. That is why there is unlikely to be any recovery in Moscow for at least a month or two. The MICEX range analogous to the RTS's 1,800-2,000 interval, mentioned above, runs from the high 1,400s to the mid/high 1,600s. Given its decline into the high 1,300s on the Thursday open this week, the MICEX has more ground to make up percentage-wise, and less momentum to start with, than the RTS, which is steady in the low 1,700s so far.
The RTS includes more highly capitalized industrial leaders than the MICEX, and they count the various natural resource sectors (mining and metals as well as oil and gas) that happen to be well represented. This is surely why the RTS has outperformed the MICEX since summer 2007 and fallen further faster in the last three months.
Just as in India, where we like to wait for the broader-based Nifty, which has more "local content", to confirm moves in the BSE Sensex 30, so in Russia we should wait for the MICEX to confirm any signals in the RTS.
Considering this, the Moscow equity situation is more ominous. If the RTS has not yet broken its support from May 2006, then the MICEX already has done so and is threatening to penetrate its February 2006 support (proportionally 12% lower). The Russian market could well be in for still rougher times over a longer term than people suspect.
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First published in Asia Times Online, 22 August 2008.