Page last updated at 15:01 GMT, Thursday, 18 September 2008 16:01 UK

Russia bullish over market crisis

By James Rodgers
BBC News, Moscow

Traders at Micex (17 September 2008)
Financial markets in Moscow have collapsed since the highs of May

"Selling begat selling," says David Askeroff of Renaissance Capital in Moscow.

His Biblical turn of phrase perhaps reflects the shock which traders and analysts have felt as they watched Russian shares fall so far, so fast.

"And the increase of cost and the lack of ability of funding forced other investors to also sell," he concludes.

That chain of events triggered an attack of the nerves which has yet to subside.

Russia's Federal Service for Financial Markets halted trading after dramatic early falls in Wednesday trading.

The recent losses have been the worst since 1998 - the year Russia underwent a massive financial crisis.

Then, millions of ordinary Russians lost what savings they had salvaged from a decade of political and economic turmoil. Foreign investors pulled out of the country altogether.

'Extraordinary' events

That was a very different Russia, and a very different time for oil prices.

Up until say 10 days ago... the issues around the declines in the market were two-thirds to three-quarters oil and commodities, and one-quarter to one-third political issues
David Askeroff
Renaissance Capital

Russia's recent economic boom has been driven by rising oil and gas revenues.

That led some to believe that Russia might somehow avoid the worst consequences of the global credit crisis. It was only in May this year that the Russian Trading System (RTS) index hit record highs.

Since then, it has lost some 60% of its value.

The board of the Moscow Interbank Currency Exchange (Micex), Russia's other leading exchange, admitted Wednesday was "extraordinary".

The whole experience has proved that Russia is not immune from the ills that afflict other markets. Oil prices, which are now falling, have also taken their toll.

'Sufficient reserves'

The government has been doing its best to calm things down. On Wednesday, the finance ministry said it would offer $44bn (24bn) in loans to Russia's major banks.

President Dmitry Medvedev speaks to financial experts (18 September 2008)
Obviously, the crisis on the world financial floors is more profound than the most pessimistic earlier forecasts
Dmitry Medvedev
Russian president

"We have sufficient reserves and a strong economy, which guarantees the avoidance of any shocks," President Dmitry Medvedev told a televised meeting of top officials in the Kremlin on Thursday.

His remarks added up to an admission that Russia enjoyed no special protection.

"The world financial system is possibly passing through the most complicated period of the past decade. No one has any doubt about that," he said.

"Obviously, the crisis on the world financial floors is more profound than the most pessimistic earlier forecasts."

Analysts estimate that $36bn (19.8bn) in foreign investment has left Russia since early August, the Reuters news agency said earlier this week.

Political concerns

Aside from global problems, and falling oil prices, there is another factor: politics.

TNK-BP logos (file)
The TNK-BP row has focused attention on the rights of foreign investors

Russia's military conflict with neighbouring Georgia, the battle over the oil company TNK-BP and Prime Minister Vladimir Putin's criticism of the mining company Mechel - which resulted in a massive fall in its share price - have all made some investors decide it is time to leave Russia.

Uncertainty over what lies ahead in Russia's relationship with the West, and with business, is undoubtedly a factor.

"Up until say 10 days ago, I would have said that the issues around the declines in the market were two-thirds to three-quarters oil and commodities, and one-quarter to one-third political issues. Not just Georgia, but don't forget the TNK-BP issue and the Mechel issue," says Mr Askeroff.

He believes that in the face of financial instability, political concerns have taken a lesser role.

"However, over the last 10 days," he says, "I think that almost all of the story has been about forced liquidation of Russian assets and the lack of liquidity in the banking system, and in the wholesale financial system."

'Real threat'

For ordinary Russians, the phrase "financial crisis" does not conjure up images of black-and-white film of the Wall Street Crash of 1929.

Russians queue for sugar in 1998
High oil prices helped Russia recover from the economy's collapse in 1998

It is much more immediate. The Russian economy's systemic collapse 1998 caused a period of genuine hardship for millions.

Compared to most Western countries, relatively few people are directly dependent on the stock market for income or saving.

But any prospect of another run on the banks would cause real worry. Analysts believe that has been avoided.

"It was a real threat earlier in the week. There was real panic. But we believe the government has done enough to remove that. They have put enough money in the system and made enough changes," says Chris Weafer, chief strategist at Uralsib.

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