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Analysis & Opinion
17.09.08 A Bad Time For Benevolence
By Dmitry Babich

Russian stocks continue their two-day-long freefall. On Tuesday, Russia’s benchmark RTS and MICEX indexes plunged by 11.47 percent and 17.45 percent respectively, and MICEX cut its trading day rather short. On Wednesday, after a brief consolidation in the morning, stocks at RTS and MICEX fell by another six and three percent respectively, forcing Russia’s Federal Service on Financial Markets (FSFR) to stop the trading at both stock exchanges at noon.

Economists and financial experts are still arguing about the reasons behind this downward spiral and its possible consequences. What is clear is that foreign investors are taking their money out of Russia, selling shares of Russian companies. Whether they do it due to U.S. financial giants’ bankruptcy, out of fear of Russia’s “isolation” in the aftermath of the Russo-Georgian brief military conflict, or for some other reason is open to discussion. In the opinion of Nikolai Salobuto, the head of the department of portfolio investments at the Finnam Management company, in the near future investors will be selling shares, since these are the most liquid, marketable assets. Upon running out of these assets, investors may start selling real estate. Obviously, Russia’s banks feel a dire need for expandable money in order to honor their obligations which resulted from previous losses.

“Deficit of expendable assets led to the deficit of trust,” the Vremya Novostei daily commented, calling September 16 the “black Tuesday” of Russia’s financial markets.

Russia’s leaders are sending reassuring signals, trying to appease fears. “There is no doubt that the ‘airbags’ we have been installing in the past few years, will work,” Prime Minister Vladimir Putin said on Tuesday during a meeting with Azerbaijan’s president Ilham Aliyev. “We ponder the possibility of using the long-term instruments of the Central Bank.”

According to Putin, on Tuesday the Russian Ministry of Finance sold 150 billion rubles (almost $6 billion) on the inter-currency market, and on Wednesday this figure was expected to be more than doubled to 350 billion rubles ($13.8 billion). On Tuesday, the Central Bank also intervened in interbank exchange, placing 325 billion rubles ($12.8 billion) on the market. On Tuesday night, Russia’s Finance Minister Alexei Kudrin, the Minister of Economic Development Elvira Nabiullina, the Central Bank’s Chairman Sergei Ignatyev and the Head of FSFR Vladimir Milovidov held an emergency meeting at the office of the first Vice Premier Igor Shuvalov to discuss ways of stabilizing financial markets.

During one of his recent public appearances, Shuvalov said that the Russian government expected oil prices to stay at the level of $98 per barrel. On Wednesday, U.S. benchmark crude oil was traded at the price of $89 per barrel.
In an economic situation of this kind, the Russian government’s resolve in helping South Ossetia, devastated by the recent Georgian attack and subsequent fighting between Russian and Georgian forces, looks almost quixotic. On Tuesday, during a meeting of the group of high federal officials responsible for liquidating the consequences of the conflict, Putin said that relations with South Ossetia, which Russia recognized diplomatically on August 26, “will have to be established on the highest possible international level.” Financially, this means 12.8 billion rubles ($500 million) of additional expenses for Russia’s federal budget in 2008-2009 alone. From this amount, according to Russia’s Deputy Finance Minister Anton Siluanov, ten billion rubles will be spent on rebuilding the country’s economy, 1.5 billion on rebuilding damaged buildings and construction, and 539 million – on financial aid to the victims of fighting and bombardments.

South Ossetia’s President Eduard Kokoity, who happened to be present at the meeting, agreed to tight Russian control over these monetary transfers, in case the money starts flowing to his country’s accounts immediately.
The importance of South Ossetia’s reconstruction can be illustrated by the fact that the person responsible for coordinating aid to South Ossetia will be none other than Dmitry Kozak, Russia’s minister of regional development and Putin’s trusted friend since his St. Petersburg days. Seen as one of the most influential figures in Putin’s circle, Kozak had some experience in the region in 2006-2008, when he worked as the president’s representative in the North Caucasus.

“I understand that Russia needs money now, but even stones cry for help in South Ossetia,” Elion Vilenchik, the former head of the Jewish community of Tskhinvali said upon returning from a trip to South Ossetia organized by the World Congress of Russian-speaking Jewry. “I had lived in this town for 32 years before the Georgian bombardment; I remember every building in the Jewish quarter there. I barely found two or three buildings in that quarter undamaged and two classmates still alive and living there.”
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