MOSCOW: Buoyed by vast oil wealth, Russia is shrugging off its worst market meltdown in a decade, emerging with its booming economy almost intact, analysts say.
The Russian stock market last week saw its sharpest falls since the catastrophic economic collapse of 1998 after suffering the toxic combination of global financial turmoil, falling commodity prices and a local credit crunch.
But with oil prices still almost 10 times higher than a decade ago, economists see Russia emerging with a relatively mild hangover.
The collapse was a “reality check, not a derailment, because the government had the money to fix it,” said Chris Weafer, chief strategist at Moscow investment bank Uralsib. “The Kremlin’s confidence has not been shaken.”
The government suspended trading on Wednesday after sharp drops of over 10% that left the benchmark RTS down 57% from an all-time high achieved in May.
After a series of ineffectual appeals for calm, the Kremlin put its money on the table, pledging over $60bn (over 40bn euros) to prop up prices.
When the RTS reopened on Friday, shares surged over 22%, recovering the week’s losses.
The crash has exposed flaws in the financial system, analysts said, but oil wealth has allowed the Kremlin to smooth over the cracks and avoid a repeat of the 1998 financial crisis, when a sovereign debt default caused a collapse of the ruble, all but wiping out the country’s middle class.
This time around, with oil prices around $100 a barrel – around 10 times higher than in 1998 – Russia’s prospects could not look more different, said Ronald Smith, chief strategist at Moscow’s Alfa-Bank.
“If you compare it to 1998, the outlook for the economy is fundamentally good,” he said. “We will come out of this with growth that is maybe slower than we had ... but relatively high.”
Moscow-based skyscraper builder Mirax Group said on Wednesday it had halted all new projects in light of the market turmoil, one of the first signs that the real economy could suffer.
But Smith said a slowdown of the construction sector could be a blessing in disguise, freeing up resources for a wave of much-needed infrastructure development.
Observers say the market’s stunning fall was in part the result of a series of unforeseen steps by the Kremlin that have unnerved investors in recent months.
In July, Prime Minister Vladimir Putin effectively knocked an estimated $6bn off the value of mining giant Mechel in a singe day by threatening a criminal investigation for price fixing, raising fears of a repeat of the destruction of oil giant Yukos.
Putin is also widely seen as behind the decision to send tanks into Georgia to repel Georgian forces in the Moscow-backed province of South Ossetia last month.
President Dmitry Medvedev, though defending the military push, has admitted it was responsible for up to a quarter of the stock market’s losses.
Both events punctured investors hopes that the arrival in the presidency of Medvedev, a soft-spoken former professor with a background in corporate law, would push forward more liberal economic reforms, said Uralsib’s Weafer.
Ultimately however the crisis may have strengthened the economic liberals by demonstrating the need to spend time “fixing the infrastructure, pushing reforms and creating a much more stable platform for growth,” said Weafer. – AFP