Russia and its neighbours

Bang, crash

Sep 18th 2008
From The Economist print edition


What Russia’s stockmarket collapse means for Russia and for its neighbours

EVER since Vladimir Putin and his ex-KGB friends came to power in Russia, they have had one big advantage: a booming economy, rising prices for oil and gas exports, and strong capital inflows from abroad. All of a sudden, that has changed.

Partly as a result of the storm hitting all emerging markets (see article) and partly because of jumpy nerves following the war with Georgia, the markets in Moscow have been crashing. On September 17th and 18th the authorities halted trading in shares and bonds after the benchmark RTS share index fell 21% earlier in the week. It is down nearly 60% since its peak in May. The finance ministry pledged $60 billion to prop up the banking system; much of it seems to have gone offshore.

As regulators and politicians in Moscow struggle to contain the damage, and firms worry about bonds due later this year, a big question is how the economic turmoil will affect Russian politics at home and its policies abroad. Optimists hope the market wobbles will mean a less abrasive anti-Western foreign policy and the restarting of reforms. Others fear that the Kremlin will respond with tighter controls at home and a still tougher stance abroad.

Modernising reforms largely stopped in the final years of Mr Putin’s presidency, as the Kremlin sought to control the country’s oil and gas industry, and to silence critics. His successor, Dmitry Medvedev, made promising speeches on corruption and legal reform, but has not acted on them. Andrei Piontkovsky, a sharp-tongued Russian commentator, says the struggle among Kremlin clans is between “global kleptocrats” who want to be part of the world economy and “national kleptocrats” with cruder domestic interests.

For now, Russia shows no sign of softening on Georgia. It has said international monitors cannot operate in South Ossetia (whose independence is recognised only by Russia and Nicaragua) without permission of authorities there. It insists that South Ossetia, and the other breakaway region, Abkhazia, must participate in upcoming talks in Geneva on settling the conflict. Georgia says it will not attend if the separatists are there.

Russia has also accused NATO of showing “cold war reflexes” after a visit to Georgia by the alliance’s secretary-general, Jaap de Hoop Scheffer. He said that Georgia’s “road to NATO remained wide open”, without giving specifics.

Ukraine, meanwhile, faces not only a financial crisis but also a political one exacerbated by the war in Georgia. The governing coalition has collapsed after a row between Viktor Yushchenko, the president, and his former ally, Yulia Tymoshenko, the prime minister. Her party is moving towards an alliance with the grouping led by Viktor Yanukovich, once the Kremlin-backed candidate who was blocked from the presidency by the pro-democracy “orange revolution” of 2004.

Mr Yushchenko says Mrs Tymoshenko is selling out to Moscow; she says he has dangerously inflamed relations with Russia. Some fear that the Kremlin is exploiting Ukraine’s political weaknesses. But the country’s politicians seem to be doing enough damage without outside help.