Market Vectors Russia ETF Trust Shares fka RSX

[frenchee]

Russia: Stock Trading Resumes -- Under Putin's Watch
Stratfor Today » September 19, 2008 | 2132 GMT

Dima Korotayev/Epsilon/Getty Images
The interior of the Russian Trading System Stock Exchange

Summary

Russia’s two main stock exchanges resumed activity Sept. 19 after trading was suspended for two days when stocks plummeted. The Russian government’s reaction to the crisis revealed just how much power Russian Prime Minister Vladimir Putin has — both within the government and over Russia’s oligarchs.

Analysis

Russia’s two leading stock exchanges — the Russian Trading System (RTS) and Moscow Interbank Currency Exchange (MICEX) — resumed activity Sept. 19 after trading was halted for two days following a massive fall that sent the Russian economy and government into panic mode. But as the markets rallied, one thing was revealed in the process: just how much power Russian Prime Minister Vladimir Putin has over government decisions and the businessmen who hold so much of the country’s (and the world’s) cash.

The Russian markets plunged on Sept. 16 before government authorities halted trading on the exchange an hour early, with the MICEX falling 17 percent and the dollar-denominated RTS dropping 12 percent. This tumble brought the RTS fall to nearly 60 percent from its mid-May highs and came along with news that the Russian ruble had become the world’s worst-performing major currency.

There are many reasons for Russia’s stock market spiral; the most obvious is the loss of Western investors’ confidence after the Russia-Georgia war. The Kremlin already had investors nervous with its flagrant targeting of foreign assets, but the very public exhibit of Russian force used on its neighbors compounded this nervousness. Top all that off with the fact that crude prices — which have flooded Russia with cash recently — fell into the $90s per barrel, and the stock markets plunged on the overall uncertainty surrounding Russia.
The government reacted by simply closing the markets an hour early on Sept. 16 and then again only an hour after they opened on Sept. 17 because they plunged again. While the markets remained closed Sept. 18, there was a flurry of movement and meetings between Russia’s oligarchs (whose companies were the main ones that nosedived) and the Kremlin. Putin ordered all the oligarchs to Moscow for a series of meetings on how to fix the situation.

The Russian government ended up directly injecting $44 billion into Russia’s largest state banks — Sberbank, VTB and GazpromBank. On top of that, Russian President Dmitri Medvedev announced that the government would directly sink $19.6 billion into the stock markets. Such preannounced injections generally create major inefficiencies and achieve very little because they could allow speculators time to line up bets against government action.

But late Sept. 18, Putin publicly contradicted his successor, Medvedev, saying that the government would not intervene directly. This has revealed an interesting dynamic in the Kremlin: Medvedev is putting on a strong face to show that the government is taking care of the markets and trying to give people a sense of ease and security. However, Putin is looking at the actual financial situation and knows that the Kremlin should not simply burn nearly $20 billion for no reason. Putin and Medvedev have very little financial understanding of what is going on. Medvedev is just looking at the social aspect of things, but Putin is following the expertise of Russian Finance Minister Alexei Kudrin, who knows how to balance a checkbook and has been very wary of throwing away Russia’s tightly guarded financial reserves unless truly needed.
When the stock markets finally opened Sept. 19, it was uncertain how they would react. But the RTS immediately shot up 14 percent, causing the government — concerned that things could “get out of hand” — to again shut the system down. The market reopened an hour later and shot up more than 20 percent, at which point the government again closed the market. At the end of the day, the RTS closed at a positive 21 percent and the MICEX nearly 29 percent.

But with the markets shooting up even without direct intervention, the question was where all the cash was coming from — besides the expected speculators who wanted to take advantage of a cheap market. Putin had prevented Medvedev’s promise to prop up the markets, but the markets were still reacting as if $20 or $30 billion were simply being dumped on them outside of the expected surge.

It is no coincidence that such a large amount of cash would be pushed onto the markets after Putin met with the oligarchs. According to Stratfor sources, Putin ordered the oligarchs to jump and pour the necessary cash into the markets so the government would not have to. The thing that is important to notice is that the oligarchs listened and obeyed. The Russian oligarchs of today are not like those 10 years ago who balked at the Kremlin’s authority; they know that Putin could dispose of them very easily, so they must comply. The move to prop up the stock markets has revealed that Putin has full control over the oligarchs.

More than that, it shows that Putin is reasserting the primacy of the state in every facet of the country. Putin is not looking to crush the oligarchs as he has in the past; rather, he wants to make it very clear to everyone that he has them in a position where he can order them (and their billions of dollars at home and abroad) to do whatever he wishes — something many foreign countries that have seen these oligarchs in action will definitely notice.