Russian Economy Takes Hits Due to War on Georgia

Looks like Comrade Volodya’s excellent adventure in Georgia is costing the oligarchs back home. Long term, that could become dangerous to his health. Without Western capital investment, Russia will be in trouble. Here is their weak point waiting to be exploited for maximum effect — and without a shot having to be fired.
Here’s an excellent article in The Financial Times, “Investors quit Russia after Georgia war”. I’ve quoted large chunks of the article below since, though registration at FT is free up to a point, it can be tiresome to set up.
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“Investors pulled their money out of Russia in the wake of the Georgia conflict at the fastest rate since the 1998 rouble crisis, new figures showed on Thursday.

Russian debt and equity markets have also suffered sharp falls since the conflict began on August 8, with yields on domestic rouble bonds increasing by up to 150 basis points in the last month.”
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“Vladimir Potanin, head of Interros, one of Russia’s largest industrial groups, has complained about the shortage of long-term credit to Mr Medvedev, the financial newspaper Vedomisti reported on Thursday.

The tight credit conditions have been exacerbated by foreign capital flight since the war. Data released by Russia’s central bank showed a drop in foreign currency reserves of just over $16.4bn in the week beginning August 8. This was one of the largest absolute weekly drops in 10 years, according to Ivan Tchakarov at Lehman Brothers.

The only larger drop in reserves since 1998 was $16.5bn in June 2006, when Russia paid off the bulk of its Paris club debt.”
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“Gennady Melikyan, the central bank’s deputy chairman, said the sell-off had been triggered by the “political situation”, adding: “Foreigners are pulling out of some assets and stock markets and the exchange rate has suffered most. I think we have come close to the bottom now.”

While the value of the rouble has stayed relatively stable since the start of the conflict, with the help of central bank intervention, the stock market has fallen 6.5 per cent since August 7 and companies have found it harder to raise capital as investors demand sharply higher yields to buy their bonds to reflect the perceived risk.

The moves show that Russia’s economy, in spite of having one of the strongest national balance sheets in the world, is not immune to global market sentiment, which could end up being an important check on Kremlin decision-making.”
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“Alexei Kudrin, finance minister, said the capital flight had largely subsided and would be more than made up for by projected inflows. Russia’s foreign currency reserves, at $581bn, are the world’s third largest. “There is nothing that has happened that could cause us to change any of our plans,” he said.

But the ebbing of foreign investor confidence will make it harder for Russian companies to raise debt and equity finance since foreign sources account for a disproportionate share of long-term capital for Russian corporate borrowers.

“The market is vulnerable to foreign capital flight,” said Kingsmill Bond at Troika Dialogue, the investment bank. “The major Achilles heel of the Russian market is that there is very little domestic long-term capital.””
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Welcome to the global economy Vlad! Isn’t capitalism grand!