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Russia's Coming Financial Crash

WASHINGTON, DC – Today, the whole world is being hit by a tremendous financial crisis, but Russia is facing a perfect storm. The Russian stock market is in free fall, plummeting by 60% since May 19, a loss of $900 billion. And the plunge is accelerating. As a result, Russia’s economic growth is likely to fall sharply and suddenly.

One problem is that, after a long period of fiscal prudence, Russia’s government has shown extraordinary ineptitude. Russia has enjoyed average annual economic growth of 7% since 1999. With huge current-account and budget surpluses, it had accumulated international reserves of $600 billion by July. Its public debt was almost eliminated. But the open economy that has bred Russia’s economic success requires the maintenance of sensible policies to succeed.

The initial American financial crisis barely touched Russia, but the global economic slowdown brought about a decline in oil and other commodity prices by more than one-third since July, which was a big blow. All the other hits, however, have been self-inflicted. The Russian financial crisis is high drama, best described as a tragedy in five acts.

On July 24, Prime Minister Vladimir Putin initiated the first act by fiercely attacking, without evidence, the timid owner of the giant coal and steel company Mechel for price-gouging and tax evasion. In three days, Mechel’s shares lost half their value, triggering the Russian stock market’s decline.