Free markets and capitalism are wonderful things, everyone agrees. At least, that is, when they’re making you money.
But when you’re losing money, they’re not so much fun. As the Fannie and Freddie debacle shows, governments will only tolerate an illusion of capitalism for so long. When the hard times hit, and prices start falling fast, then markets are deemed to have failed in some way, and can only be fixed by politicians.
It’s not just American politicians of course. The Russians, never the most likely converts to free market capitalism, aren’t too happy about falling prices either. Two in particular are worrying them – the falling prices of Russian stocks, and the falling oil price.
So now the Kremlin is stepping in to stem the losses. But just like the Americans, they’ll find that markets have a habit of getting their own way, regardless of what the politicians want…
Russian stock markets have taken a dive recently
Russian stocks have taken a hammering in recent months. Both the benchmark Micex index and the dollar-denominated RTS are down about 40% since early July. The fracas in Georgia – regardless of the rights and wrongs of the situation, which are by no means clear-cut – has been something of a catalyst. As Pierre Briacon points out on Breakingviews “it played a big part in the recognition by Western business circles that the Russian government isn’t as predictable as it claims to be.”
But it’s certainly not the whole problem. Regardless of Opec’s decision to cut oil production, not to mention a swathe of hurricanes threatening the Gulf, the oil price has just kept heading lower. Brent crude is now firmly below the $100 a barrel mark, while New York prices are heading that way as well.
Russia needs oil prices to stay high. That’s where it’s been getting its replenished power and money from, after all. And the plunging stock market is also taking its toll. The market is falling as foreign investors flee to safer havens, and of course, as it falls, the charts look even uglier, and more and more investors flee.
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Government attempts to prop up prices are doomed to fail
So it’s no surprise that Russian president, Dmitry Medvedev, has decided to step in and take charge. After all, when even the leaders of the land of the free decide that markets can’t be allowed to function unhindered, you can hardly expect the head of an ex-Communist country to exhibit any kind of restraint.
Mr Medvedev told a televised government meeting that “the government and central bank must do everything they can to ensure that new financial resources enter the market… it is absolutely clear and this must be done.” He added that, “the Russian stock market remains very promising for investments and serious investors understand that.”
Meanwhile, the country has been cosying up to Opec, saying that it wants to co-operate closely with the oil cartel. What that means is that it absolutely doesn’t want oil prices to fall any further.
Both of these attempts to prop up prices are doomed to fail in the long run. Oil’s falling just now partly because demand is falling, but also because the price ran ahead of itself. Barclays has already revised its expectations for the fourth quarter down from $122.20 a barrel of Brent crude, to $95.90. It’ll probably be lower than that – just as analysts were behind the curve on the way up, they’re likely to be just as slow to adjust on the way down.
And as Martin Hutchinson points out on Breakingviews, Russia’s desire to join Opec shows how fragile its oil industry is. “Its declining production makes it interested in maximizing short-term prices.” The country would be better off focusing how to improve its production, rather than trying to control today’s prices.
Is this a buying opportunity?
As for the Russian stock markets – investors are already taking fright at instability in Russia, and the more the government seems to be throwing its weight around, the more concerned they will become. Rupert Murdoch is reportedly close to selling his Russian advertising business, News Outdoor, says The Telegraph. A month ago he said: “The more I read about investments in Russia, the less I like the feel of it. The more successful we’d be, the more vulnerable we’d be to have it stolen.”
Several commentators disagree, and think just now is a buying opportunity – our own regular columnist Simon Nixon, despite his general concerns over the Russian market, said as much last week.
They may well be right, but right now I can’t say I’d be happy to have my money in Russia for any length of time. When times are good, investors and governments in general can rub along together, because everyone’s making money and everyone’s happy.
But the good times are over now. And as the economic environment gets tougher, investors and governments will find themselves competing for chunks of a rapidly shrinking pie. With political risk in Russia high even during the good times, it’s going to go through the roof now. I’d steer clear.
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