Sunday, June 10, 2018

The Meaning of Halted Russian Stock Trading

Some other commentators (coming from you-know-where) have expressed schadenfreude at Russia's stock markets diving. Recently, matters have gotten worse if you believe them: for a second straight day, Russia's equity bourses fell enough to trigger trading halts. In this topsy-turvy world where the rules are being rewritten almost daily, some cling to--pardon the word--neoliberal platitudes that Russia is busy shattering. You know what they are: respect property rights, honour contracts, observe transparency, etc. If it were not already abundantly evident before the Russia-Georgia conflict, those things mean very little to an assertive Russia now.

The naive response is "ha-ha, see how countries that don't play along with the West receive their comeuppance," perhaps in expectation of a 1998-style Russian collapse. It's very Thomas Friedmanesque circa 1999--the (re)imposition of "market discipline." Of course, such a collapse is not likely. As Premier Putin points out, the country's has healthy twin surpluses--budget and trade. Going forward, these will augment Russia's already massive reserves now totalling over half a trillion. Mount a speculative attack on Russia? You must be joking.

Conspiracy theories aside, the West is not out to undermine Russia as Putin suggests. Rather, rational investors are justifiably pulling out of Russia in droves given its independent (mean) streak. The important point is this: flighty FDI is not uncommon. However, increasingly dear stuff you can pull out of the ground--oil, gas, metals--is. In an era where resource scarcity plays a bigger role, demand did not suddenly disappear altogether for Russia's export wares. Instead, what's likely to happen is similar to the Seventies when oil companies were kicked out of the Middle East--key industries became nationalized. In the end, that's all there is to it--a major geopolitical event (support of Israel during the Yom Kippur War in 1973 and the Georgians in 2008) irks resource-rich foreigners (Middle Easterners then and Russians now). Foreign investment fleeing is not necessarily a "negative," but part of gaining greater national sovereignty on resource endowments. If foreign expertise is required, foreign managers can be easily hired by now-nationalized operations.

There will be dislocations in the meantime--nothing that a country with twin surpluses and half a trillion in FX reserves cannot withstand--but ultimately, the stuff buried under Russian soil is worth more than any flighty FDI. Do not forget the lessons of the past like some others have.

UPDATE: Would a country concerned about pleasing the much-vaunted "electronic herd" of foreign investors just now decide to sign friendship treaties with Abkhazia and South Ossetia? Talk about tweaking Russia's critics. Somehow, this doesn't strike me as builder of investor confidence. Further nationalization of Russia's economic interests is consistent with such moves.

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