Tuesday, September 16, 2008

Russian Stock Market

Many observers have argued that the decline in the Russian stock market since the outbreak of conflict in Georgia shows that Russia is being punished by foreign investors. For example, Dan Drezner wrote:
Russia is paying a price for its actions. Last week Russia's RTS Index dropped 7 percent, and has fallen by 33 percent since July. Last month $20 billion left Russian markets in search for safer havens. Moscow has had to intervene aggressively in foreign exchange markets to defend the ruble.
This seems to be a common thread. But how then to explain the fact that the RTS fell faster before the crisis then after? As my colleague Cliff Gaddy has noted:

In the four weeks before the invasion, the RTS lost more value than in the four weeks after -- $192 billion before and $167 billion after. In fact, the Russian market has been declining since early July.
Cliff points out in this Moscow Times article the extent to which the fall in the Russian stock market is due to the usual culprit, oil prices. You can get an idea of the argument by looking at this chart of what has happened to the RTS:

You can see that the decline in the RTS really starts when oil prices fall. The fall due to Mechel (see my old post on this) is just a blip as is the Georgia crisis. lThe prior sharp fall is the dropping of electricity giant UES from the index.

Now let us look at oil prices. We see a similar pattern:
What is unexplained is they the RTS started falling when oil prices were still rising. Here I think the answer is the world financial crisis. May 19 was also an interesting day on Wall Street. The S&P 500 started to fall and this sucked capital out of emerging markets. Let's look at what happened to the S&P500 during this period.

So the basic story would be that oil prices explain most of the fall in the RTS, not a response to Georgia, and that the initial fall was due to the crisis facing most emerging markets.

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