Russian market in free fall

Bloomberg:

Russia poured $44 billion into its three largest banks and halted stock trading for a second day in a bid to stem the worst financial crisis since the devaluation and default a decade ago.

The Finance Ministry extended the repayment period on loans available to OAO Sberbank, VTB Group and OAO Gazprombank to three months from one week. The benchmark Micex stock index plunged as much as 10 percent, bringing its three-day decline to 25 percent. The KIT Finance brokerage said it's in talks with investors to sell a stake after failing to meet obligations.

Russia's markets are facing the biggest test since the government defaulted in 1998. The decade-long economic boom is fading, foreign investors have pulled at least $35 billion from the nation's stocks and bonds since the five-day war in Georgia last month, and the collapse this week of Lehman Brothers Holdings Inc. and American International Group Inc. prompted a flight from emerging markets.

``I will tell my clients today to continue to abstain from buying Russian assets'' until economic problems are solved, said Zina Psiola, who manages a $1 billion Russian equities fund at Clariden Leu AG in Zurich.

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The ruble has lost 4.8 percent against the dollar since Aug. 8, when Russia sent troops and warplanes into Georgia for a military campaign that led to the worst relations with NATO since the Cold War. Investors have pulled at least $35 billion out of the country since the war, according to BNP Paribas SA estimates.

Oil production, the government's biggest source of revenue, and accelerating inflation are adding to concerns for investors. Crude output is falling for the first time since 1998 and the inflation rate advanced more than expected in August, to near a five year high of 15 percent.

Industrial output grew more slowly than economists expected in August and economic growth in the second quarter slowed to an annual 7.5 percent from 8.5 percent in the previous period.

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I think the story understates the effects of the reaction of the world to Russian aggression in Georgia and the bluster that has been the face of the government since the attacks. Russia has also shown itself to be an unreliable partner for outside investors especially in the energy sector where the government does not allow investors to receive the fruits of their investment.

Russia's assertion of it sphere of influence also makes investors concerned about stability in Russia. Who wants to invest in a country that is threatening war with its neighbors and possible with the investor's country.

The State Department makes the case against Russia and its effects on the market in their Reuters story. It puts the fall in the value of the Ruble at "nearly 10 percent."

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