The war in Georgia and Russian markets

Daniel Larrison takes me to task for suggesting that Russia paid a price for the Georgia war in the flight of foreign capital, which predated and exacerbated the financial crisis. Says Larrison:

Capital had been “fleeing” Russia in the form of a decline in its stock market throughout 2008, long before the war in Georgia and the full outbreak of our financial crisis in September, in a more dramatic expression of the slow downward trend that our own market was showing through the first half of the year. At the time of the war in Georgia, the Russian index had already declined roughly 20% for the year, and Russia did not suffer its worst precipitous drops in its stock market until the full brunt of the financial crisis struck New York in mid-September.

It's quite true that the Russian stock market began to decline before the war in Georgia, thanks mostly to this man:



The first big drop market drop in Russia occurred in late July, when Prime Minister Putin launched a nasty verbal attack on the CEO of the Mechel steel company, Igor Zyuzin:

"We have a respected company, Mechel," Putin said in introducing his subject.

"By the way, we invited the owner and director of the company, Igor Vladimirovich Zyuzin, to today's meeting, but he suddenly got sick. Meanwhile, it is known that in the first quarter this year the company exported raw materials abroad at half the domestic, and world, price. And what about the margin tax for the government?"

He added: "Of course, sickness is sickness, but I think Igor Vladimirovich should get better as quick as possible, otherwise we'll have to send him a doctor."

As the International Herald Tribune report puts it:

On the heels of the imprisonment of one tycoon and some bare-knuckled corporate raids and renegotiations of large energy contracts under Putin, the market did not take this talk lightly.

Over all, the Russian stock market slid more than 5 percent Friday, on fears that Putin's comments might presage another attack on a company similar to the destruction of the Yukos oil company in 2004.

The remarks also coincided with the departure of the American chief executive of the British energy company BP's joint venture in Russia, which is under pressure from its Russian partners and the government, in another glum sign for investors here.

More on the BP dispute here. State thuggery is bad for business; who knew?

(Incidentally, the role of Putin's "we'll have to send him a doctor" quip in crashing the Russian stock market is so widely understood that, remarkably, even the pro-government Izvestia criticized it in a year-end roundup of the Putinisms of 2008. Izvestia also quotes a more complete version of the remark: "We'll have to send him a doctor and clean up these problems." The word Putin used, zachistit', was most commonly used with regard to "cleanup operations" against Chechen separatist fighters.)

That said: did the war in Georgia have an effect on capital flight? Well, here's what an August 19 report in the New York Times had to say:

More than $7 billion left Russia during Moscow’s military campaign in Georgia, a rate more than 10 times higher than earlier in the year and the product at least in part of fears that “certain political risks” are making the Russian Federation a less attractive place for investment, according to Russian Finance Minister Aleksei Kudrin.

Kudrin must be another one of those Russia-hating neocons.

This August 22 Russian-language article in Nezavisimaya Gazeta examines the various causes of capital flight and concludes:

Before the events in South Ossetia, the capitalization of the Russian stock market was close to $1.1 trillion; now, it is below $1 trillion. Even adjusting for the exchange rate fluctuations and the general downward trend, the war-related component in the stock market drop is estimated at tens of billions of dollars.