Our Economies

Financial Virus Infects the World

By Artyom Galustyan

The USA has sneezed and the world has taken ill. Almost 80 years ago the world economic system was damaged by the grave disease that came from Wall Street and history is now repeating itself exactly: falling indexes, downfall of financiers, job cuts. How do the leading powers survive? Will a new Great Depression start or will we just get off with nothing more than a fright?

After the collapse of several significant U.S. companies (Fannie Mae, Freddie Mac, Lehman Brothers), developing world markets were shaken, especially BRIC (Brazil, Russia, India, China). The worst of the fall out has occurred in Russia: Russian Trading System (RTS) has dropped more than 30% this month and  Moscow Interbank Currency Exchange (MICEX) has declined about 28%. The Russian government has announced about an 8% inflation, but traders from MICEX say that it is about 25%. The worst ramification for Russia is that oil prices are going down in value. This drop in pricing is causing financial instability in Russia because the government’s budget is based almost entirely on oil revenues.      

“Risks of a financial crisis in Russia: factors, scenarios and the policy of counteraction”, a report prepared by the Financial Academy at the government, there are four potential scenarios of the financial crisis in Russia:

-  Business interests have overdone positive economic dynamics. They hope this will keep the market stable because it depends on foreign investors and debt financing of non-residents.

-  One of the segments of the internal financial market might be congested. About 40-50 % of  the Russian financial market’s growth is speculative. It can create a soap bubble economy (this kind of crisis is predicted in 2009-2011).

- The Russian economy is extremely dependent on raw material prices in the world markets. The crisis caused by falling export prices could start 2010.

- The imported crisis (”financial virus”) is the most possible scenario today. The Russian financial market is just emerging and it is not stable, that’s why non-residents can divest it.

 Central Bank of Russia announced last month that more than 17 billion dollars have already been drained since the war in South Ossetia began. But, the Finance Minister Aleksey Kudrin doesn’t see this fact as troublesome. “We have all possibilities to reduce the tension and influence of world crisis. Moreover, the Russian economy will increase about 7% a year,” he said.

On the contrary, the head of the financial institute markets, Jacob Mirkin,  has noticed that the Russian market contains a lot of high risk investments, which can make the economy “narrow” and frustrate the system of public finances. Also, he doesn’t exclude the possibility of strong capital drain and inflation growth.
In spite of the fact that the Russian government has given two trillion ruble ($74 billion) for suppression of the crisis, RTS and MICEX traders are certain the crisis cannot be stopped and that it will be much worse than the Great Depression 1929.

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