Streetwise Professor

I have noted before that when making the investment case for Russia, Putin, Medvedev and their pilot fish (or remoras) from the financial community claim that Russia is driven by its own strong fundamentals and is essentially decoupled from the American and European stock markets, but when anything goes bad in the Russian market, it’s the Americans’ fault (e.g., credit crisis). With the Russian market currently in near meltdown mode, the latter claims have become even more shrill. To wit, Putin’s and Medvedev’s recent penetrating diagnoses of the precipitous drops in the RTS and MICEX:

Vladimir Putin yesterday admitted that foreign capital inflows could fall by up to 45 per cent this year, but rejected suggestions that turmoil in Russia’s financial markets was caused by the conflict in Georgia.

The Russian prime minister said that the country was simply suffering from the same credit crisis affecting the rest of the world, but he acknowledged that foreign inflows might fall this year from $80bn in 2007 to $45bn or $50bn (€35.7bn, £28.5bn).

Mr Putin blamed Russia’s outflow of capital on “speculative” moves by western institutions withdrawing funds because of the “mortgage crisis” in the US and Europe.

But, speaking to western journalists in the resort of Sochi, he denied there was a liquidity crisis and rejected the view that the turmoil had “anything to do” with the Georgian conflict.

The US market has been moving largely sideways during a period when the Russian market has moved down approximately 45 percent. The recent precipitous drops in the Russian indices have not been matched by similar declines in the Dow or S&P, or any of the European indices. Indeed, for Putin’s story to make sense, one would have expected the Russian market to outperform (e.g., lose less) than the US market. The reverse has happened.

The far more plausible explanations for the Russian market implosion are (a) the Mechel episode and its aftermath, (b) the Russo-Georgian War, and (c) the sharp (approximately 40 percent) drop in oil prices post-July. For Putin (and Medvedev) to deny the obvious connections between their actions and the market’s reaction is a testament to either denial or chutzpah. It is particularly difficult to reconcile the sharp drop of the ruble relative to the Euro and the dollar with Putin’s United States-centric explanation. If US financial turmoil was the driving factor, the ruble should have been rising (as investors flee the dollar), instead of falling like a stone as it has.

During this interview, Putin dishes out more than usual dollops of his famous charm:

Mr Putin devoted much time to defending Russia’s intervention in Georgia, saying Moscow had had no choice but to respond to Tbilisi’s aggression in South Ossetia. “Should we have wiped the bloody snot off and bowed our heads again this time? What did you expect us to do, defend ourselves with catapults?”

In the three-hour meeting, Mr Putin appeared in complete command, giving the impression that he had ceded little, if any, authority to Dmitry Medvedev, his successor as president.

Asked whether he saw prospects of improvement in ties with the UK, the Russian prime minister offered little hope.

“Why do you use the territory of Great Britain to be used as a launching pad to fight Russia,” he asked, referring to the asylum granted to various Kremlin opponents including Boris Berezovsky.

“That’s why it’s not possible to have normal relations with the UK. If we had given safe haven to the militants of the IRA with weapons in their hands, what would you have done?”

This vulgarity is of a piece with Ivanov’s carpet f-bombing British Foreign Minister Miliband. It is especially pitiful when the elfin Medvedev feels compelled to talk like a capo to fit in with the overall mien of the siloviki dominated government.

I predict that the shrieks from Casablanca on the Moskva and the Kremlin to become even more shrill in coming days. Such shrillness is common when there is a yawning gap between reality, and what the speaker wants the audience to believe. (Hence, I also predict an increasing shrillness in the anti-Palin hysteria.)