UN votes and demonstrations had little impact on a communist totalitarian nation. Only in Afghanistan did a ruthless (and mostly Western armed) resistance army have any real effect and finally throw the Russians out.
These days life is more complicated. The issues surrounding Russia’s invasion of Georgia, and the South Ossetia and Abkhazia problem, have had further ramifications for the Russian authorities than they would normally have experienced.
Wingeing and wailing from the Western nations is of course to be expected - and for the most part can be ignored as few really appreciate the local history and background to the events that have taken place. However, Russia is not the USSR and for the most part now a capitalist (lite) style economy. Thus it now finds itself open to the unreliable vagaries of the external international investors and traders.
Over the past four months the main Russian stock market index, RTS, has dropped by some 45% and has wiped out nearly all the gains made since June 2006. The economy is now facing its worst financial crisis since the Russian default in August 1998 when the country’s finances lurched from danger to default with all the similarities of behaviour of its then somewhat alcoholic leader Boris Yeltsin.
With the current rise in geo-political tensions, investors have become increasingly nervous and this has resulted in the past few weeks of an estimated $20 billion of capital being withdrawn from Russia and already the shortage of cash and its implications for lending is having an impact, with projects being curtailed and initiatives halted. The Central Bank does dispute these figures, if not necessarily the effects, but evidence in the failure of confidence can be seen in the dramatic fall in the value of the Rouble since mid-August (6.1% against the Dollar).
A further capitalist twist to this comes by looking at those who have borrowed too much, including some of the “oligarchs” who may now find themselves being at the wrong end of “margin calls” to cover their debts and be thus, given the shortage of cash, forced to sell assets. Additionally there is also a background of rising corporate nerves over inward investment after the BP/TNK fiasco, as well as Shell’s torrid time and most recently the broadside from Mr Putin on Mechel the steel manufacturer for political interference, and thus not unsurprisingly confidence has evaporated faster than the Aral Sea.
So investors who piled in last year have been “withdrawing like lemmings” as described by one analyst. This fashion fad has not been replaced by a tank top but rather by the top of a tank.
All this means is that Russia finds itself not immune to economic pressures. It seems therefore that there will be a slowing of the economy which is over-reliant on oil, whose price has been falling. Add to this an accelerating background of inflation and we don’t have an especially healthy scenario.
Without realising it, the Western politicians have now found the tender spot of the Bear and so maybe, with a little less postulating and a bit more economic realism by both parties, this factious situation in the Caucasus can start to be defused.
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Time now for the annual “so was it true this year then?” when we find out whether certain old wive’s tales are really of any use. “Sell in May and go away and don’t come back until St Leger day” is the old line referring to the idea that we apparently should all leave the City for the London season (Ascot, Henley etc) and then go on holiday only to return in time for the St Leger festival at Doncaster. Nice to have your Summer so well planned. The idea behind this was that trading volumes would drop away and potentially prices as well.
The St Leger was run on Saturday 13th September. So did it work this year and what would we have missed? Well on 1st May the FTSE 100 was at 6,087 and as of 11th September it stood at 5,318. The DOW Jones Industrial dropped from 13,010 to 11,433 and the S&P 500 index 1,409 to 1,249 but taking into account the currency changes, back on 1st May the £:$ stood at 1.98 compared to 1.76 at present - a 12.5% decline. Thus your US investments would have merely lost 1.3% (DOW) or 0.5% (S&P).
Last we had Northern Rock and this year of course the Americans have Freddie and Fannie. So whatever the markets do, certainly the Summer is no guarantee of a docile market and economy.
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And finally................are they all barking in Florida, as news comes in of a lady having been arrested for attacking her husband with a frozen lasagne? In my experience the freshly made ones can be equally dangerous, given my experience of certain culinary techniques. Also in Florida another woman had to be arrested for driving around a car park with her three year old grandchild on the roof. I think this is taking the term of “son” roof a tad too far – they never could spell properly.
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited