Finally Russia is losing the war against Georgia!!! Investors are rushing out of the country!!! There might be a financial crisis in Russia!!! The power of the ‘global markets’ are fighting Russia!!! This will provide ‘an important check on Kremlin decision-making’!!!
So is the Financial Times telling its readers today. Under the headline Investors quit Russia after Georgia war it asserts:
Investors pulled their money out of Russia in the wake of the Georgia conflict at the fastest rate since the 1998 rouble crisis, new figures showed on Thursday.
Russian debt and equity markets have also suffered sharp falls since the conflict began on August 8, with yields on domestic rouble bonds increasing by up to 150 basis points in the last month.
Money is fleeing the country, the rouble crisis, sharp falls in the stock market, increasing yields … terrible indeed.
Now may we check the numbers please?
Let’s start with bond yields. I don’t have access to the Russian rouble bond index (the MICEX CBI), but was it really the war that began on August 8 that induced the yield increase up to 150bp in the last month?
Consider this Reuters piece written on August 7 when the war was only on Saakashili’s and his minders’ minds:
Russia’s LSR Group placed a five-year rouble bond at par with a coupon rate above the initial guidance, confirming that funding costs for construction firms are rising, market data showed.
London-listed LSR placed 5 billion roubles ($212 million) of the bond at a coupon rate of 13.25 percent and an 18-month put option. The company earlier provided a coupon rate guidance for the bond at 11.75-12.75 percent.
Here we have a sudden 150 base point yield increase above the lower original guidance. But this increase happened on August the 7th. It had nothing to do with the war. LSR is a property developer operating in Petersburg. The reasons for its higher bond rate are the cooling property markets there and the global credit crunch.
Domestic rouble bonds may have increase by ‘up to’ 150 basis points ‘in the last month’? But what is the evidence that this occurred because of the war instead of the general economic conditions?
But the Financial Times has more:
Data released by Russia’s central bank showed a drop in foreign currency reserves of just over $16.4bn in the week beginning August 8. This was one of the largest absolute weekly drops in 10 years, according to Ivan Tchakarov at Lehman Brothers.
The only larger drop in reserves since 1998 was $16.5bn in June 2006, when Russia paid off the bulk of its Paris club debt.
Of course you can use absolute numbers, but what do they tell you?
According to the Russian Central Bank statistics the reserves indeed fell by 16.4 billion between August 8 and August 15 to $581 billion. But that change was only -2.7% of the total reserves. The change in June 2006, while in the same absolute range, was at that time -16.5% of then $275 billion total reserves.
Weekly swings in the range of 2 to 3% of reserves are not uncommon. Between May 5 and May 11 2007, Russian reserves changed by +3.8%. In the second week of 2005 reserves changed by -3.6 percent, two weeks later they changed by +8.1%.
The change in reserve assets does not tell anything about the reasons behind this. Maybe a Russian company payed multibillions for another U.S. steel company during that week? To say it is the war that induced the current one is pure speculation. What wars took place at the beginning of 2005 and what happened in May 2007?
But the FT has a third point of evidence:
While the value of the rouble has stayed relatively stable since the start of the conflict, with the help of central bank intervention, the stock market has fallen 6.5 per cent since August 7 and companies have found it harder to raise capital as investors demand sharply higher yields to buy their bonds to reflect the perceived risk.
The Russian Trading System Stock Exchange (RTS) Index fell over 30% over the last four month. That is a big drop but it has nothing to do with a war that started August 8.
In July alone the RTS Index fell 14.3%. As the monthly RTS report for July explains (pdf):
More than 50% of the RTSI total capitalization is concentrated in the oil and gas sector. The other large-weight sectors at the end of July were finance – (19.1 %) and metallurgy (14.9%).
The stock prices for oil and steel companies depend largely on the price of the commodities they trade in. Since commodity prices dropped over the last month, the index drop is no surprise at all and has likely nothing to do with Georgia.
From the chart you can tell that there was a big drop on August 8-10 when the war started. But two days later the index was back on its August 5 level. The drop that occurred because of Saak’s splendid little war was immediately repaired .
You can also see that there was an even bigger drop on July 24. Did I miss a war that started on that date?
No. On July 24 Putin lashed out against the Russian coal and steel company Mechel for price manipulations. Earlier the Federal Antimonopoly Service had launched a case against the company. Putin made sure that this got attention and Mechel stocks dropped by a third.
It seems as if Putin bullying a local company has more financial effect than Putin bullying Georgia.
The FT’s evidence for financial markets reactions to the Georgian war is very thin. The three indicators presented, rising bond yields, reserve swings and stock prices, may have been influenced by the war. But there is zero evidence that they have reacted because of the war. Instead there is evidence that they have likely reacted for other purely economic reason.
But what is the FT’s conclusion?
The moves show that Russia’s economy, in spite of having one of the
strongest national balance sheets in the world, is not immune to global
market sentiment, which could end up being an important check on
Kremlin decision-making.
Based on three numbers mixed with hot air, the FT believes ‘global market sentiment’ influenced these. Could it be that local market sentiment in Russia played a bigger role? Or could it be that ‘global sentiment’ is different from what the FT writers perceive?
Only yesterday Kishore Mahbubani opined in the very same Financial Times:
The combined western population in North America, the European Union
and Australasia is 700m, about 10 per cent of the world’s population.
The remaining 90 per cent have gone from being objects of world history
to subjects. The Financial Times headline of August 18 2008 proclaimed:
“West in united front over Georgia”. It should have read: “Rest of the world faults west on Georgia”.
If ‘global market sentiment’ really induced a reaction to the Georgia war on Russian financial markets, shouldn’t those markets have gone up?
And where is proof that financial issues are able to influence Kremlin decision-making at all? The Kremlin sits on a soft and nice cushion of $600 billion in foreign currency reserves. A few billion more or less is unlikely to make any difference to its decisions.
I find such propaganda as the FT obviously construed here dangerous. It may make ‘western’ decision makers believe that they have leverage over Russia using some financial trickery.
Such believe is likely false. But decisions and actions based on propaganda induced believes can have negative effects in other areas. One must be careful to not fall for them.