Russia's just rewards?

Is the free-fall plummet of the Russian stock exchange global market retaliation?
Or, is it just an element of the global financial crisis?  At this point it's not obvious, but Putin's chess game initiatives may be facing a defensive action and situation that he had not factored in to his Georgia gambit.

Aug. 8, Russia went to war with Georgia. Fearing a new Cold War, foreign portfolio investors took fright, selling the ruble and Russian bonds as well as stocks.

"A REFLEX REACTION"

By the beginning of September, says Evgeny Nadorshin, chief economist at Trust Investment Bank in Moscow, the panic had spread from foreigners to locals. Fearing a further slide in the ruble, Russian investors also began piling out of ruble assets. "The times when the dollar was considered a much safer investment aren't that long ago, so many people just had a reflex reaction," he says.

As often happens in times of market panic, the collapse has been self-reinforcing. Having taken out loans to buy stocks, many investors suddenly found themselves forced to put up extra collateral as stock prices began to fall. The only way to raise cash in a hurry was to sell more stocks, creating an unstoppable vicious circle. "Once things start, you get automatic mechanisms that kick in. People don't know where it's going to stop," says Richard Hainsworth, general director of the Rus-Rating credit-rating agency in Moscow.

For Russia, the biggest fear now is that the chaos on Wall Street will deepen the global economic slowdown, pushing oil prices still lower. They've already fallen 35%, to the current $95 a barrel, after peaking at $147 in July.  MORE....

There's more to the story as well.  In this morning's Wall Street Journal, Gary Kasparov details other specific actions that have ignited the global investment community:

This week's global market catastrophe kicked the Russian economy when it was already down. On Wednesday trading was suspended for a day and a half. An unprecedented 1.126 trillion rubles (around $44 billion) has been allocated to rescue three major Russian banks. One, Gazprombank, is controlled by Yuri Kovalchuk, Vladimir Putin's closest partner.

The market's collapse, down 57% since May, is linked to the dysfunctional nature of the Russian state and economy. Nearly every aspect of commerce in Russia is deeply entangled with state power, if not with Mr. Putin personally. This, for obvious reasons, does not comfort most investors.

One famous investor in particular was worried about the security of doing business in Mr. Putin's Russia. Rupert Murdoch, speaking on News Corp.'s earnings call on Aug. 5, had this to say: "The more I read about investments in Russia, the less I like the feel of it. The more successful we'd be, the more vulnerable we'd be to have it stolen from us, so there we sell now."

But, unless the West - NATO and the US, present a strong, unified and determined opposition to Putin's dictatorial and fascist regime, it may not make much difference.  Kasparov presents the reality of European politics that make this approach fragile:

The hoped-for liberalization under new Russian President Dmitry Medvedev has turned out to be another case of wishful thinking both in Russia and the West. There's no doubt in the business community about who's really in charge. After his cronies' takeover attempt of steel and coal giant Mechel was rebuffed, Mr. Putin's public outburst of criticism in late July was enough to destroy the company's market value.

Mr. Sarkozy has just one more trip to go before he completes his imitation of Neville Chamberlain's infamous trio of visits to Germany in September 1938. Perhaps Georgia should not be as nervous today as Czechoslovakia was then. But one parallel is real: If there is anything an authoritarian leader cannot abide, it's a power vacuum on his borders.

Dictatorial power demands to expand into every available space. Establishing effective penalties will require great political will, especially in Europe. There Mr. Putin has defenders like Silvio Berlusconi, who boasted last week about how he prevented the EU from levying sanctions against Russia over its actions in Georgia. The Kremlin also has many influential employees, including former EU leaders Gerhardt Schroeder of Germany and Paavo Lipponen of Finland, who both took plum positions with the Russian energy giant Gazprom immediately after leaving office.

With their reliable business partners in the West, the Kremlin has opened up a lucrative market for what could be called democracy offsets. In exchange for oil and gas from Russia, they provide democratic credentials and pretend Mr. Putin and Mr. Medvedev are elected officials rather than mafia bosses.

Until Russia has a government that is accountable to its citizens, no company or individual will be safe here. The silver lining of the meltdown will be the weeding out of so many of the foreign and domestic profiteers who greedily abetted Mr. Putin's drive to turn Russia into a dictatorship. But there are still many who hope that all will be back to business as usual once the dust settles. Apparently they think the show must go on, even though many of the lead actors have left the stage -- and the theater itself is ablaze.

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