In the Wake of Stock Market Trouble in Eastern Europe, Russia Approves Bailout Plan

Sources: New York Times, Russia Approves $36 Billion Loan Plan; Financial Times, Stock Exchanges Are Closed in Russia, Ukraine and Romania

This was another bad week for the Russian exchanges, as the regulator closed markets again for a two-day stretch following an 11% plus drop for the RTS and 14.4% drop for the Micex index. This occurred despite the government’s promise to provide $37 billion in long-term loans for two state banks, showing that the Russian injection strategy may not be as strong as originally hoped.

On Friday, the Duma approved a $36 billion bailout to private banks from the Central Bank and the Russian government, and the shares in Russian companies traded on foreign markets continued to fall while the Russian exchanges stayed closed. The money for the bailout will come not from borrowing as with the U.S. bailout but instead from gold and hard currency reserves. Meanwhile, fears of future deficits loom with the price of oil falling to $82 a barrel.

The Duma is considering putting $17 billion from the National Welfare Fund, a fund intended to place oil revenues in excess of 10% GDP each year in long-term investments, on deposit with the large state-owned bank VEB. VEB would then be expected to loan to businesses and other banks.

Other stock markets in the region also experienced trouble at the end of the week. Ukrainian and Romanian markets were closed on Friday, with the Romanian BET index falling 15% in a little more than an hour Friday morning before trading was suspended. The Bulgarian Sofix index closed 7.5% down on Friday, and markets in the Baltic states fell 6-8%. Poland’s WIG20 inex finished 1.3% down on Friday.

Questions:

1) Do you think markets in Eastern Europe will be capable of recovery independently of Russia if Russia cannot save its own markets, or do you think the markets in the region are inextricably linked?

2) Are these continued problems a sign that former Communist bloc countries have aligned too closely with the West and are therefore doomed to its failures, or should Eastern European countries work together with Western partners on recovery to achieve common solutions?

3) Should the Duma approve the proposal to put money from the National Welfare Fund on deposit with VEB in hopes of a near-future recovery, or should it reject the plan and keep the money safe for future generations?