Russian Stock Market Remains Shaky Despite Government Support

Sources: Kyiv Post, Russian Stocks Reverse Losses; Financial Times, Moscow Moves to Arrest Freefall in the Markets; International Herald Tribune, Russian Shares Fall Sharply, Russian Stock Markets Suspended for Second Time; Kyiv Post, Trading Suspended on Russia's Micex After 15 Percent Plunge

The regulators in Russia continue to watch the stock market carefully as new developments emerge in the U.S., threatening the performance of stocks owned in large part by foreign investors. On Tuesday, regulators suspended trading for two hours shortly after opening in response to initial rejection of the U.S. bailout plan. At re-opening, both major indexes declined, but finished slightly up after Bush's appeal to Congress and the recovery of European markets.

The Russian exchanges are two of the most volatile in Europe, and the attempt by the Federal Financial Markets Service to control prices was met with little criticism in light of the circumstances. Regulation controls panic selling and allows more time for reaction to market forces. Closing the markets is seen as an emergency measure, and even Western players see the wisdom of additional regulation in this financial climate.

However, as declines continue, concern creeps in. Trading was suspended three more times on Friday, and the strategy was less successful. Reacting to U.S. markets, the RTS index closed 7% down and the Micex index 5.3% down. Part of the problem is confidence, as foreign investors worry that Russian companies may default on their debts in a repeat of the 1998 financial crisis. The state has offered to help companies refinance debts, but this assistance may not extend to all companies. Government support for the stock market also has limited effect due to its short-term nature and the lack of buyers on the market.

This week begins on a similarly worrisome note, with 15% drop in the Micex exchange before a one-hour suspension on Monday. Trading on the RTS exchange was not suspended immediately, though it also dropped 13.9%. By the end of the day, both exchanges had closed twice and suffered major price declines. Part of the problem is a drop in the price of oil to under $90 a barrel, and another is overall low investor confidence. Banking stocks saw especially sharp drops, unsurprising in this uncertain climate.

Questions:

1) Does regulation threaten Russia's status as a capitalist market economy, or is the suspension of trading warranted by the circumstances and the need to avoid panic selling?
2) Though the Russian government has claimed an ability to absorb even significant drops in the price of oil, it has committed large amounts of money to rescuing the stock market. Do you think short-term recovery attempts will jeopardize long-term growth by eating up surpluses and foreign exchange reserves, or can the Russian economy recover?