Russia market crisis could help Kremlin hawks

3 mins read

By Michael Stott (Reuters)

Russia's worst financial market crisis since 1998 could strengthen further the Kremlin hawks who favour a strong state and oppose closer links with the West.

Emboldened by military success in Georgia, where Russian troops quickly crushed a troublesome pro-Western opponent, the hardliners may now seize the opportunity of market turmoil to argue that Western capitalism does not suit Russia.

"People who want to push more of a statist agenda could take advantage of this situation," said Chris Weafer, chief strategist at local brokerage Uralsib.

"They will say that since the global economic situation has gone to hell, we need strong state companies. This could undermine reformers and shift the political boundaries."

As regulators shut down Russia's two main markets after catastrophic share price falls, reports circulated of one of the country's top politicians in Venezuela shaking hands with U.S. enemy and socialist firebrand Hugo Chavez.

Deputy Prime Minister Igor Sechin, one of the leading hardliners in the government and a close ally of Prime Minister Vladimir Putin, handed Chavez a new biography of veteran Cuban revolutionary Fidel Castro and hailed Venezuela as a key ally.

By contrast, First Deputy Prime Minister Igor Shuvalov, one of the leading standard-bearers for liberal economic ideas in the Cabinet, has been almost silent during the market panic of recent days.

Fellow cabinet liberal Alexei Kudrin, the finance minister, has spearheaded the government's rescue measures, a role that shows the liberal camp controls economic policy for now but which carries serious political risks if they fail.

"Russia is paying for the mistakes of Kudrin", the daily Nezavisimaya Gazeta said in a front-page banner headline, blaming him for capital flight.

Russian commentators, never slow to miss an opportunity to criticise the West, have firmly pinned the responsibility for the financial crisis on the United States.

"America turned out to be more dangerous for the world than the (large Hadron) collider," read the banner front-page headline in the pro-government daily Izvestiya on Thursday.

And President Dmitry Medvedev, who took power in May pledging a liberal, free-market reform agenda, has instead led a war against Georgia and then organised a massive state bailout of the private sector, now totalling more than $130 billion.

The turmoil in Russian financial markets, where stocks have fallen nearly 60 percent since May, and the seizing-up of the banking system has not so far hurt the wider Russian economy, growing at around 7 percent a year.

Stock markets are relatively unimportant to most Russians, who generally do not hold shares or have private pension funds.

"Should the bulk of Russian stock markets dry up, few Russians will care much," U.S. private intelligence firm Stratfor said in a commentary.

But the situation could change quickly if nervous Russians, who remember all too well how they lost their savings in previous crises, start pulling their money out of banks.

"The single biggest priority right now is to prevent a run on the banks," said Weafer.

The Finance Ministry and the central bank have announced tens of billions of dollars in state support for the banking system but some market analysts said there was a risk that foreign banks would simply suck this money out of Russia to service obligations back home.

"If Putin hears Russian capital is being taken out of the country to help Western banks out of crisis, you can imagine how he may react," said one analyst, who declined to be named.

Controls on capital movement from Russia could follow.

The Kremlin's hardline wing has long argued that Russia must follow its own political and economic course independent of the West and guarantee its security with a strong state which dominates key sectors of the economy.

Underlining the advantages of state firms with strong cashflow, Russia's oil major Rosneft — chaired by Sechin — announced earlier this week it had repaid all of a $22 billion loan it took out in 2007 to buy assets of a rival oil firm.

State news agency RIA Novosti's economic commentator Vlad Grinkevich went a step further in his analysis of the global economic crisis.

"Some sociologists and historians believe this to be the predicted collapse of the American empire", he wrote.

"…There are many examples from history of huge international empires than once united a part of the world with language, ideology, religion … but collapsed because of their own complexity".