Paying the Costs of War

I think it’s ridiculous for U.S. officials to gloat over the financial crisis in Russia as though it were caused mainly by the invasion of Georgia. It seems that undersecretary William Burns would like to take credit for the worst stock market performance Russia has seen in a decade, but that’s probably why the guy doesn’t work in finance. There are four major determinants of Russia’s economic growth potential: 1) price of oil, 2) inflation, 3) fiscal and monetary policy and government spending, and 4) the price of natural gas. There’s more, but these are the big ones … and a perfect storm of unfortunate developments in one or several of these areas, which is happening now, can cause investor confidence to crash and bring in an unsustainable number of call options. So many of these banks are so heavily leveraged into each that they may truly be de-coupled, but as one analyst has said, during a time of crisis the country’s economy appears to be a giant “pyramid scheme.” Russia’s got some serious financial issues at the moment and frighteningly surreal perspectives on the problems from the government, but the war is not the main reason it is happening. (Note to Alexei Kudrin: never say that the market slump is nearing the bottom unless you want to discover a whole new cellar) Reuters:

“At least in part because of the Georgia crisis, Russian financial markets have lost nearly a third of their value, with losses in market capitalization of hundreds of billions of dollars,” William Burns, undersecretary of state for political affairs, told a Senate hearing. (…) “Capital is fleeing Russia, with $7 billion leaving on August 8 alone,” he said. Opportunity costs for Russia are even greater, with its plans to diversify the economy and rebuild infrastructure at risk, he said. “Russia and the Russian people are paying a considerable price for their country’s disproportionate military action,” Burns said.