Russian Stock Market Crash Won't Mean Much to US

The Russian stock market suffered an 11% loss overnight in reaction to a run on bank deposits fed by rumors that the European Union and the United States would apply Cold War-type sanctions to punish Russia’s invasion of the Crimea. The price collapse was worst for bank stocks with the Sberbank (nation’s largest) falling 17% and VTB (second largest) falling 20%.  The turmoil caused stocks around the world to fall modestly, with markets in Europe falling 3% and American stocks falling 1% at openings.  The markets’ reaction so far seems similar to the effect of Russia’s 2008 invasion of the nation of Georgia. Despite threats of economic retaliation there is very little the U.S. and EU can do, because Russia will continue to be the main supplier to Europe’s for natural gas.

Economists refer to modern bank runs as “capital flight,” because electronically billions of depositor’s dollars can be withdrawn on the internet in microseconds.  The Central Bank of Russia just raised interest rates by 1.5% to try to prevent a compounding effect from more losses or a devaluation of the Russian ruble currency.  But Russia should not fear sanctions or need an IMF bailout, because they are the world’s largest producer of oil and the second largest producer of natural gas. Europe buys 30% (5.5 tcf) of the 19 trillion cubic feet (tcf) of gas production and lots of oil produced by Russia.

Russia’s Gazprom Corporation produces 75% of the nation’s natural gas and has a monopoly over exports to Western Europe through three main pipelines..Gazprom badly wants new sources of gas and access to new markets in Europe. The International Energy Agency estimates that Gazprom needs to spend $730 billion by 2035 merely to replace most of their current production of natural gas.  But much of Gazprom’s 350 tcf of reserves are in barely accessible places such as the Yamal Peninsula, the Far East and Eastern Siberia. The plan was for the EU to provide much of the financing for this effort while the U.S. would provide much of the technology.

Germany was so confident in its future economic relationship with Russia and Gazprom, that it announced plans in May 2011 to abandon its 17 nuclear power plants by 2022 and rely on Russian natural gas and renewable energy sources.  According to Chancellor Angela Merkel: “We believe that we can show those countries who decide to abandon nuclear power -- or not to start using it – how it is possible to achieve growth, creating jobs and economic prosperity.”  Germany has since made no investments in their existing plants and has started the shut-down process.

Three years earlier in August 2008, Russian forces invaded Georgia. Sen. John McCain reacted strongly, but then-senator Barack Obama’s reaction was described as limp-wristed.  The atmosphere among the American media was at first poisonous, but over time the blame-the-victim mentality became rife.  Two months later, The New York Times suggested that tiny, democratic Georgia was responsible for provoking Russia. European fact-finders went so far as to blame George W. Bush for provoking Russia by celebrating Georgia’s democracy, and its efforts to promote freedom and liberty.

Immediately after the U.S. elections in November, Russian President Dmitry Medvedev, in a rare moment of honesty, revealed  his reasons for invading Georgia. According to Radio Free Europe/Radio Liberty, he suggested to a group of military officers that Russia’s goal was to prevent Georgia from joining NATO: “We have simply calmed some of our neighbors down by showing them that they should behave correctly in respect of Russia and in respect of neighboring small states. And for some of our partners, including for the North Atlantic Alliance, it was a signal that before taking a decision about expansion of the Alliance, one should at first think about the geopolitical stability. I deem these [issues] to be the major lessons of those developments in 2008.”

Georgia demonstrated that the American Left will throw any small ally under the bus and that the European Union would rather stay warm than clamp on sanctions to cut off Russian oil and gas purchases. The turmoil in the stock market might last for a few more days, but this too will pass. 

The author welcomes feedback @ chriss@chrissstreetandcompany.com
Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 – June 8, 2014.  Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll! 

The Russian stock market suffered an 11% loss overnight in reaction to a run on bank deposits fed by rumors that the European Union and the United States would apply Cold War-type sanctions to punish Russia’s invasion of the Crimea. The price collapse was worst for bank stocks with the Sberbank (nation’s largest) falling 17% and VTB (second largest) falling 20%.  The turmoil caused stocks around the world to fall modestly, with markets in Europe falling 3% and American stocks falling 1% at openings.  The markets’ reaction so far seems similar to the effect of Russia’s 2008 invasion of the nation of Georgia. Despite threats of economic retaliation there is very little the U.S. and EU can do, because Russia will continue to be the main supplier to Europe’s for natural gas.

Economists refer to modern bank runs as “capital flight,” because electronically billions of depositor’s dollars can be withdrawn on the internet in microseconds.  The Central Bank of Russia just raised interest rates by 1.5% to try to prevent a compounding effect from more losses or a devaluation of the Russian ruble currency.  But Russia should not fear sanctions or need an IMF bailout, because they are the world’s largest producer of oil and the second largest producer of natural gas. Europe buys 30% (5.5 tcf) of the 19 trillion cubic feet (tcf) of gas production and lots of oil produced by Russia.

Russia’s Gazprom Corporation produces 75% of the nation’s natural gas and has a monopoly over exports to Western Europe through three main pipelines..Gazprom badly wants new sources of gas and access to new markets in Europe. The International Energy Agency estimates that Gazprom needs to spend $730 billion by 2035 merely to replace most of their current production of natural gas.  But much of Gazprom’s 350 tcf of reserves are in barely accessible places such as the Yamal Peninsula, the Far East and Eastern Siberia. The plan was for the EU to provide much of the financing for this effort while the U.S. would provide much of the technology.

Germany was so confident in its future economic relationship with Russia and Gazprom, that it announced plans in May 2011 to abandon its 17 nuclear power plants by 2022 and rely on Russian natural gas and renewable energy sources.  According to Chancellor Angela Merkel: “We believe that we can show those countries who decide to abandon nuclear power -- or not to start using it – how it is possible to achieve growth, creating jobs and economic prosperity.”  Germany has since made no investments in their existing plants and has started the shut-down process.

Three years earlier in August 2008, Russian forces invaded Georgia. Sen. John McCain reacted strongly, but then-senator Barack Obama’s reaction was described as limp-wristed.  The atmosphere among the American media was at first poisonous, but over time the blame-the-victim mentality became rife.  Two months later, The New York Times suggested that tiny, democratic Georgia was responsible for provoking Russia. European fact-finders went so far as to blame George W. Bush for provoking Russia by celebrating Georgia’s democracy, and its efforts to promote freedom and liberty.

Immediately after the U.S. elections in November, Russian President Dmitry Medvedev, in a rare moment of honesty, revealed  his reasons for invading Georgia. According to Radio Free Europe/Radio Liberty, he suggested to a group of military officers that Russia’s goal was to prevent Georgia from joining NATO: “We have simply calmed some of our neighbors down by showing them that they should behave correctly in respect of Russia and in respect of neighboring small states. And for some of our partners, including for the North Atlantic Alliance, it was a signal that before taking a decision about expansion of the Alliance, one should at first think about the geopolitical stability. I deem these [issues] to be the major lessons of those developments in 2008.”

Georgia demonstrated that the American Left will throw any small ally under the bus and that the European Union would rather stay warm than clamp on sanctions to cut off Russian oil and gas purchases. The turmoil in the stock market might last for a few more days, but this too will pass. 

The author welcomes feedback @ chriss@chrissstreetandcompany.com
Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 – June 8, 2014.  Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll! 

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