26 May 2004
Until mid-April, the stock market had enjoyed more than a year of steady growth. The benchmark RTS index more than doubled during this period to a high of 781.55 on April 12. Then the market's fortunes changed dramatically.
In two weeks, the RTS fell by 20 percent. The decline accelerated around the time of President Vladimir Putin's inauguration, and hit 26.2 percent following the May 9 assassination of Chechen President Akhmad Kadyrov.
The modest market rebound now under way does not reduce the need to identify the factors that caused this sharp decline.
The scale of the decline becomes clear when you consider that the beginning of the so-called Yukos affair -- the arrest of former Group Menatep head Platon Lebedev and former Yukos security chief Alexander Pichugin -- caused a 10 percent decline in the RTS. The arrest of former Yukos CEO Mikhail Khodorkovsky -- not taking into account the effect of subsequent official pronouncements --sent the RTS tumbling by 20 percent.
No one was arrested in the second half of April, however, and the decline began long before the May holidays, the prosecutors' alleged interest in Vladimir Potanin and Audit Chamber chief Sergei Stepashin's campaign to "get Abramovich."
The price of raw materials remained sky-high, and the resultant influx of hard currency ensured that there was "free money" knocking around. Given the continued weakness of property rights, most of this money was funneled into the stock market and into real estate in a few major cities. The real estate market showed no ill effects, so what happened to the stock market?
The drop in share prices could have been caused by simple overheating of a still narrow market. The state has made precious little effort to encourage more companies to float shares on the market, while successful corporations have access to cheap loans and little motivation to go public.
As a result, only a limited number of corporations are listed, and the perception of them being undervalued has largely disappeared as share prices have grown. This could have produced a market correction or even burst the speculative bubble, a risk that Economic Development and Trade Minister German Gref warned about. Instead we saw a gradual, steady decline in share prices.
With the favorable situation on Russia's export markets, the only way to explain this development is to assume a change in the mood of the business community.
The immediate cause for the decline could have been the outflow of capital from the financial sector that began in the first quarter. This movement also requires explanation, however, and with the influx of hard currency remaining stable, it points once more to a change of mood in the business community. Even the liberalization of hard currency regulations, which has made it easier to take money out of Russia, proves significant only in conjunction with a change of mood. Otherwise, business would not have taken advantage of this opportunity with such alacrity.
Following the presidential election in March, there was a general perception that the government would go through a one-month settling-in period. When this month came to an end in mid-April, business -- along with the rest of society -- realized that the settling-in period was still in full swing and there was no end was in sight. The sheer scale of chaos within the government made even day-to-day business activity difficult.
The spectacle of public squabbling among top officials and the airing of the government's dirty laundry did little to inspire confidence. Business has reached the point where it is poised to expand. It now requires assistance from the government in the form of a clear-cut economic development strategy, the identification and stimulation of priorities, intelligent protectionism and the creation of essential infrastructure. Instead, business saw clearly that the government was lagging behind, stuck in the late 1990s and unable to meet the real needs of business today. The immaturity of the state left business with no clear perspectives for further growth.
In addition, the business community regarded with skepticism an array of questionable social initiatives: simplifying the rules for evicting deadbeats while simultaneously raising housing and utility payments; raising the Unified Social Tax rate from 20 to 26 percent for the lower middle class; and kicking middle-aged people out of the new pension system. When you think about it, the idea of replacing pensioners' privileges with cash payments sounds like the start of "social genocide."
The mere discussion of such initiatives by government officials creates a certain tension in society, and now that the election is over, the business community no longer regards them with its former equability. For experience has shown that when the ruling bureaucracy needs a scapegoat for its own failures, it pins the blame on business.
As the implementation of liberal fundamentalist ideas exacerbates social problems, talk will inevitably turn to the business community's social responsibilities. But since business will probably have no control over how its money is spent under such programs, the result will likely be just more embezzlement and waste.
When its poorly thought-out social programs lead to popular discontent, the ruling bureaucracy will shift the blame onto business -- specifically those businesses that do not enjoy cosy relations with the authorities. In addition, the government's show of strength in attacking individual oligarchs has been taken by siloviki and bureaucrats in the regions as a signal to launch an all-out attack on business and as permission to step up extortion.
Given the general enmity toward the oligarchs, even the threat of a new attack on them sends a shiver throughout the business community because it heralds a worsening of the overall business climate.
All of this has produced a great deal of uncertainty regarding the future of Russian business. It was hoped that the government of Mikhail Fradkov would be an improvement on that of his predecessor, Mikhail Kasyanov. But it has proven to be an alarming nonentity. In response, the stock market tripped over its own feet.
One thing seems clear: The war against the oligarchs -- entrepreneurs whose incomes depend on their control of the state -- should not be allowed to turn into a war against business as such. This should be a war aimed at improving the health of business, transforming the old oligarchs into honest businessmen and removing the new oligarchs among the siloviki and bureaucrats from public service.
Otherwise, the war against the oligarchs will develop into a war against Russian society as a whole. And as the stock market taught us in the second half of April, wars like that are not won.