Investors Pull Funds from Russia

When the reserves of a nation’s central bank fall, it’s a sign that the markets are getting nervous and investors/speculators are putting their funds elsewhere. After Russia’s lopsided military engagement with Georgia, Russia’s central bank reserves dropped $16.4 billion to $581.1 billion. This seems to be the biggest drop according to the Financial Times “since comparable figures began” in 1998.

The latest figures released are for the week ended August 15, the day Georgian President Mikhail Saakashvili signed the EU-brokered cease-fire deal. Thus, the figure reflects the worst of the fighting and the greatest of investors’ fears. However, there isn’t going to be a flood of money headed back that direction just yet. As Justin Urquhart Stewart, investment director at Seven Investment Management, put it to the BBC, “Investors are realising that the bear has put its paw on the pipeline, and geopolitical risk is likely to remain a theme for the next month or so.”

Indeed, there are a few developments since August 15 that make one think the Russian Central Bank will see reserves fall farther. The US-Polish deal on missile defense is the most obvious. Moreover, the BBC notes, “Both houses of Russia's parliament have urged the president to recognise the independence of Georgia's breakaway regions of Abkhazia and South Ossetia.” If President Dmitry Medvedev does this (although he isn’t legally bound to do so), all bets are off. That the votes in each house were unanimous suggests the Russian government and people are of a single mind on this.

At the same time, former Yukos boss Mikhail Khodorkovsky, has had his appeal for parole refused. Igor Faliliyev, the judge in the case, said as he refused the application, “Since the prisoner Khodorkovsky had no connection with the professional educational program offered him in detention, he does not deserve conditional early release.” Convicted of fraud and embezzlement in 2005, he’s already done 5 of his 8 years including time held before his trial. This leads one to believe that Mr. Medvedev’s presidency isn’t very far removed from Mr. Putin’s when it comes to oligarchs who get too big for their boots.

Taken as a whole, then, the situation in Georgia and the region around it is calmer but not any more settled. Investors are going to keep their money out of Russia for a while. However, the Russians have sufficient reserves and enough oil and gas income that they don’t need to care. And they won’t.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

Kensington Review Home