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Monday, July 28, 2008

Russia's Stock Market in Freefall

(click image to enlarge)

The Russian stock market lost nearly 6% of its value last Friday as a rabid, frothing Vladimir Putin launched another one of his crazy Stalin-like diatribes against Russia's "enemies" -- this time Russian steel maker Mechel (whose shares lost nearly half their value).

An editorial in the Times of London:

Russian stocks are in freefall, spooked by threats of anti-trust inquiries by Vladimir Putin, the Prime Minister, falling oil prices and the chicanery over TNK-BP. Foreign investors have been patient optimists, preferring to turn a blind eye to the mounting chaos in Moscow while keeping a steady gaze on commodity price indices. Yesterday, they lost their bottle and began to sell - and the selling may continue. It is a reminder that reputations built over several years can be lost in a day.

The irony is that among those who will suffer badly from the sell-off are three individuals whose activities provoked a major cause of the loss of confidence: Mikhail Fridman, Len Blavatnik and Viktor Vekselberg. Their successful effort to evict Bob Dudley, the BP-nominated head of TNK-BP, has undermined a bull run fuelled by petrodollars and little else. It is important to understand that the three oligarchs are looking for a profitable exit - they want their money offshore. They have clamoured for bigger dividends from TNK-BP. A Eurobond prospectus issued by Renova, the holding company for Mr Vekselberg's assets, said that the group would seek to diversify away from Russia and from its oil and metal assets. Cash from TNK-BP, some $18 billion over five years, has flown out of Russia. Mr Blavatnik has built a chemical empire in Europe and America, buying Basell, the world's biggest olefins business, from Shell and BASF. Mr Vekselberg has taken over Swiss engineering firms.

Investors in Russia should not forget the cash cow was a political gift. Tyumen Oil, the TNK half of the joint venture, was sold by President Yeltsin to his friends for a song, some $800 million in 1997. It has since been spitting out dollars at a fantastic rate, funding not just investment outside Russia but providing respectability and adulation in high places. Mr Blavatnik is on the Board of Dean's Advisers at Harvard Business School. Mr Fridman is on the advisory board of the Council on Foreign Relations, a US think-tank.

For years, the notion of oligarchs as loveable rogues has held sway, akin to America's early robber baron capitalists. However, the latter built their businesses from scratch - Rockefeller created Standard Oil. Tyumen Oil was an outrageous gift and as the RTS stock index tumbles, one wonders when these not very loveable men will return the favour.

EllliotWave International adds the following (including the chart above):

If Russia’s RTX Index is in a bear market, as Bloomberg reported today, then what’s next for the nation itself? Worrisome headlines about Russia in the past few weeks are sending clear signals that Russia’s collective social mood is worsening. But without the proper perspective, you don’t know how much importance to give those signals. Our study of socionomics – the new science that explores how changes in social mood affect financial markets and society -- shows that large trend changes in social mood are signaled long before the turning point, first by stock markets, and only later by headlines.

[Last week], the Russian RTSI Index took its biggest hit since January 21. It is now down almost 22% from its May 19 high. The surly social mood is steadily worsening, much as we predicted in our November 2007 Global Market Perspective Special Report, Sizing up a Superpower: A Socionomic Study of Russia. The report begins like this: “Our long-term Elliott wave count for the Russian stock market indicates that a major top is imminent.”

[The chart above] shows the 22% decline from the May 19 peak. And we’ve also gathered some July headlines and quotes about Russia that reflect the deterioration in Russian social mood. Take a look at these stories and get a sense of the feelings they express -- fear, belligerence and xenophobia, for example – as negative social mood accelerates.

  • Russia needs bombers in Cuba due to NATO expansion July 21 (RIA Novosti) “The possible deployment of Russian strategic bombers in Cuba may be an effective response to the placement of NATO bases near Russia's borders, a former Air Force commander said on Monday.”

  • BP says 60 staff leaving Russia July 22 (AFP)“British energy giant BP said Tuesday it had recalled all 148 staff sent to Russia to work for its TNK-BP venture amid ongoing Russian attempts to end foreign control of major energy assets. The crisis is a major problem for BP ….executives have warned the row is tearing the multi-billion dollar company apart.”

  • Moscow must answer U.S. shield with Cuban 'spy' site July 23 (RIA Novosti)“‘Cuba is a unique place to gather intelligence on the United States….amid the threat that the Americans are creating for Russia,’ Alexander Pikayev, head of the disarmament and conflict resolution department at the Russian Academy of Sciences' World Economics and International Relations Institute, told a news conference….”

  • Russia and Venezuela in deal to counter 'US aggression' July 23 (UK Telegraph)“Hugo Chavez first signed off on a deal giving Russia's state-owned energy companies …. exclusive rights to develop new deposits in Venezuela's Orinoco Oil Belt.Then he [called] for the Russian rouble to replace the US dollar as the world's global currency.”

  • Russia 'could answer U.S. shield with orbital ballistic missiles' July 24 (RIA Novosti)“Russia strongly opposes the possible deployment of the U.S. missile shield [in the Czech republic], viewing it as a threat to its national security. 'A program could be implemented to create orbital ballistic missiles capable of reaching U.S. territory via the South Pole, skirting U.S. air defense bases,' said [a] former chief of staff of the Russian Strategic Missile Forces…”

  • Russia opens trial of skinhead gang for 20 murders July 24 (Reuters) “[Gang] members are charged with murdering 20 people in racist attacks… The accused video-taped their attacks… and posted them in the Internet. Attacks on foreigners and darker-skinned migrant workers from ex-Soviet republics have become commonplace in today's Russia, where Jewish cemeteries and synagogues are often desecrated by neo-Nazi vandals. Swastika graffiti can be seen across Russia.”

  • Russia Stocks Plunge After Putin Rebuke Destroys `Safe Haven' July 25 (Bloomberg) “Putin's censure of Mechel [one of Russia’s leading mining and metals companies] combined with falling oil prices, has 'finished' Russia's reputation among some investors as a 'safe haven' in the global equity market this year'…" [Ed note: the RTSI fell over 17% before the Putin rebuke.]
The June issue of Global Market Perspective showed important trend line support in a chart of the RTSI and said “The trend is up… unless trend line support breaks.” That trend line was broken [last week]. And one last headline, an apt metaphor for the upcoming crisis, appeared on July 23. Don’t let this happen to you: Starving bears eat 2 men in Russia July 23(AP)“A pack of enormous bears searching for food killed and ate two men at mines in Russia's Pacific Kamchatka region and have kept hundreds of geologists and miners from reaching the mine…”

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