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Russia's Economic Chernobyl


Effects of US fallout reach Moscow.

The tiny ripples from a butterfly's wings can alter the course of a tornado on the other side of the globe. But when the butterfly is actually the collapse of America's largest financial institutions, a tornado doesn't even begin to describe the potential global fallout.

After the collapse of Lehman Brothers (LEH) and the sale of Merrill Lynch (MER) to Bank of America (BAC), Russia felt the butterfly effect in full force. Its primary stock indexes, MICEX and RTS, plunged to 11.47% and 17.45%, respectively. The RTS fell to 1131.1 points, a loss of nearly $80 billion from the market value of the country's top companies.

Fearing a repeat of 1998's economic crisis, during which Russia saw the devaluation of the ruble as well as extensive bank failure, regulators were quick to respond. Trade on both exchanges was temporarily halted as of noon Tuesday. When trading resumed on the MICEX, it slumped another 190 points.

Russia's top banks -- Gazprombank, Sberbank and VTB -- were hit particularly hard. To stop the bleeding, Russia's finance ministry said it would loan the banks federal funds for a minimum of three months. Prime Minister Vladimir Putin remained optimistic about containing the fallout.

"I have no doubt that the 'safety cushions' that have been created in the Russian economy over the past few years will do their job," Putin said during a meeting with the Azerbaijani president. "We are studying the possibility of using long-term instruments by the Central Bank [and] will act carefully and judiciously."

Russian markets declined faster than other global economies as a result of US fallout, according to The Moscow Times. Analysts attribute the market's speedy freefall to "frayed investor nerves after the recent conflict with Georgia and the economy's heavy reliance on commodities."

For more on the Russian economy, check out Hoofy and Boo's always astute report.

No positions in stocks mentioned.

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