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 the European Union and the United States would apply Cold War-type
sanctions to punish Russia’s invasion of 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.
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 US and EU can do because Russia will continue to be the main
supplier of Europe’s natural gas.
Economists refer to modern
bank runs as “capital flight,” because, electronically, billions of depositors' dollars
can be withdrawn via the internet in microseconds.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.
However, Russia should not fear sanctions or need an IMF bail-out because
it is the world’s largest producer of oil and the second largest producer of
natural gas. It sells largely to Europe,
which buys 30% (5.5 tcf) of the 19 trillion cubic feet (tcf) of gas 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 its current production of natural gas. 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, and the US would provide much of the technology.
Germany was so confident of its future economic relationship with Russia and Gazprom that it announced plans on May
2011 to abandon 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 its existing plants and has started the shut-down
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 a 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 US 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 Europe 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 @ firstname.lastname@example.org. Chriss Street is teaching microeconomics 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