Russian rout

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Russia’s government has set about trying to reverse the tidal flow out of Russian markets in the way it knows best: ordering people to do something about it and suggesting it might throw money at the problem.

Dmitry Medvedev, the Russian president, instructed authorities to “undertake all necessary measures to ensure inflows” into financial markets, and Russia might use money from its national wealth fund to support them. That all this failed to prevent the two Moscow stock indices falling further on Thursday suggests a Canute result.

Put aside Georgia, TNK-BP and Vladimir Putin’s verbal mugging of Mechel and there were already good reasons why Russia’s market started falling in May, long before the tanks trundled through the Roki tunnel. Those are the recovering dollar – forcing closure of long rouble positions – and falling prices of oil and commodities. Those factors are still in play, but have come together with a big – and justified – leap in political risk perceptions to turn an orderly retreat into a rout.

Russia’s market, priced at 6.5 times historical earnings, looks cheap, but fundamentals have been trampled underfoot. Investors are unlikely to be tempted back until they have a clearer idea where oil prices and the dollar are going – quite apart from any easing of diplomatic tensions. The Kremlin is under pressure from Russian tycoons, also being squeezed by liquidity problems, to use its oil wealth to support the market.

But it risks foreign investors using any rally as an opportunity to take profits. The Russian leadership, moreover, has resisted pressure to make more populist use of national wealth fund money to raise pensions and public sector pay or build roads. With little retail investment in stocks, pouring funds into what ordinary Russians perceive as the playground of oligarchs and speculators carries political dangers. too.

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