Russia Is Slammed Hard by Credit Crisis

Stock market volatility leads to frequent trading halts as foreign investors bail out.


At the other end of the economic spectrum, Tatyana, a well-educated Moscow pensioner who didn't want to give her surname because she is ashamed of her circumstances, says that she's immune from the crisis because she has no investments. "I didn't have anything and I don't have anything, so I haven't lost anything," she says. At any rate, her 6,475 ruble ($250) monthly pension buys less and less because of Russia's galloping inflation rate, which the IMF predicts could rise to about 14 percent this year.

Russia's nascent middle class of about 30 million people is particularly vulnerable, says Tatyana Maleva of the Institute of Social and Economic Studies of Population in Moscow. If the crisis spreads from the financial sector and affects the rest of the economy, their savings, investments, and pension plans could be affected.

Some analysts are drawing comparisons with Russia's 1998 financial crisis, when falling oil prices and shockwaves from the Asian financial crash caused the ruble to collapse. The trauma is still remembered vividly here.

Still, there's reason for optimism, says David Aserkoff, chief strategist at Renaissance Capital, a Moscow investment bank. "In 1998, oil was $10 per barrel; now it's $80," he says. "Then Russia was running a significant current account deficit, and it has a current account surplus now."

Russia has over a half-trillion dollars of currency reserves to cushion its financial system. Indeed, it is Russia, not European nations or the United States, that is in negotiations to provide Iceland with a $5.4 billion loan to shore up its ailing economy.

The crisis has some pondering whether Russia's financial system, which came into being through rapid liberalization and deregulation after the 1991 Soviet collapse, is in need of a dramatic overhaul.

Asks Maleva: "Do we build the Russian economy on the basis of a system that has been shown not to work, that has led to a crash in the West? Or should we choose a different model?"