Tuesday, August 19, 2008

Russian capital markets down

The amount of foreign investment flowing into Russia's capital market is expected to be down almost 23% from the level in the first half of 2007. Observers see several causes. One is poor conditions in global financial markets. The second is investor unease following recent attacks on a British Petroleum joint venture and on Mechel, a huge Russian metals company. The third is Russia's invasion of Georgia.

As one sign of the times, Soros Fund Management has dumped virtually all its Russian securities. Ten years ago, high-profile investor George Soros' lack of confidence in the Russian financial market contributed to its collapse, which in turn caused great economic turmoil and hardship in Russia. Then the Russian government was broke; now it is sitting on a huge surplus from oil and gas revenues. While this money is a tremendous cushion, it is also true that surpluses can evaporate faster than expected, particularly during a military campaign.

It will be interesting to see if declining foreign investment flows make the Russian government more cautious, or if Western governments seek to exploit this situation. Analyst Paul Goble suggests that Western political moves to isolate Russia could further decrease inflows.

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