As the impact of the financial storm in the US sinks in, there may be some surprising losers. Not so much the "masters of the Universe", since they know full well that with high rewards come high risks, but some who arrogantly believed themselves immune to the storms of the financial markets.
Six weeks ago, Russia was basking in the warm economic climes caused by a massive surge in the price of oil and other commodities. Though their balance sheet was relatively small, they believed that the biggest problem that they had to face was the inflationary risks of so much money coming into their economy. The liquid reserves would allow them to weather any storm.
Since then we have seen the BP TNK mess underline the real risks that even one of the largest and most powerful global corporations face when dealing with the crooked and opaque business world of the Silovik state. We have seen aggressive comments by Vladimir Putin about the running of Mechel undermine confidence still further.
Then came Georgia.
The contempt for international law and the extent of Russian aggression and the extremely intemperate language of the Siloviki was the political last straw for the international system. The US has now marked Russia ans a potential threat and will no longer deal with it except on those terms. The European Union, aware that the Russians are apt to use gas supply as a weapon has not put forward overt sanctions, but has also concluded that Putin is not a man that we could really do business with.
However, the economic impact of the Russian attack is now set to be felt in full.
The international markets, facing serious problems across the board is not willing even to look at Russia unless a major risk premium is applied. In some cases the markets will not supply capital at any price. The market for second-tier Russian banks is closed. This is a problem, since several of them are now urgently seeking capital. It seems likely that there will be Russian banks that will be caught up in the current financial crisis, and several secondary banks will not survive.
Meanwhile the price of oil has unexpectedly fallen very sharply, as I write, Brent Spot is down to $ 87. Though Russia is still making money at that level, the revenues to the Russian treasury will be sharply reduced, and as the global slow down continues, there seems little chance that the oil price can make a dramatic recovery.
Russia is politically isolated, but the market impact of Russian aggression is already much more serious. Already at least $8 billion of reserves have been needed to deal with the market volatility, and as further international investors try to get their money out of Russia the market rout grows ever deeper. The exchanges are down about 40% since the summer and the interbank markets are reaching levels not seen for four years.
There is a price for Russian risk, but, investors have concluded, it is not this price.
As Putin and Medvedev continue with another bout of willy waving: defiant in the face of near universal condemnation of their actions, they do not seem to notice that they are increasingly naked to the markets. At a time when there is a flight to quality, an unstable, corrupt, opaque and potentially hostile power is not the place that international investors want to be- and some of them will sell at any price, just to get out.
Though the Siloviks believe that their reserves can be used to insulate themselves from these problems, the fact is that they risk their credit rating if they do this. The blustering and arrogant Siloviki are caught between a rock and the hard markets. Politically the Siloviks may have got off lightly, but the markets seem set to punish the Russian regime to the maximum extent.
A secondary banking collapse in Russia might remind even the Siloviki that it is better to be polite, even to those you consider your enemies, because you might just need their help one day. In the end sending the Peter the Great to Venezuela will look like the act of hubris that it is- and the blustering of the Siloviks may diminish to the point where they have to face some hard realities.
Turmoil in New York may lead to real crisis in Moscow.
UPDATE: Trading in Moscow was suspended this afternoon after a further 18% fall.