Kremlin Aid Will Make A Bad Situation Worse

President Dmitry Medvedev likes to blame Russia's stock market troubles on the global financial crisis that was triggered by the U.S. housing market bust, while critics of Medvedev and Prime Minister Vladimir Putin see it as the result of the government's mistakes.

The truth lies somewhere in the middle, but probably closer to Medvedev's position. Developing markets fluctuate in unison, so most of Russia's losses can be attributed to investors' jitters over the worsening global crisis. But the MSCI Emerging Markets Index, which tracks stock markets in developing economies, fell by just 20 percent since May, while Russia's stock market dropped by more than 40 percent. This suggests that Russia's leadership played a significant role in the stock market decline.

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Three major government missteps that contributed to the stock market woes this summer can be singled out: Putin's and Medvedev's decision not to interfere when government agencies applied pressure to BP in the TNK-BP affair; the harsh words by Putin against Mechel; and the escalation of the Cold War rhetoric following the conflict with Georgia.

Two government proposals were announced last week for supporting the country's stock market. In the first, money from the National Welfare Fund would be invested in the stock market. The second calls for the Central Bank to extend credit to banks. But the idea of using state funds to buoy the market is fraught with dangers. If the stock market's drop is connected with a global trend, pumping state funds into a sinking market means we would be using taxpayers' money to pay a nice bonus to scared investors who are eager to exit the Russian market.

The one advantage to supporting the equities market with the help of the Central Bank is that at least the money would be given as credit, and not as a gift from taxpayers' pockets. But this approach is even more dangerous than the previous one. This is because when banks invest in the equities market, their asset portfolios are exposed to greater risk.

It seems that the Central Bank wants to keep all Russian banks solvent, even those that have high default rates in their consumer credit portfolios. This could mean that taxpayer money will be used to cover the increased risk. Yet the main danger in the Central Bank supporting the equities market is that it would strip the bank of the independence that is so necessary to fulfill its primary function -- curbing inflation.

Maybe, for the lack of a better option, the government should just leave the stock market alone for a while.

Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for Vedomosti.