How to Protect Russia From U.S. Contagion

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U.S. Secretary of State Condoleezza Rice gave a bizarre speech last week in which she warned that Russia's policies are pushing the country into international isolation. She got it exactly backward. This is precisely the Russian government's plan. I am talking about the country's financial markets.

Russian leaders are taking sweeping measures to insulate the economy from the financial contagion that is now sucking the United States into an economic black hole.

"They have set us all up!" President Dmitry Medvedev said recently, summing up the Kremlin's mood toward Washington's disastrous economic policies that led to the buildup of dangerous market bubbles -- from housing prices to credit swaps and other under-collateralized securities.

With the subprime debacle now destroying venerable American financial institutions, the U.S. government has resorted to socialist policies by nationalizing banks and the country's largest insurance company.

With speculative foreign money making up almost 70 percent of the Russian stock market, the value of its stocks plunged by almost 40 percent in one week, leading to a confidence crisis among financial institutions. All of a sudden Russia was facing a financial meltdown -- not of its own making -- that was threatening to wipe out the country's impressive economic gains of the past 10 years.

Medvedev and Prime Minister Vladimir Putin reacted in ways that signal a fundamental shift. The government is now seeking to reduce the stock market's dependence on foreign portfolio investors and to attract more long-term investment from Russia's institutional investors, including the National Welfare Fund.

The decision to invest up to 250 billion rubles of government money into Russian stocks is a breakthrough that ends years of financial orthodoxy while making a lot of business sense, with some of the best Russian companies now valued at laughable price-to-earnings ratios. This is not government spending but a very lucrative investment. Some market analysts are projecting the RTS Index to hit from 7,000 to 8,000 points a few years from now, according to UFG Asset Management CEO Andrei Podoinitsyn.

The government is also trying to encourage long-term private investment from Russians by making capital gains tax-free. This is extremely important to create tax-deductible private pension plans to modernize the country's pension system.

This will make the economy less reliant on foreign speculative investment and boost long-term investment by Russian individuals and institutions, making growth more sustainable and insulated from the U.S. contagion.

Vladimir Frolov is president of LEFF Group, a government relations and PR company.