Too Connected to Fail

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Russia has allocated 3 trillion rubles ($127.7 billion) to support the country's financial markets. During one Cabinet meeting on Sept. 18, the government decided to buy shares in Sberbank, VTB and Rosneft to the tune of 500 billion rubles ($21.3 billion).

I am not sure what the Kremlin means by "state support for the stock market." It's also not clear how this type of support is fundamentally different from insider trading, a financial crime that in other countries is punishable by lengthy prison terms.

In the United States, the government chose not to support Lehman Brothers but opted to bail out AIG with a $85 billion loan. Russia adopted similar measures, bailing out KIT Finance and Svyaz Bank when state-controlled Gazprombank and VEB bought out their shares.

But there is no similarity between AIG and Fannie Mae on the one hand, and KIT Finance and Svyaz Bank on the other. If the former were indeed "too big to fail" since they were supporting pillars of the U.S. economy, the latter played no significant role in Russia's economy.

Speculation is swirling that these two banks have links to high-ranking officials -- KIT Finance to Finance Minister Alexei Kudrin and Svyaz Bank to former IT and Communications Minister Leonid Reiman -- and this may be the reason why the Kremlin has shown so much concern for them.

Unlike in the United States, the Russian stock market was not infected with high-risk derivatives, such as credit-default swaps, nor did it suffer from a mortgage meltdown.

Therefore, Russia had every opportunity to survive the global financial crisis with only minimal losses -- if only Prime Minister Vladimir Putin's had not meddled so much in the economy. Putin's promise to "send a doctor" to the owner of the Mechel coal and steel company cost the Russian stock market nearly $60 billion. Moreover, following Russia's war with Georgia, foreign investors closed their positions and fled the country in panic.

To make matters worse, the securities held by numerous Russian speculators came due: They received margin calls that forced them to sell their shares at any price.

Throughout this period, the Kremlin was completely oblivious to these problems. "Those are just speculators," our leaders quipped. "Who needs them anyway? The market will rebound." In an apparent attempt to calm nerves, President Dmitry Medvedev told Russians not to fear the outbreak of a new Cold War, and some newspapers ran stories blaming the stock market's falls on another Western conspiracy against Russia.

Then businessmen with close Kremlin ties got a rude awakening. When the banks that they held in their back pockets were in danger of failing, the government decided that enough was enough. Media reports about a foreign conspiracy immediately stopped, Medvedev said he did not want another Cold War, and the government began speaking openly of a financial crisis.

Until recently, there were a lot of foreign investors in the Russian stock market, but most of them have now run for the hills. The market also attracted minor Russian players, but most of them went bust. But when things turned bad for high-ranking officials, the government decided to bail out their companies with help from the Central Bank. In the end, the lucky bureaucrats saved their shirts by loading off their shares on the government.

Have you ever wondered what "government support for the stock market" actually looks like? Here's how it works. A government official owns an offshore company. That company has shares. The state buys those shares, sending the money offshore.

The Kremlin calls these machinations government support for a functioning stock market. I call it money laundering.

Yulia Latynina hosts a political talk show on Ekho Moskvy radio.