MICEX Chief Sees Similarities to 1929

The 67 percent decline in Russian equities this year resembles the U.S. stock market crash of 1929 because of the damaging effect of highly leveraged investors, MICEX chief executive Alexei Rybnikov said Wednesday.

Russian stocks have suffered three days of declines greater than 14 percent in the last month, spurred in part by leveraged investors reducing their holdings after margin calls from their brokers. Speculators making bets with borrowed money also contributed to the 1929 U.S. stock market crash.

"It's pretty much the same thing," Rybnikov said. Besides the level of leverage of domestic and foreign investors, Rybnikov cited the lack of long-term money from institutions and the absence of government pension reform as contributing to the market collapse.

"We don't have any long-term money here," he said. "We need to sit down and think about what we need to do long term to make the Russian financial system more stable."

Following the collapse of 1929, Regulation T required U.S. investors to purchase stock only when the amount of equity in their accounts made up 50 percent of the purchase price.

The Federal Service for Financial Markets on Sept. 26 increased the level of equity required for stock purchases to 50 percent from the previous 25 percent.

Falling stock prices can lead investors to exceed the amount of margin borrowing allowed under regulations, leading to a call from their brokers to deposit more equity or sell shares, which can drive prices down further.

Regulators shut the MICEX stock exchange for the rest of the day as well as Thursday after the 30-stock MICEX Index dropped 14 percent. The ruble-denominated index is down 67 percent from its May high.