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. Last Updated: 07/27/2016

The Weak Link

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The web site of the St. Petersburg International Economic Forum proclaims, without any false modesty, that the city will be the world's economic capital from June 8 to June 10.

With growing frequency and a waning sense of reality, Russian leaders have been demanding that it be accorded its proper place in the global pecking order -- as a military power, a historic victor over Nazism, an energy superpower, a hockey powerhouse and even a cradle of democracy. That St. Petersburg has merely assumed the title of economic capital of the world should not be a big surprise.

In fact, it wouldn't have even deserved mention, had not Russia been turning into exactly the opposite -- a weak link in the global financial system. Although Russia's economy has very different underpinnings from that of mainland China, the Moscow stock market has been quick to follow -- and even exceed -- the recent dramatic ups and downs of the Shanghai and Shenzhen bourses.

Even though the bull market in global equities continues, it is starting to fray around its most vulnerable fringes. Russia, along with Turkey and other exotic markets, is starting to feel investor jitters. The dollar-based RTS index in Moscow -- although it set a record above 2,000 this year -- has actually been range-bound and has now declined by nearly 10 percent from its early-April peaks.

Being a weak link is nothing new for Russia over the past century. In 1905, it became the first European power to take a licking from an Asian nation when it lost a naval war to Japan. During World War I, Russia suffered the most calamitous social, political and economic collapse of all the warring parties. It was the first to blink in the Cold War, too.

It suffered an economic crash in 1998, and its default and devaluation triggered a chain reaction that nearly brought down the world financial system. Back then, however, Russia was not a weak link. It actually held out for a year after the onset of the Asian financial crisis. Moreover, Russia's subsequent recovery was remarkably swift, taking most observers by surprise.

This occurred because by the late 1990s, Russia had become largely integrated into the global economy . This fact is often ignored by modern Russian politicians and official economists, who tend to dismiss the Yeltsin era as a period of asset theft by money-hungry oligarchs -- and who are usually well represented at the St. Petersburg forum.

Integration into the world economy was a painful process, which required a root-and-branch restructuring of the vicious-cycle Soviet economy that used all the coal and iron ore it mined to build machines to mine more coal and iron ore. It also entailed bringing the ruble down to its market value -- which took the exchange rate from 90 kopeks per dollar to over 6,000 old rubles over the 10-year period ending in 1998.

There is no question that record prices for oil, gas and other commodities have provided Russia's current wealth. But Russia earned plenty of hard currency in the early 1980s too. Integration into the world economy explains the difference in the level of prosperity then and now and the wide availability of food and consumer goods.

Russia has now begun to extricate itself from the world economy once more, and this alarming process is accelerating and broadening. Its political and economic system, instead of becoming more institutional and predictable, are growing more "voluntarist"-- as Soviet leader Nikita Khrushchev's style of government was labeled after his ouster. President Vladimir Putin is becoming more and more pivotal in making managerial decisions, and his statements and deeds appear increasingly erratic.

Clandestinely or not, most rich Russian entrepreneurs and bureaucrats hold foreign passports or residency permits and have family members residing abroad. Is it hard to understand why investors with money in Russian financial markets are starting to put one foot on the sidelines as well?

Alexei Bayer, a native Muscovite, is a New York-based economist.