But there are intriguing signs in Russia that those whose jobs and markets and investments are most integrated with Europe and the global economy are starting to count the cost of Vladimir Putin, the former Russian president who is now prime minister but who still seems to rule the Kremlin. The costs to Russian democracy and its chances of joining the World Trade Organization are already unpleasantly clear. The costs in cash and in Russia's economic prospects are still being reckoned.
Russian officials have sought to explain away the $16.4 billion outflow in foreign reserves in the week of the invasion of Georgia and also the 32 percent drop in Moscow's stock market since Putin began expressing his displeasure with the Mechel coal group in May. Mechel shares alone lost $8 billion after Putin's first remarks. Finance Minister Alexei Kudrin claimed Friday that the outflows had stopped.
But Russian debt and equity markets also have gone into decline since the conflict with Georgia began Aug. 8, with yields on domestic ruble bonds increasing by up to 150 basis points over the last month. That is the equivalent of a 1.5-point jump in interest rates, the kind of panic measure that few central banks would risk taking except in extreme circumstances.
The pace of capital flight from Russia has been the highest since the 1998 collapse of the ruble, when Russia defaulted, and the amount of cash leaving the country in the second week of August was the highest on record.
There is still plenty of cash left. Russia's central bank, which reported the $16.5 billion decline last week, still reckons to have $581 billion in reserves, money being stored away for the rainy day when the oil runs out and the gas flow starts to falter. This may come somewhat sooner than many think.
Kudrin also noted last week that the decline in oil prices could force Russia to start spending its savings, known as the Reserve Fund, in 2015 because "oil and gas revenues will be insufficient."
Kudrin spoke after the Cabinet approved the draft federal budget for the next three years, which assumes that Russia's main oil blend, Urals, will sell for at least $95 a barrel. (The current price is $112, but the Russian government's own budget estimates suggest that the oil price is expected to drop to $90 in 2010 and $88 in 2011.)
Industry and Trade Minister Viktor Khristenko warned publicly this year that "the output level we have today is a plateau, or stagnation," and Leonid Fedun, vice president of LUKoil, is on record declaring, "Russian oil production has peaked and may never return to current levels."
At current rates of extraction combined with rising national consumption, Russia's known oil reserves will start to run out in the 2020s, and a lack of investment in maintenance and development means the two main gas fields expected to maintain Russia's export income are falling ominously behind schedule.
The largest, Yamal, is supposed to start producing next year, according to Gazprom, but construction in the forbidding permafrost environment of Siberia has barely begun. The offshore Shtokman field in the forbidding arctic waters is supposed to start producing gas in 2014, but this will depend on foreign investment and expertise. Gazprom's share price dropped sharply this week when Gazprom announced it would have to increase its $40 billion investment budget.
The readiness of foreign investors to take risks in Russia has been jeopardized by the experience of BP, whose own stake in Siberian oil is threatened by a combination of Russian oligarchs and state officials who have blocked working permits for BP executives.
Russia's private sector is getting nervous, after Putin noted at Thursday's Cabinet meeting that the government should "prepare for any eventuality, even negative." Alfa-Bank reported it expects Russia's economy to slow in the second half of the year because of higher borrowing rates after the military intervention in Georgia and a decline in the construction industry. InterBank lending rates have jumped as high as 10 percent.
President Dmitry Medvedev faces pressure from business leaders at next month's annual "summit of oligarchs" with business leaders, already nervous that the global credit crunch is hitting Russia. Vladimir Potanin, head of the giant Interros industrial conglomerate, already has raised the lack of long-term credit with Medvedev, the financial paper Vedomosti reported last week.
"The market is vulnerable to foreign capital flight," warned investment bank Troika Dialogue. "The major Achilles heel of the Russian market is that there is very little domestic long-term capital."
"The conflict with Georgia and the nervousness created by the government's criticism of Mechel have substantially damaged the economic outlook," Alfa's chief economist, Natalya Orlova, wrote in a note to investors. Russia's banking sector already is suffering from a liquidity shortage, with about $45 billion in tax payments looming in October, Orlova added.
"The flight from the ruble, which occurred at the beginning of the conflict with Georgia, damaged local liquidity," she said, adding that unless capital inflows resume next month, the central bank could have to lower banks' mandatory reserve requirements for lenders.
So far there is little sign that market sentiment is likely to restrain the Kremlin's foreign policy, where the siloviki, veterans like Putin of the old Soviet Union's intelligence agencies and security establishment, hold sway. But the Russian economy is still massively dependent on its oil and gas exports and the prosperity and foreign investment they have brought. By risking that, Putin and the siloviki are risking everything. The cost of Putin could turn out to be very high indeed. In the long run, it may do more to restrain Russian behavior toward its neighbors than any number of EU summits.
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