Russian equity flight, already hit hard by declines in world energy and commodity prices and done no favors by the Kremlin’s decision to invade Georgia last month, spirals further downwards at an ever faster pace.

Two main stock indices reflect the Russian equity flight

The two main indices, the RTS and the MICEX, continue the steep descent that they had begun after May 19, well before the invasion (see Georgian invasion makes Russian downturn worse, August 22). This plunge has even accelerated. For each index, the rate of decline from mid-May until the present is now greater than the rate of decline from mid-May up until the invasion almost five weeks ago. Given that we are talking about a sustained period of nearly four months, this is almost a phenomenal statistic.

In the first fortnight after the invasion, the RTS’s rate of decline, by comparison with mid-May as the base and up until August 7, itself declined by a third from 2.3% to 1.4% per week while that of the MICEX increased by half from 2.2% to 3.3%.

However, during the second fortnight (actually two-and-a-half weeks) since August 7, the rate of decline has accelerated to 6.5% per week for the RTS and 4.8% per week for the MICEX, bringing the average rate of decline for the whole period since mid-May (computed arithmetically, not exponentially) to 2.5% per week for the former and 2.4% for the latter. Since May 19, the RTS and MICEX have respectively lost 40.8% and 39.4% of their value.

In absolute terms, those figures represent the September 9 closes at 1,395 for the RTS and 1,158 for the MICEX, crashing through the lowest supports of the trading ranges I identified on August 22, respectively at the 1,800 level and in the high 1,400s. The RTS is now at a level not seen since June 2006, and the MICEX since January 2006 (with the exception of the latter’s one-day spike down on June 13, 2006, from which it recovered almost entirely the next day and thereafter continued rising, never looking back).

The Russian equity flight in global perspective

The ongoing rout in world energy and commodities accounts for only a part of this. By comparison with the other most resource-rich country in the Group of Eight (G-8) leading industrialized countries, Canada’s S&P/TSX index, which also reached an all-time high in mid-May, is down only 18% during the same period, even with its relative overweight in the hard-hit financial sector. In Australia, not a G-8 member but still resource-rich and with a recently weakened national currency, the All Ordinaries index is down only 23% since its high in November 2007.

Again Russia has shown that its economy and finance have more in common with “BRIC” countries Brazil and China than with the other G-8 members. Brazil’s Bovespa approaches the magnitude of losses in Russia, down 34.1% since its own all-time high also in mid-May. But India’s BSE Sensex 30 is down only 27.8% since its all-time high in early January of this year, not much different from Australia.

Yet losses in the Russian equity market are exceeded only in China, which has been declining over twice as long. The benchmark Shanghai Stock Exchange Composite (SSEC) is down 64.8% since its all-time high in mid-October 2007. However, the SSEC has finally collapsed to the 2,100-2,200 range where it is very tentatively finding some support, having oscillated around that level for over a year at the beginning of the decade.

The RTS has in the past three weeks crashed through a support in the mid-1,500s first established in February 2006 and then confirmed three times since then but only most recently in the early autumn of the same year. Two more supports from same year, really so minor that they almost do not deserve mention, may be detected at its present level and around 1,270. In early October 2005, there is an equally minor support at 1,050. The only level that looks like giving a substantial backstop is a band in the high 600s ranging up to the low 700s.

Outlook for the Russian equity flight downwards

Is it really possible for the RTS to fall that low? Russians have a saying, usually referring to bizarre and unexpected events and encounters, used in Andrei Tarkovsky’s epic 1966 movie Andrei Rublev. Tarkovsky shows the 15th-century iconographer bearing that name giving a guided tour of his work to the victorious Tatar barbarian on horseback inside the church where Rublev is painting at the time. On being told the identities of the figures portrayed on one particular icon, the Tatar replies, “A virgin with a son? In Russia anything is possible!”

So could the RTS fall to 700? In Russia anything is possible. But the crash of the late 1990s shows it is no joking matter. The ruble-denominated MICEX has already burst downward through all of its supports at levels analogous to the RTS chart that I have just pointed out. Its one-day spike in mid-June 2006 that I mentioned earlier thrust down to the high 1,100s, not so far from where the index is now, and with no subsequent movement to indicate that that this local minimum really signified anything; moreover, also as noted above, the move was not confirmed by the RTS. The RTS’s minor support at 1,050 (off 57.5% from the all-time high) is represented on the MICEX chart at the 939 level (off 51.8% from the all-time high).

However, the MICEX support that is congruent with the RTS’s backstop around 700 falls by coincidence in the high 600s itself. And the structure is the same, with modest but strong local maxima in April and October 2004 on a bed of solid medium-term support, before the subsequent takeoff. But look at this.

Whereas that level would represent a 72.9% drop from the all-time May 2008 high for the dollar-denominated RTS, for the ruble-denominated MICEX it would be a decline of 64.3%. Note that this figure is almost exactly identical to the SSEC’s decline from its all-time high to its present level, a significant figure according to influential schools of wave analysis.

Caveat emptor. Buckle your seatbelt. In Russia anything can happen.

[First published in Asia Times Online, 11 September 2009.]