Summary: Did the United States conduct a successful financial “raid” on Russia? These rumors might not be true — probably are not true — but then so many stories that start wars are false. Remember the Maine! More seriously, these rumors signal that the possibility of financial warfare is on the minds of key people. Probably for good reason.

Update: The significance of this event lies in the fears, not the underlying reality. It shows that people have become aware that financial warfare is not sci-fi, but a possibility. Each time these episodes happen, it becomes more likely that governments begin to consider this new dimension of warfare. Both in offense and defense.

“Russian Rescue Package Expands to $120 Billion“, Wall Street Journal, 19 September 2008 — Subscription required. Excerpt:

As Russia’s stock market went into free fall this week, conspiracy theories circulated that Washington was egging on American financiers to punish Moscow for its incursion into Georgia last month. The theories gained enough credence that Russia’s finance minister, Alexei Kudrin, spoke with U.S. Treasury Secretary Henry Paulson late Wednesday and sought assurances that the U.S. wasn’t playing politics with Russia in the financial crisis, the Russian Finance Ministry said. Mr. Paulson told Mr. Kudrin that the U.S. wasn’t, according to the Russian side. A U.S. account of the call wasn’t available.

… In recent weeks, Mr. Medvedev has blamed the crisis primarily on the U.S., which has been the target of Kremlin wrath on all fronts since the U.S. sharply criticized Russia’s war in Georgia.

A top State Department official, meanwhile, this week cited the financial problems as the “price” Moscow was paying for the war. On Thursday, Secretary of State Condoleezza Rice said Moscow’s moves in Georgia and elsewhere “are putting Russia on a one-way path to self-imposed isolation and international irrelevance.”

The question broached by Mr. Kudrin in his phone call with Mr. Paulson reflects a view widely held in the opaque world of the Moscow elite. Russian officials have asked U.S. bankers in recent weeks if the banks have been ordered by U.S. officials not to lend to Russian companies, according to people familiar with the conversations. The banks deny any such order.

“There’s a feeling of hostility,” said one person who works closely with the Russian government. “The biggest problem is that they don’t understand that the problem is home-made.”

… With growth running about 8% this year, there is no sign of a recession, economists said, but that growth rate could be halved next year. “Growth will slow down,” said Martin Gilman, a former International Monetary Fund official, now a professor at Moscow’s Higher School of Economics.

For a less sanitized version of opinion in Russia, let’s go to our #1 local source in Moscow.

“Angst“, Eric Kraus, Truth and Beauty, 10 September 2008 — Excerpt:

Objectively, the Russian economy is doing better than 95% of the economies on earth. Profitability is high, macroeconomic stability is excellent, growth is compelling – there has not been a single bank failure since 2004, and virtually no exposure to US subprime. Yes, there is the usual litany of complaints, many of them justified – but none of this is really new, and while we are very familiar with the short-term irrationality of markets, we struggle to explain this debacle on the basis of normal market factors alone.

More controversially late last week at least two of the top local Moscow brokers were warning clients that major US banks were being encouraged/pressured to sell their Russian assets. Although certain bulgebracket US institutions were clearly dumping Russian paper last week, it remains possible that they were doing so largely – or entirely – of their own accord.

We have been unable to get confirmation of the alleged political pressure; a very senior person at JPMorgan denied it flat out, whereas contacts at the sole remaining solvent major US investment bank confirmed that they had indeed gotten the call. Our friends on the sovereign debt desks inform us that only US accounts have been selling Russian Federation bonds, but these have all found a new home a couple of percent below last weeks prices. CDS spreads have widened out, but this was primarily hedging activity as cash volumes have dried up.

Intriguingly, aggressive and apparentlyconcerted statements by assorted US officials (vide supra) suggest that it would have pleased them to no end to inflict some economic damage. Whether they are thumping their chests following a successful covert intervention – or are simply trying to put a useful spin on a market-driven sell off to which they were mere spectators – remains an open question.

The Russian equity market has – in recent weeks – been the worst performing global major market. Trading has been substantially worse than in the run-up to the 1998 crisis (where we saw regular dead cat bounces) or during the Yukos debacle. There is one minor difference – in 1998, the Russian economy was dying, the CBR coffers were empty, GDP was stagnant, oil was dropping below $10, and despite Russian domestic debt paying >100%, the government was surviving on expedients.

Russia is currently seeing 7.9% GDP growth, growing trade and budget surpluses, very limited capital flight (with a net positive capital account YTD), and no signs of substantial economic slow-down. Contrast this with Estonia, Latvia or Turkey…or the UK! While markets are often a bit irrational, we would be surprised to see them begin to defy the laws of gravity without reason.

At present, we simply do not know whether or not this was truly the onset of economic warfare; we tend to distrust conspiracy theories, and would note the existence of several plausible counter-arguments …

T&B is frankly bewildered. While we remain sceptical about the purported attack, we are at a loss to find any rational explanation for what we are seeing.

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