Russian economy isn't in great shape, either

MOSCOW — The message from the Kremlin is not to panic. But that's exactly what many investors in Russia are doing.

Russia's stock markets are down some 40 percent since the start of the year, threatening to undercut a remarkable eight-year economic boom.

Eighteen months ago, it seemed unthinkable. Russia's high-flying economy was a strong draw for investors seeking fat emerging-market returns, the government encouraged ordinary Russians to invest in the stock market via the so-called "people's IPO" for the VTB Group banking concern and, most important, the price of oil kept marching up, up, up.

But geopolitical tensions and sliding crude prices have contributed to a black week — and an even blacker year — for Russian equities, scaring off a thinning number of investors. Russia proudly proclaimed itself "an island of stability" at the World Economic Forum in Davos, Switzerland, in January but is now looking the most fragile of all the major emerging markets.

Banks are short of liquidity and clamoring for more ready cash from the central bank, while investors are starting to voice concerns over the economy, which remains highly reliant on its oil and gas industry. It's the No. 2 oil producer after Saudi Arabia.

Faced with plunging stock markets on the one hand and soaring inflation on the other, the popularity of Russian government is in the balance.

But it's only now that the Kremlin has started to act.

"Russia — thanks to its situation and role in the world's division of labor, thanks to its geography, thanks to its intellectual potential — will always be attractive for investments," President Dmitry Medvedev said Friday, talking to a group of Russia experts and journalists. "To destroy this, an iron curtain would need to be put up."

It was the third time in as many days that Medvedev spoke publicly to reassure investors, to limited effect.

He laid the blame at the door of the U.S. subprime mortgage crisis, which sparked off an international credit squeeze and liquidity difficulties.

As the global financial crisis took hold, Russia's markets tracked international indexes, giving investors a rollercoaster ride early this year. Then doubts about the Russian market itself began to weigh more heavily on investors.

A shareholder struggle blew up at Anglo-Russian oil venture TNK-BP, raising questions about government interference, which were reinforced when Prime Minister Vladimir Putin launched a verbal assault on coal and steelmaker Mechel in July over price-fixing allegations, wiping billions of dollars off the company's share price in one day.

The final straw for many was Russia's invasion of Georgia last month, which contributed to a rapid deterioration of relations with the West and raised the prospect of Russia's growing isolation.

Worse was still to come. In recent days, the price of oil has slid to just above $100 per barrel, down from more than $147, in just three months.

Investors note that Russia is following a similar trajectory to the stock-market crash of 1998, when the markets lost around 90 percent of their value over the year.

While nobody is projecting a calamity of that scale, some investors say Russia has reached a fork in the road.

"We're at this juncture where these equity prices can jump up because they are truly cheap at $100 oil," said James Fenkner, director of Red Star Asset Management.

Fenkner added, however, that many investors fear that crude might have farther to fall, which could deal another blow to Russian markets. "It all pivots on oil," he said.