Russia's Crash `Pretty Much the Same' as 1929, Micex Chief Says By William Mauldin and Ellen Pinchuk
Oct. 8 (Bloomberg) -- The 67 percent decline in Russian equities this year resembles the U.S. stock market crash of 1929 because of the damaging effect of highly leveraged investors, the head of Russia's Micex Stock Exchange said.
Russian stocks have suffered three days of declines greater than 14 percent in the last month, spurred in part by leveraged investors reducing their holdings after margin calls from their brokers. Speculators making bets with borrowed money also contributed to the 1929 stock-market crash in the U.S.
``It's pretty much the same thing,'' Micex Chief Executive Officer Alexei Rybnikov said today in an interview. Besides the level of leverage of domestic and foreign investors in the Russian market, Rybnikov cited the lack of long-term money from institutions and the absence of government pension reform as contributing to the market collapse.
``We don't have any long-term money here,'' he said. ``We need to sit down and think about what we need to do long term to make the Russian financial system more stable.''
Following the collapse of 1929, Regulation T required U.S. investors to purchase stock only when the amount of equity in their accounts makes up 50 percent of the purchase price. Russia's Federal Financial Markets Service on Sept. 26 increased the level of equity required for stock purchases to 50 percent from the previous level of 25 percent, the lowest of any major emerging market except for South Africa.
Falling stock prices can lead investors to exceed the amount of margin borrowing allowed under regulations, leading to a call from their brokers to deposit more equity or sell shares, which can drive down prices further.
Micex
Regulators shut the Micex Stock Exchange, Russia's biggest by trading volume, for the rest of the day as well as tomorrow after the 30-stock Micex Index dropped 14 percent. The ruble- denominated index is down 67 percent from its May high, hurt by a withdrawal of cash from risky emerging markets, a drop in crude prices, and capital flight following the beginning of Russia's war with Georgia on Aug. 8.
The Micex Index currently trades at a price-to-earnings ratio of 3.9, compared with a ratio of almost 14 in May, according to data compiled by Bloomberg.
``Most of the Russian blue chips are extremely undervalued,'' Rybnikov said. ``The market will certainly find its bottom at some point.''
To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net.
Last Updated: October 8, 2008 07:50 EDT
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