Red Tide at the Casino

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"We're not back in 1998," says Eric Berglof, chief economist at the European Bank for Reconstruction and Development in London, who reckons the financial-market problems will result in a "smallish blip" in the economy rather than any bigger meltdown. Certainly, the situation today is very different from a decade ago, he and others point out: Russia currently has a whopping $550 billion in foreign-currency reserves, a hefty budget surplus, a negligible national debt and an economy that remains on course to grow by 7% this year. The fount of much of the nation's newfound wealth — oil and gas — isn't affected by these banking liquidity problems. As long as the price of oil stays somewhere above about $70 per barrel, the windfall profits will continue to roll in. Moreover, only about 2% of Russian households — the very affluent — own stocks, so the market plunge won't affect the population at large.

Savov at Credit Suisse says the banking problems could slow domestic investment and industrial growth. But significantly, Russia's most important banks don't appear to be at risk — in fact, their conservative behavior, rather than risky practices, may be holding the economy back. About 40% of the nation's deposits is in the hands of three stodgy institutions with strong ties to the Kremlin — Sberbank, VTB and Gazprombank — that have been increasingly loath to lend to some 1,200 scrappy, smaller rivals. This is contributing to the liquidity squeeze. "It's the second- and third-league firms and banks that will be hurt, not the big state-owned or state-controlled ones," says Gunter Deuber, a global-risk analyst for Deutsche Bank in Frankfurt.

The spread of consumer finance such as car loans and home mortgages could be affected as a result of the expected shakeout, and some commercial projects are already being hit. Two leading developers, Sergei Polonsky — who is building Europe's tallest skyscraper in Moscow — and St. Petersburg – based Artur Kirilenko, recently announced a freeze on new projects.

Russian authorities have responded by injecting $44 billion into the three big banks. President Dmitri Medvedev has also pledged to make a further $20 billion from the state budget available to support the stock market. However, earlier talk by other officials that some of the nation's oil windfall should be used to support the stock market has been dropped.

Russia has always been a risky place to do business, but that hasn't prevented a huge flow of international investments into the economy this decade. The question now is whether the country's latest bout of economic instability will frighten away, possibly for years to come, the foreign capital the country needs to thrive. No, answers Marc Lhermitte, a partner at Ernst & Young, which in September published a survey of the attractiveness of leading cities. Moscow scored high on the list; Chinese investors ranked the Russian capital just behind Paris, for example. Despite all the recent economic and geopolitical turmoil, Russia is becoming "a significant destination" for international companies, Lhermitte says. The crisis doesn't seem to have made too much of an impression on Russia's superrich, either. When Larry Gagosian of the New York Gagosian Gallery opened a modern-art exhibition including works by Picasso and Warhol at the Red October chocolate factory in downtown Moscow in September, all roads to the show were jammed by luxury cars.

As for Dostoyevsky's grandmother, she may well have empathized: in The Gambler, after loudly disapproving of others who staked their fortunes recklessly at the roulette table, she went on to lose hers the same way.