Quotes of the Day

There's a celebrated scene in dostoyevsky's classic novel The Gambler in which a wealthy, 75-year-old Russian grandmother takes a seat in a casino and watches a young man pile up his winnings at the roulette table. After a few minutes, she nudges the narrator, and instructs him: "Tell him to stop and take his money with him. Soon he will be losing — yes, losing everything that he has now won."

In the wake of the meltdown of the stock market in Moscow this month, there are quite a few Russians who probably wish they had heeded that sort of advice. For after partying through several years of heady growth, much of it financed by borrowing from abroad, the nation's scrappy banking system and its underdeveloped financial markets are suddenly losing much of what they have won in the past couple of years — and more.

The main MICEX stock exchange shut down for two days on Sept. 16 after it lost 17% of its value in a matter of hours. At that point the market was down almost 60% for the year, its lowest level since early 2006, although it has since been boosted by measures taken by the Russian central bank and the Kremlin. Those measures, however, weren't enough to shore up the nation's largest investment bank, Renaissance Capital, which on Sept. 21 sold a 50% stake to the Russian oligarch Mikhail Prokhorov for $500 million. Just over a month ago, Forbes magazine, in a profile of Renaissance and its New Zealand – born chief executive, Stephen Jennings, reckoned the same stake would have been worth $3.5 billion — seven times as much.

Some Russia watchers are expecting much more upheaval. Vladimir Savov, an analyst for Credit Suisse in Moscow, sees the recent turmoil as the beginning of a broad consolidation of Russia's highly-leveraged banking sector. "We want to hope that this will improve the resilience of Russia's financial markets in the long term," he says, "although in the near term the process could be painful." Renaissance says it had been in talks for some time and didn't act out of distress. But its move came a few days after the first financial institution fell victim to the crisis, a boutique investment bank and brokerage firm called KIT Finance, which defaulted on its debt when the markets shut down; it was rescued by an investment arm of the state energy giant Gazprom. Other erstwhile high-flying financial firms in Russia remain at risk. According to the business newspaper Kommersant, the Russian central bank has drawn up a "red list" of 15 other second-tier banks that, like KIT, are in urgent need of financial assistance.

A variety of factors are speeding a shakeout. They include falling oil prices and Russia's war with Georgia, which spooked foreign investors and sparked capital flight. Of course, the tumult on Wall Street and the general seizing up of global finance has caused a liquidity squeeze for banks worldwide. But the root cause of Russia's current crisis is homegrown: wannabe oligarchs who used debt to continue doubling down while the going was good, only to find themselves on shaky ground now that the market has turned. As one wag said this month, it's a case of minigarchs turning into nanogarchs.

International lending statistics show the extent to which Russians have been bingeing on borrowed funds. The total volume of international financing of the private sector, including bonds, equities and loans, has more than tripled in the past three years to over $76 billion. Indeed, Russia has raised more on international bond markets alone than the whole of Latin America.

The big question is what sort of an impact the banking sector's problems and the cascading margin calls on stock-market investors will have on the Russian economy as a whole. In such volatile times, it's particularly hazardous to make any predictions. But Russia experts say that, for the moment at least, they don't expect the troubles to blow up into a huge national economic crisis like the one of a decade ago, when the ruble collapsed and the economy contracted sharply. If anything, there will be a welcome cooling off in the economy, which has been hit by rising inflation.

"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.

• Peter Gumbel